Ammad Awan Glasgow - Understanding Basic Accounting Controls

1. Ammad Awan Glasgow - Understanding Basic Accounting Controls 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.

2. 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. 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 Accounts 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

3. 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 Payroll - 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.

4. 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. Fixed 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 Inventory - 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