Internal Control Warning Letter

How to Improve Internal Controls with QuickBooks

 

Internal control is an important area for any business, but especially for those using QuickBooks.  The very nature of QuickBooks being so easy to use contributes to fraud by those who will change and delete transactions to cover their tracks.  Below are 8 steps to help reduce the likelihood that such activities will happen. 

 

In Issue 51, the Spring 2001 issue of CAMICO IMPACT (a quarterly newsletter for CAMICO policyholders) there is an article on SSARS 8 written by Suzanne M Holl, CPA that also includes good risk management suggestions, regardless of the level of service to be provided to the client.  Most notably is the fact that when a lawsuit is filed, the juries expect the CPA to "get it right" regardless of the level of service performed.  In addition to some do's and don'ts for traditional (SSARS 1) type engagements there is a section that deals with internal control the need to document everything possible, especially in light of the fact that the jury will seldom give the CPA the "benefit of the doubt." 

 

To provide additional protection, it suggests that the CPA should obtain an understanding of the internal controls within the client's organization even though it is beyond the scope of the services to be provided.  In addition, the recommendation is that additional services be offered to minimize the risk, if needed. 

 

The explanation further states, "Annual internal control warning letters sent to clients document this [risks inherent to the client's business] well and help to meet jury's expectations.  Remember the public places a higher level of expectation on the CPA to have the documentation necessary to support the CPA's position."   Below is a sample.



Sample Internal Control Letter (Download as PDF Document)

Dear <Client>:

 

How are you managing your business finances?  Many business owners are discovering that their assets are not as well protected as they thought.  This is especially true in small business environments that use QuickBooks.  The potential risk is compounded for small businesses where a single employee manages all the finances.  Other there are no "checks and balances" to verify that transactions are accurate.  Trust is not the issue, verifying the transaction is.

 

Overview

 

When proper, consistent procedures are not in place, employees can learn to manipulate the accounting system to their benefit.  Whether they take money from the company or their mistakes are undiscovered, the end result can greatly impact the company's management discussions, financial reports, and tax filings.

 

Unfortunately, once your financial records have been altered, discovering problems is extremely difficult.  Most standard accounting practices are not designed to uncover internal problems such as embezzlement.

 

General Suggestions

 

Therefore, the best way to safeguard your company's assets is to recognize and improve weaknesses in your internal procedures.  By implementing some simple internal controls you can reveal potential errors or discrepancies while safeguarding company assets and financial records.

 

  • Procedural Manual – While providing a resource for activities, procedural manuals also serve two additional purposes: 1) examining and documenting often uncovers potential internal control weaknesses; and 2) serves as a benchmark for determining employee performance.
  • Related duties should be assigned to different people – Certain accounting functions are designed to cross-reference each other for accuracy, writing/signing checks, ordering/paying/receiving materials, handling cash/recording cash, etc.  The procedures can reveal inconsistencies in your records in a timely manner.
  • Reconcile and scrutinize your bank statements each month – A bank statement can tell you a lot about your business if you review the information in a timely manner.  Bank reconciliation procedures are important because by reconciling and scrutinizing your bank statements every month, you can catch bank errors and note unusual activity.  Your company can also benefit from examining checks and verifying all endorsements, tracking transactions between accounts, reviewing cash disbursements on a regular basis and comparing payroll checks with employee records
  • Always ask for proof before you sign a check or authorize a transaction – When you insist on reviewing original documentation, your employees become more accurate and communicate their needs more clearly.  In addition, it serves as a final check point.  Recommended practices included never signing a blank check.  You should also verify the names of your vendors and your employees occasionally.  And remember to cancel supporting materials after signing a check. 
  • Review reports timely and thoroughly – Financial statements and other management reports should be prepared timely.  Sloppy or delayed bookkeeping practices make decision making more difficult.  In addition, timely review of the reports, especially comparative and trend statements can be the most efficient way to discover internal control problems.
  • Limit and monitor access to important documents and supplies – Keep blank checks and signature stamps secured, and deposit cash and checks daily.  It is also important to secure fidelity bonds and insurance for all accounting and key personnel. 
  • Know your employees and examine behavior changes – Always verify employee references before hiring.  Many while-collar crimes go unreported and continue to be repeated.  Watch for trouble signs; possible substance abuse, change in lifestyle, living beyond means; possession of work.  It is recommended that you also require vacations (and have someone else do the work during the interim); be unpredictable; and perform unscheduled checks of work.
  • For a few additional QuickBooks specific suggestions:
    • Use the password feature effectively, including limiting access to closed periods and changing passwords regularly
    • Turn on and use the audit trail report for reviewing transactional detail and history
    • Update the closing date monthly
    • Back Up often and keep back ups off site

 

These internal controls can help you reveal many discrepancies, as well as recognize the excellent efforts of your staff.  Our firm can help you develop and implement any of these important internal controls.  Please call me if you have any questions.  I will be happy to assist you any way I can.

 

Sincerely,

 

Accounting Firm

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