Does Your Organization Have Internal Controls in Place?

Does Your Organization Have Internal Controls in Place?

Auditors are well aware of the concept of internal control, as are many organizations, both for-profit and nonprofit. However, this idea can occasionally be overlooked or its importance underestimated by organizations, leading to potentially devastating consequences. From an accounting standpoint, internal control refers to the framework of processes in place related to an entity’s finances, meaning not only the financial reporting process but also safeguarding of assets. Auditors consider an entity’s internal control in designing audit procedures, and not surprisingly, lack of internal control makes auditors more skeptical, requiring increased audit procedures.

A look at two of the key internal control components will help you in evaluating whether your company or organization’s internal control is up to speed. Good internal control serves as an effective deterrent against not only fraud but also unintentional errors. While all frauds require intent of a perpetrator to commit, poor internal control often provides the opportunity for frauds to become reality. An effective internal control setup can often prevent frauds or detect them before significant damage has been done.

  • Control environment – What is the tone at the top? Do employees truly feel that top management is ethical? Does the organization have a formal code of conduct recognized by all employees? Is the code of conduct enforced by management, meaning if something is done that is not in line with the code, there are consequences?
  • Control activities – Does the entity understand the importance of segregation of duties? Is one person responsible for receiving cash, posting to the general ledger, preparing a deposit slip and taking the cash to the bank? Who reconciles the bank account, and who reviews this? Who is able to post journal entries to the accounting system? Who is able to change pay rates and add employees to the payroll? Who approves expense reports? Who has access to blank checks?

Answering these questions may help to locate areas of your company or organization’s internal control that could be improved. Each of these questions relates to opportunities in which numerous frauds have occurred. And yes, the perpetrator can be that most trusted employee you’d never suspect! Additionally, unintentional errors may occur, specifically in the bookkeeping and financial reporting roles, and without a good system of internal controls, these misstatements can go undetected.

It’s not too early to evaluate your company or organization’s internal control. You could save yourself future problems by doing this and your auditor will appreciate it!

Posted In: Audit | Insights

Disclaimer: Information provided by Brown Plus as part of this blog post is intended for reference and information only. As the information is designed solely to provide guidance and is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations, responding to such inquiries does NOT create a professional relationship between Brown Plus and the reader and should not be interpreted as such. Although Brown Plus has made every reasonable effort to ensure that the information provided is accurate, Brown Plus makes no warranties, expressed or implied, on the information provided. The reader accepts the information as is and assumes all responsibility for the use of such information.