Internal Control Checklist

An internal control checklist is intended to give an organization a tool for evaluating the
state of its system of internal controls. By periodically comparing the checklist to actual
systems, one can spot control breakdowns that should be remedied. When followed
regularly, a checklist has the following benefits:

 There are fewer audit comments about internal control weaknesses

 Management can gain assurance that reported financial results are accurate

 There is a reduced risk of asset losses due to fraud

 There is less chance that the organization is not complying with any
applicable regulatory requirements

Internal controls are a system of policies, procedures, reviews, segregation of duties, and
other activities that are used to minimize the risk of asset loss, produce accurate
financial statements, and conduct operations in an efficient and orderly manner.

When going through an internal control checklist, the intent is to spot any controls that
are missing or weak. Such a finding does not automatically indicate the presence of a
control problem that requires remediation. If there are offsetting controls elsewhere in
the system, a weak control could be considered acceptable. For example, if a signature
plate is used to sign checks, this could be considered a control weakness, except that a
formal approval is required upstream for every purchase order issued. This offsetting
control ensures that purchases are still approved somewhere in the purchasing system.

The internal control checklist can be massive, and is tailored to the needs of the
individual business. For example, the controls used for a casino (with its heavy use of
cash) are quite different from the controls used in a software development company
(which may never use cash at all). Here is a selection of the controls that might be found
in a typical business:

Payables control checklist:

 All invoices greater than $50 are approved by a manager

 A three-way match of the purchase order, receiving document, and supplier

invoice is conducted

 Blank checks are stored in a locked location

 The sequence of check numbers is tracked

 Checks are manually signed

 Invoices are stamped "paid" when they have been paid

Customer billing control checklist:

 All discounts and special prices are confirmed

 Invoices are checked for errors

 Unmatched bills of lading are reviewed

 The sales order total is compared to the invoice total

 Statements of unpaid amounts are issued to customers

Payroll control checklist:

 Time sheets are matched to a list of current employees

 The hours stated on time sheets are approved by supervisors

 The totals entered into the payroll system are matched to time sheet totals

 The preliminary payroll register is reviewed and approved by the payroll

manager

 All payroll checks are manually distributed to the people named on the
checks
 Internal Financial Control ( IFC )

General Accounting Controls

 Chart of accounts

 Accounting procedures manual

 The organizational chart to define responsibilities

 Absence of entries direct to ledgers

 Posting references in ledgers

  Review of journal entries

 Use of standard journal entries

Use of prenumbered forms

 Support for all journal entries

10. Access to records limited to authorized persons

11. Rotation of accounting personnel

12.Required vacations
13.Review of the system at every level

14. Appropriate revision of the chart of accounts

15. Appropriate revision of procedures

16. Separation of recordkeeping from operations

17. Separation of recordkeeping from custodianship

18. Record retention policy

19. Bonding of employees

20. A conflict of interest policy

Cash Funds Controls

   Imprest system

   Reasonable amount

  Completeness of vouchers

  Custodian responsible for fund

  Reimbursement checks to order of custodian

   Surprise audits
   No employee check to cash

  Physically secure

  Custodian has no access to cash receipts

10.  Custodian has no access to accounting records

Cash Receipts Controls

       Detail listing of mail receipts

       Restrictive endorsement of checks

       Special handling of postdated checks

       Daily deposit

       Cash custodians bonded

       Cash custodians apart from negotiable instruments

       Bank accounts properly authorized

       Handling of returned NSF items

       Comparison of duplicate deposit slips with cash book

10.   Comparison of duplicate deposit slips with detail A/R

11.   Banks instructed not to cash checks to the company

12.   Control over cash from other sources

13.   Separation of cashier personnel from accounting duties

14.   Separation of cashier personnel from credit duties

15.   Use of cash registers

16.   Cash register tapes

17.   Numbered cash receipt tickets

18.   Outside salesmen cash control

19.   Daily reconciliation of cash collections

Cash Disbursement Controls

       Numbered checks

       Sufficient support for checks

       Limited authorization to sign checks

       No signing of blank checks

       All checks accounted for

        A detailed listing of checks

       Mutilation of voided checks

       Specific approval of unusually large checks

       Proper authorization of persons signing checks

10.   Control over signature machines

11.   Check listing compared to the cash book

12.   Control over interbank transfers

13.   Prompt accounting for interbank transfers

14.   Checks not payable to cash

15.   Physical control of unused checks

16.   Cancellation of supporting documents

17.   Control over long outstanding checks

18.   Reconciliation of bank account

19.   Independence of the person reconciling the bank statement

20.   Bank statement direct to person reconciling

21.   No access to cash records or receipts by check signers

  

