Critical Internal Control Processes
A strong internal control system can make or break any business. Identifying and understanding critical internal control processes is important for the success of any business.
The first step is the identification of specific operating cycles (or processes) of your Company.
The following five operating cycles are an important part of a Company’s operations:
- Cash Disbursements: To ensure there is proper verification of invoices and data entry.
- Cash Receipts: The cash collection occurs at the property level where tenants are required to pay their monthly rent via check or money order by a certain day of each month.
- Payroll Processing: To ensure there is proper segregation of duties in place and proper review and approval of payroll amounts.
- General Ledger: To ensure there is proper support and approval for adjusting journal entries.
- Financial Statement Preparation and Budgeting: To ensure the preparation of the monthly reporting package for the Company’s management and the property owners are being processed timely and accurately. Additionally, the annual budgeting is being prepared and rolled out in November of each year for the subsequent reporting year.
The second step is the analysis of existing internal controls procedures for the identified operating cycles.
Thirdly, the identification of Company’s key controls in place for the processing of day-to-day transactions. Below are examples of key controls for the cash disbursements cycle.
CASH DISBURSEMENTS OPERATING CYCLE:
- CASH DISBURSEMENTS – SEGREGATION OF DUTIES:
- Duties should be segregated to serve as a check and balance on the employee’s integrity and to maintain the best control system as possible.
- CHECK SIGNING:
- Consider developing a policy whereby checks written over a predetermined amount require two signatures.
- COMPUTER-GENERATED CHECKS AND CONTROL OF BLANK CHECK STOCK:
- Controls over access to the check-writing module should be established to ensure that checks are not duplicated or otherwise misused. Blank check stock should be kept in a locked box or cabinet accessible only to those with proper authorization.
- VENDOR SET-UP PROCESS:
- A new vendor log and vendor deletions log should be run and reviewed by appropriate management personnel. The Company should use the accounting system to generate new vendor numbers in order to prevent duplicate vendor numbers and provide better audit paper trail of vendor set-up.
The use of an internal auditor or outside CPA firm could help with monitoring of controls. For additional information regarding internal controls concerning cash disbursements, payroll, general ledger, and financial statement preparation contact Jessica Vasquez, Audit Supervisor at 714.569.1000.
*This article was featured in February 27th Issue of Orange County Business Journal, in the CREW-OC SPIRE Awards Supplement
