A private company audit can be a daunting task. You have to ensure that your financial statements are in order and that you are in compliance with all relevant regulations and accounting standards. But one of the most important aspects of an effective third party audit or review is having a well-developed internal control system in place. Internal controls can help you manage your business risk and prepare for future audits. In this article, we’ll dive into five best practices for setting up internal controls at your company.
What Are Internal Controls?
Before we get into the best practices for setting up internal controls, let’s first take a step back and define internal controls. Internal controls are the procedures and policies that businesses put in place to ensure the accuracy and completeness of their financial statements. They also help private companies prevent and discover fraud, as well as protect the company’s assets.
Five of the best practices for implementing an internal control system include:
1. Perform A Risk Assessment
Private companies should start by performing a risk assessment to reduce the likelihood of errors and fraud. Analyzing risk will help you identify the most vulnerable areas of your business and enable you to allocate resources toward developing and implementing controls that focus on those areas.
2. Segregate Duties
Segregation of duties is necessary because it can help prevent errors and fraud from occurring in the first place. Dividing the critical responsibilities for important business processes among different people can help ensure that no single individual has too much control over the process. Typically segregating duties involves separating custodial duties (of the financial assets), authorization duties, and recordkeeping duties between different individuals.
3. Control Approvals and Authorizations
Financial transaction approvals are generally high-risk areas prone to inaccuracies and fraud. It is vital to have controls in place that require all financial transactions to be limited to personnel with the right level of authority and require more than one person to approve transactions. For example, an authorization control could require a manager to authorize large payments or cash withdrawals and stipulate that two individuals are required to approve all transactions over a certain value.
4. Document Internal Controls
Everyone in your organization is responsible for understanding and complying with your internal controls. So the documentation of your internal controls must be complete, clear, detailed, and up-to-date. This documentation will be necessary for your third party audit and ongoing compliance.
What should your documentation include?
At a minimum, it should describe your control environment, risk assessment procedures, control activities, information and communication systems, and monitoring procedures. It’s also wise to keep your documentation in an easily accessible location, such as on your company intranet so that employees can reference it as needed.
5. Perform Reconciliations for Accurate Financial Statements
Reconciliations help identify and correct discrepancies. Similar to balancing a checkbook, reconciliations ensure that the amounts reported in your financial statements agree with the corresponding amounts in your accounting records. Reviewing financial statements should occur routinely throughout the year, as well as in preparation for a private company audit.
Who is best to perform reconciliations at private companies?
Reconciliations should be performed by someone independent of the individual responsible for the original transaction. For example, if an accounts receivable clerk records customer payments in the accounting system, then someone else in the organization should be responsible for reconciling the bank statements.
Monitor Controls with A Third Party Audit or Review
Once you have put internal controls in place, monitoring them on an ongoing basis is essential to ensure they are working as intended. Internal controls can be regulated by someone in your organization or through an external private company. Monitoring your internal controls will ensure they are adequate and preventative.
At Assurance Dimensions, we apply over 50 years of combined accounting experience to ensure that your comprehensive audit, review, and compilation will be accurate and actionable. Learn more about how we can provide the audit and assurance services you need to make better business decisions. Contact us today.