Investments Controls

       Proper authorization of transactions

       Under control of a custodian

       Custodian bonded

       Custodian separate from cash receipts

       Custodian separate from investment records

       Safety deposit box

       Record of all safety deposit visits

       Access limited

       Presence of two required for access

10.   Periodic reconciliation of detail with control

11.   Record of all aspects of all securities

12.   Availability of brokerage advice, etc.

13.   Periodic internal audit

14.   Securities in name of the company

15.   Proper segregation of collateral

16.   Physical control of collateral

17.   Periodic appraisal of collateral

18.   Periodic appraisal of investments

19.   Adequate records of investments for the application of the equity method

Accounts Receivable and Sales Controls

       Sales orders prenumbered

       Credit approval

       Credit and sales departments independent

       Control of backorders

       Sales order and sales invoice comparison

       Shipping invoices prenumbered

       Names and addresses on the shipping invoice

       Review of sales invoices

       Control over returned merchandise

10.   Credit memoranda prenumbered

11.   Matching of credit memoranda and receiving reports

12.   Control over credit memoranda

13.   Control over scrap sales

14.   Control over sales to employees

15.   Control over C.O.D. sales

16.   Sales reconciled with cash receipts and A/R

17.   Sales reconciled with inventory change

18.   A/R statement to all customers

19.   Periodic preparation of the aging schedule

20.   Control over collections of written-off receivables

21.   Control over A/R write off, e.g., proper authorization

22.   Control over A/R written off, i.e., review for the possible collection

23.   Independence of sales, A/R, receipts, billing and shipping personnel

Notes Receivable Controls

        Proper authorization of notes

       Detailed records of notes

       Periodic detail to control comparison

       Periodic confirmation with makers

       Control over notes discounted

       Control over delinquent notes

       Physical safety of notes

       Periodic count of notes

       Control over collateral

10.   Control over revenue from notes

11.   Custodian of notes independent from cash and recordkeeping

Inventory and Cost of Sales Controls

       Periodic inventory counts

       Written inventory instructions

       Counts by noncustodial

        Control over count tags

       Control over inventory adjustments

       Use of perpetual records

       Periodic comparison of G/L and perpetual records

       Investigation of discrepancies

       Control over consignment inventory

10.   Control over inventory stored at warehouses

11.   Control over returnable containers left with customers

12.   Preparation of receiving reports

13.   Prenumbered receiving reports

14.   Receiving reports in numerical order

15.   Independence of custodian from recordkeeping

16.   Adequacy of insurance

17.   Physical safeguards against theft

18.   Physical safeguards against fire

19.   Adequacy of cost system

20.   Cost system tied into the general ledger

21.   Periodic review of overhead rates

22.   Use of standard costs

23.   Use of inventory requisitions

24.   Periodic summaries of inventory usage

25.   Control over intracompany inventory transfers

26.   Purchase orders prenumbered

27.   Proper authorization for purchases

28.   Review of open purchase orders

Prepaid Expenses and Deferred Charges

       Proper authorization to incur

       Authorization and support of amortization

       Detailed records

       Periodic review of amortization policy

       Control over insurance policies

        Periodic review of insurance needs

       Control over premium refunds

       Beneficiaries of company policies

       Physical control of policies

Intangibles Controls

       Authorization to incur

       Detailed records

       Authorization to amortize

       Periodic review of amortization

Fixed Assets Controls

       Detailed property records

       Periodic comparison with control accounts

       Proper authorization for acquisitions

       Written policies for acquisition

        Control over expenditures for self-construction

       Use of work orders

       Individual asset identification plates

       Written authorization for sale

       Written authorization for retirement

10.   Physical safeguard from theft

11.   Control over fully depreciated assets

12.   Written capitalization–expense policies

13.   Responsibilities charged for asset and depreciation records

14.   Written, detailed depreciation records

15.   Depreciation adjustments for sales and retirements

16.   Control over intracompany transfers

17.   Adequacy of insurance

18.   Control over returnable containers

Accounts Payable Controls

        Designation of responsibility

       Independence of A/P personnel from purchasing, cashier, receiving functions

       Periodic comparison of detail and control

       Control over purchase returns

       Clerical accuracy of vendors’ invoices

       Matching of the purchase order, receiving report and vendor invoice

       Reconciliation of vendor statements with A/P detail

       Control over debit memos

       Control over advance payments

10.   Review of unmatched receiving reports

11.   Mutilation of supporting documents at payment

12.   Review of debit balances

13.   Investigation of discounts not taken

Accrued Liabilities and Other Expenses Controls

       Proper authorization for expenditure and incurrence

