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Internal Control: A Preventive Maintenance Program
|You read about
this in every newspaper in every town in the entire country: Some
bookkeeper, trusted by the owner of a small business, embezzles
thousands of dollars. If the theft doesn’t put owner out of business,
it certainly causes a major headache.
The reason we hear of these cases so often is that, in a small
business, there may only be the owner and a bookkeeper. The owner
doesn’t like doing the books, doesn’t understand them, and relies
on this one person to take care of things. The bookkeeper, who
is usually having personal financial difficulties, takes a small
amount of money intending to pay it back. No one seems to notice,
so more is taken. Over a period of time, it starts to mount up
to a lot of money.
This is where the concept of “internal control” comes in. Essentially,
every business should have, at some level, an internal control
system in place to protect against losses, both intentional and
unintentional. This is because “internal control” systems will:
1) protect cash and other assets; 2) promote efficiency in processing
transactions; and, 3) ensure reliability of financial records.
An internal control system consists primarily of policies and
procedures designed to provide reasonable assurance that these
three objectives will be achieved. The size and complexity of
the business will determine the extent of the internal control
Regardless of size, one of the most important aspects of an internal
control system is the concept of separation of duties. Separating
duties makes it more difficult for theft and errors to go undetected.
It is highly unusual for two employees to “collude” in an effort
to steal from the company.
I worked as an internal auditor for a newspaper chain for three
years. My job was to walk in to the newspaper offices unannounced
and go directly to the cash boxes, count them, and verify receipts.
One of my most important audit steps was to make sure the internal
control procedures were in place and working properly. Here are
a few suggestions for internal control procedures regarding handling
- Allow only specific designated individuals to handle cash.
- Give responsibility for bookkeeping to an individual who does
not handle cash.
- Use numbered receipts to document all payments.
- Make all bank deposits promptly.
- The person who prepares the bank reconciliation should be different
than the one handling cash.
- If possible, the person who makes the bank deposit should be
different than the one who handles the cash and the one who prepares
the bank reconciliation.
- Make deposits intact with no amounts withdrawn to pay expenses.
- Keep cash and checkbook in a locked drawer or cash register.
- Since tills will never be 100orrect all the time, establish
a tolerance level for overages and shortages to determine the
point at which corrective measures will be triggered.
- Make all disbursements by check, except minimal amounts paid
from petty cash.
- Make certain every payment is related to a paper document, such
as a voucher, to ensure that a paper trail exists for all disbursements.
- Conduct random surprise counts of petty cash and cash drawers.
- Count inventory and other assets frequently and compare with
An internal control system set up early as a preventative measure
is more efficient than establishing a corrective system in reaction
to a loss. If it so happens, that there is just you and the bookkeeper
in your small business, you need to learn how to do some of the
bookkeeping tasks so you can spot check the bookkeeper’s work.
That, in itself, is an excellent preventative measure.
About the author:
John W. Day, MBA is the author of two courses in accounting basics:
Real Life Accounting for Non-Accountants (20-hr online) and The
HEART of Accounting (4-hr PDF). Visit his website at http://www.reallifeaccounting.comto
download for FREE his 3 e-books pertaining to small business accounting
and his monthly newsletter on accounting issues.
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