Learn Accounting – Understanding Basic Accounting Controls

Tampa, FL March 27, 2009 – Whether you operate a large multi-national corporation or a small local restaurant, understanding some basic accounting controls will go a long way towards creating more reliable financial results and rendering you a better night’s sleep. Basically, accounting controls are operational, financial, or technological mechanisms used by businesses to ensure or encourage a particular behavior or result. Internal controls give owners and managers some degree of assurance that people are doing what they are supposed to be doing and that material mistakes, accidental or otherwise, will be detected prior to going out the door. For example, segregating responsibility for check writing from the responsibility for reconciling monthly bank statements helps to control against improper check disbursements. In the example above, segregating such duties may be difficult in small businesses with limited staffing capabilities. However, alternate control mechanisms, such as manager or owner review of monthly bank reconciliations, can be implemented to partially mitigate such risks.It’s no surprise that internal controls frequently come at a cost. As such, the number and strength of the controls within any given internal control structure is usually a function of the owner or manager’s resource capacity and risk tolerance level. As such, it is important to conduct a general risk assessment of the business process or function that you are looking to control in order to focus your efforts most effectively and gain the most bang-for-your-buck as they say.First, let’s talk about some higher-level control concepts that should be present across most accounting processes to set the stage for more detailed transaction or process-level control mechanisms. One of the best ways to standardize behavior and set expectations is to create formal written policies and procedures to govern the actions and activities within your business or department. In accounting, such policies and procedures are frequently summarized in an Accounting Manual, which specifies the who, what, when, and how of common accounting procedures and activities. Another control concept, illustrated in the earlier example, is known as segregation of duties. Optimally, no single individual should have the responsibility or ability to initiate, authorize, process, and record a given transaction (i.e. they shouldn’t have end-to-end responsibility). Segregating such duties decreases the chances of errors, intentional or otherwise, going undetected.Next, let’s look at some common accounting functions and give some examples of common internal controls specific to each. It is important to note that these are only examples and any good internal control system should be customized to the needs and risks within your organization or department. Below is a list of some common accounting areas, their functional objectives, and some common internal controls suggestions.Accounts Receivable, Credit, & Collections – To ensure that all funds intended for the organization are received, promptly deposited, properly recorded, reconciled, and kept under adequate security.
o Formally document policies and procedures governing accounts receivable, credit, and collection processes detailing timeliness, responsibilities, actions, responsibilities, etc
o Require credit reporting on all customers prior to credit issuance
o Require periodic review of key customers to ensure ongoing credit worthiness
o Establish limits of authority for credit issuance and terms (system or otherwise)
o Limit system access to alter credit limits and/or terms only to appropriate personnel
o Require manager approval for adjustments to and/or write-offs of A/R balances
o Sequentially number credit memo adjustments to A/R balances
o Require periodic reconciliation of the General Ledger to the Cash and A/R subsidiary ledger balances along with managerial review of this reconciliation
o Reconcile bank statements to the General Ledger on a regular basis
o Set-up lock-boxes for receipt of customer payments in order to limit the handling of checks and other forms of payment
o Establish a central point of contact for incoming mail, preferably someone without the ability to post cash and/or adjust customer A/R balances in the system
o Create summary reporting to be reviewed by management on a periodic basis, such as A/R aging, credit memos by customer, credit memos by employee, write-offs by customer, write-offs by employee, etc.