        Control over partial deliveries

       Postage meter

       Purchasing department

       Bids from vendors

       Verification of invoices

       Imprest cash account

       Detailed records

       Responsibility charged

10.   Independence from G/L and cashier functions

11.   Periodic comparison with budget

Payroll Controls

       Authorization to employ

       Personnel data records

       Tax records

       Time clock

        Supervisor review of time cards

       Review of payroll calculations

       Comparison of time cards to job sheets

       Imprest payroll account

       Responsibility for payroll records

10.   Compliance with labor statutes

11.   Distribution of payroll checks

12.   Control over unclaimed wages

13.   Profit-sharing authorization

14.   Responsibility for profit sharing computations

Long-Term Liabilities Controls

       Authorization to incur

       Executed in the company name

       Detailed records of long-term debt

       Reports of the independent transfer agent

        Reports of the independent registrar

       Otherwise adequate records of creditors

       Control over unissued instruments

       Signers independent of each other

       Adequacy of records of collateral

10.   Periodic review of debt agreement compliance

11.   Recordkeeping of detachable warrants

12.   Recordkeeping of conversion features

  

Shareholders’ Equity Controls

       Use of registrar

       Use of transfer agent

       Adequacy of detailed records

       Comparison of transfer agent’s report with records

       Physical control over blank certificates

       Physical control over treasury certificates

       Authorization for transactions

        Tax stamp compliance for canceled certificates

       Independent dividend agent

10.   Imprest dividend account

11.   Periodic reconciliation of dividend account

12.   Adequacy of stockholders’ ledger

13.   Review of stock restrictions and provisions

14.   Valuation procedures for stock issuances

15.   Other paid-in capital entries

16.   Other retained earnings entries

Every small business needs internal financial controls to help ensure its money is properly managed.
Without them, your business risks employee fraud, cash flow shortages or even bankruptcy.

Here are 17 financial controls every small business should have in

place.
1. Keep business and personal finances separate. Never co-mingle business and personal
finances. If you do make a loan to your business or take a loan from your business, document it
appropriately with a promissory note specifying repayment terms.

2. Conduct background checks before hiring. This is especially important for employees whose
job duties involve finances, such as bookkeeping, accounting, payroll or handling cash.
3. Create monthly cash flow projections. If your actual cash flow falls short of projections,
investigate to find out why.

4. Review your business’s monthly bank statements in detail. Have bank statements sent directly
to your personal email or home address.

5. Review all credit and debit card statements for accuracy. Using payment cards for business
expenses can simplify accounting and tax preparation. However, the more employees have company
credit cards, the greater the chance of fraud. Require employees to document all business expenses
with detailed receipts.

6. Set up inventory control systems. Inventory is often damaged, stolen or lost. Inspect and count
incoming inventory to make sure orders were filled accurately. Designate who can sign for incoming
inventory or release outgoing inventory. Conduct regular inventory of products or materials.

7. Monitor point-of-sale transactions. Count cash in the cash drawer at the beginning and end of
each business day. Use point-of-sale software that requires employees to log in—tracking who is on
the register at any given time reduces the risk of theft.

8. Don't put one person in charge of petty cash. Require a second employee to authorize all petty
cash transactions. Record all transactions, and balance the petty cash once a week.

9. Review all outgoing payments. Compare payments to invoices. Watch for duplicate invoices,
new vendors or multiple invoices from the same vendor in a short time. Embezzling employees often
use these tactics to pay themselves.

10. Require vendors to submit detailed invoices. Avoid vague language on invoices.

11. Sign checks yourself. Require all outgoing checks and payments to be signed or authorized by
the business owner.

12. Review payroll before it goes out. Watch for any variations in the amount. Use direct deposit to
reduce your risk of payroll fraud.

13. Delegate financial duties to multiple employees. If one person is in charge of all your business
financials, such as bookkeeping, payments and payroll, it's easy for them to steal from your business.

14. Check up on employees involved with your business finances. Require these employees to
take annual vacations and have someone else handle their duties. Embezzlement is often discovered
this way.
15. Monitor your use of debt. Your accountant can help you set a maximum debt-to-equity ratio and
a minimum debt-to-cash flow ratio. Stay within these bounds to keep your business from becoming
overleveraged.

16. Plan ahead for business financing. If you have a sudden cash flow crunch, or find an
opportunity that requires a cash outlay, will you be prepared to handle it? Always have a couple of
potential capital sources at the ready.

17. Don't be predictable. Put the element of surprise on your side when watching for employee
misconduct. Perform your financial reviews and audits at random times.