Businesses throughout the world fall victim to fraud and cybercrime on a regular basis. As such, regardless of what type of business you run, you should be mindful that you could be impacted by fraud at any time.
An internal control system represents a reliable technique for firms of all types and sizes to safeguard against fraud. While internal control systems can never be completely failsafe, they can give you some peace of mind and help you to maintain your operations in the event things don’t quite go according to plan.
In this article, we share the items that should be on your small business’s internal control checklist.
What is an internal control checklist, and why do you need one?
An internal control checklist for small businesses is a management tool used to assess the organisation’s policies and practices created to effectively work toward the achievement of corporate objectives.
A system of checks and balances must be established to safeguard company assets from fraud, regardless of the business size, revenue, or number of employees. A strong internal checklist should contain the five components outlined below.
Internal Control Systems: Five Key Elements
The five basic control systems that should be incorporated into your internal control plan are as follows:
- The development of a safe environment
- Regular risk analysis
- Implementation of required control measures
- Robust information management and communication systems
- Monitoring systems
Examples of fundamental internal controls for each of the five internal control components are provided in the internal control checklist for small businesses that follows.
- The development of a safe environment
Often referred to as “the tone from the top,” the control environment sets the standard for all employees. It’s critical for business owners to communicate the idea of internal controls in a positive way, motivating staff to adopt and enforce rules. A unified approach to risk management and control lays a solid basis for success.
Start by establishing or enhancing the following in your control environment:
- Positive attitudes toward implementing internal controls throughout the organisation.
- Strong leadership promotion and support for positive ethical behaviours.
- Written guidelines outlining the internal controls circulated to all employees.
- An established and unambiguous code of ethics governs business.
- Each employee has a responsibility to follow internal controls that are specified in their job description.
- Managers carry out background investigations and confirm job histories prior to recruiting new staff.
- Regular risk analysis
It is not possible to manage controls if they are not first identified and understood. Detailed risk analysis should include the following steps:
- Identification of the areas of your business where fraud is most likely.
- Delineation of any weaknesses in the financial reporting.
- Frequent internal audits of accounting records, as well as compliance and regulatory checks for the industry.
- Analysis of the success of the security measures that are already in place to protect staff, customers, cash, and physical assets.
- Implementation of required control measures
Include particular control procedures that each employee is expected to follow and carry out in accordance with their various tasks in order to produce an exhaustive internal control checklist for small businesses. Several instances of control activities include:
- Create a framework for separating responsibilities, particularly for handling money and bookkeeping; for example, one person is in charge of managing cash flow and cash receipts, while another should handle bank deposits.
- Ensure adequate business insurance coverage is in place. For instance,cyber liability insurance, business liability insurance, and/or public liability insurance.
- Reconcile bank statements on a regular basis.
- Ensure that an individual other than the bookkeeper must give supervisory approval before making cash disbursements.
- Develop and implement standard processes for all operational activities.
- Secure digital assets using password protection and/or a reliable cybersecurity system. Lockdown buildings, equipment, inventory, and other physical assets after hours.
- Robust information management and communication systems
Assuring the accuracy of financial reporting, enhancing workplace responsibility, and optimising daily operations are all heavily reliant on communication and information technologies. Take the following steps as part of your internal control plan:
- Disseminate information influencing employees’ capacity to carry out their assigned tasks in a regular and timely manner
- Ensure all financial statements and other essential accounting records are promptly submitted to your bookkeeper.
- Issue a policy and procedure manual to all new hires on Day One.
- Develop detailed job descriptions covering diverse organisational responsibilities and duties.
- Train employees as soon as any business procedures or operations are changed.
- Monitoring systems
The final element in the internal control system checklist is monitoring. This is where a company starts to understand how to improve internal controls and discovers which internal controls are operating as required and which need to be changed.
- Perform ad hoc spot inventory and bank reconciliation checks.
- Arrange for a certified public accountant to arrange an internal audit (CPA)
- Perform ad hoc cash register audits, comparing sales made with credit cards and cash.
- Verify recent write-offs of problematic debts.
- Appraise staff members on a regular basis.
- Review changes to state or federal laws and regulations and assess current compliance strategies.
- Verify receipt documentation against accounts receivable journal entries
- Evaluate accounts payable procedures by comparing bills to purchase orders, keeping track of feedback from customers, external vendors, and stakeholders
- Set up an automated system for your small business’s internal control checklist items.
Due to a perception of a lack of available resources, many small enterprises opt not to implement an internal control system. However, if you want to run a successful operation, you must safeguard your company from fraud while achieving operational objectives.