o Limit access to alter or create records in the customer master file to appropriate parties
o Batch receipt input data is compared to control totals and differences are investigated and resolved
o Mail account statements to customers
o Maintain support files in a secured area and restrict to appropriate personnelAccounts Payable, Purchasing – To ensure that funds are disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded.o Formally document policies and procedures governing accounts payable and purchasing processes detailing timeliness, responsibilities, actions, responsibilities, etc
o System access to create, edit, or delete purchase orders is restricted to appropriate personnel
o Ability to add, modify, or delete vendor records in the vendor master file is restricted to appropriate individuals
o All new vendors or major modifications to vendor information require manager approval
o The vendor master file is periodically purged of old and obsolete vendors
o A three-way match between the invoice, PO, and receiver must be present before payment is released to the vendor
o Adjustments to A/P balances (credit notes) require managerial approval and is restricted to appropriate personnel
o Check stock, signature plates, etc are appropriates secured and access is restricted to appropriate personnel
o Dual signatures are required on all manual check disbursements
o Positive pay account maintained at bank
o Check sequences and gaps are investigated
o Bank statements are reconciled to the general ledger regularly and reviewed by management
o Major supplier statements are reconciled to the A/P subsidiary ledger
o Support files are maintained in a secured area and restricted to appropriate personnelPayroll – To ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursement is properly recorded and that related legal requirements (such as payroll tax deposits) are complied with.o Formally document policies and procedures governing payroll processes detailing timelines, responsibilities, actions, responsibilities, etc
o Access to add, modify, delete records from the employee master file is restricted to appropriate personnel. Modification to significant data (i.e. salaries, etc) requires managerial approval.
o Payroll is disbursed manually with picture ID only on an annual basis in order to validate that paychecks are for bona fide employees (i.e. not ghost employees)
o Support files are maintained in a secured area and restricted to appropriate personnelFixed Assets – To ensure that fixed assets are acquired and disposed of only upon proper authorization, are adequately safeguarded, and properly recorded.o Formally document policies and procedures governing fixed asset-related processes detailing timeliness, responsibilities, actions, responsibilities, etc
o Assets are appropriately secured
o Book to physical reconciliation is conducted annually to validate condition and existence
o Access to the fixed assets register is restricted to appropriate personnel
o Asset disposals and write-offs require managerial approval above certain levels
o Asset acquisitions must be approved in advance of purchase
o Pre-numbered asset tags are affixed to all fixed assets
o Asset valuations are periodically reviewed by management for continued relevance
o All supporting paperwork must be obtained prior to entry into the fixed asset register
o Support files are maintained in a secured area and restricted to appropriate personnelInventory – To ensure that inventories are received and/or shipped only with proper authorization and documentation, properly recorded, and appropriately safeguarded.o Formally document policies and procedures governing inventory-related processes detailing timeliness, responsibilities, actions, responsibilities, etc
o Inventories are appropriately secured
o Book-to-physical or cycle counts are conducted periodically to validate condition and existence
o Inventory will only be received with valid support paperwork (i.e. PO)
o All inventory receipts must be verified for quantity and condition against the bill of lading and the packing slip and recorded on pre-number receiver forms or a log
o The receipts log is reviewed and reconciled to system receipts by management on a daily basis
o Support files are maintained in a secured area and restricted to appropriate personnel
o Inventories are periodically marked to market to ensure proper valuation
o Inventory write-offs require management review and approval
o System access to process inventory adjustments is restricted to appropriate personnel
o All inventory shipments must be accompanied by a valid order
o Periodic managerial review of open work orders, inventory aging reports, etc
o All shipments are recorded in a shipping log, which is reviewed and reconciled to the system shipments by management on a daily basisFinancial Closing or Reporting- To ensure that financial data is recorded, consolidated, and reported accurately, timely, and in compliance with US GAAP.o Formally document policies and procedures governing financial closing processes detailing timelines, responsibilities, actions, responsibilities, etc
o Create and maintain a comprehensive close checklist of all close activities
o Closing checklist and binder with all supporting entries should be reviewed and approved by the controller and/or owner prior to close
o Segregate duties within the account reconciliation, journal posting, and management review/approval processes
o All non-standard, adjusting, and/or manual journal entries require management approval
o Establish a budgeting and forecasting process. Use trend analysis (horizontal and vertical) in order to sanity check results. Research and resolve any unusual variations
o Ability and/or access to post journal entries is limited to appropriate personnelUnderstanding the underlying concepts behind basic accounting controls will allow you and your organization to create an internal control structure, both within accounting and beyond, that enables more effective and efficient operating and financial results. And one more thing it provides…a little extra peace of mind.For more information on accounting and auditing, please visit The Accounting Nation website at [http://www.accountingnation.com]