Internal Controls - Accounting and Reporting

Internal Controls

Internal controls are the practices performed by departments to provide management with reasonable assurance that assets are safeguarded and transactions are authorized, valid, complete and accurate.

Internal Control Objectives

• Encourage adherence to prescribed policies and procedures.
• Promotes efficiency.
• Provides management with reasonable assurance that accounting and reporting transactions are authorized, valid, complete and accurate.
• Safeguards accounting documents from theft, loss and destruction.

Benefits of Internal Controls

• Prevents errors and irregularities from occurring. If errors or irregularities do occur, they will be detected in a timely manner.
• Ensuring issues arising from reporting errors are kept to a minimum and quickly resolved.
• Protects employees:
  1. By clearly outlining tasks and responsibilities:
  2. By providing checks and balances: and,
  3. From being accused of misappropriations, errors or irregularities

Responsibility of Management

It is the responsibility of management to develop and implement a system of internal controls.

Elements of a Good System

There are 4 elements in a good internal control system:

• Separation of duties
• Authorization
• Documentation
• Reconciliation

Separation of Duties

No person should have control over a transaction from beginning to end. Ideally, no person should be able to record, authorize and reconcile a transaction.

Why?

• To protect employees;
• To prevent and detect intentional and unintentional errors; and,
• To encourage better job performance.

Key Points

• Separation of duties may vary depending on each unit's size and structure.
• Duties may be separated by department or by individuals within a department.
• A simple sharing of duties between individuals may eliminate this weakness.
• Management should increase the review and oversight function when unable to sufficiently separate duties.
• Separation of duties can be circumvented by collusion.

Authorization

Transactions should be authorized and executed by persons acting within the range of their authority.

Why?

• To prevent invalid transactions.

Key Points

• Policies and procedures should clearly identify which individuals have authority to approve different types of transactions.
• Authority comes with accountability and responsibility.
• Individuals should understand what they are approving. Individuals should have first hand knowledge of transactions being approved, or they should review supporting information to verify the propriety and validity of transactions.
• Authorization of adjustments should be timely.
• Authorization should be from at least one level above.
• Employees should not authorize their own transactions.
• Adjustment documents should proceed directly for processing after approval by a supervisor and not return to the employee where they can be falsified. Many frauds (i.e. unauthorized adjustments) occur after approval.
• Supervisors should not sign blank forms.
• The supervisor and employee should initial corrections or adjustments.
• Delegation of authority in writing is required for grants and recommended for other budgets.

Documentation

Transactions should be clearly and thoroughly documented and available for review.

Why?

• Documents provide a record of each event or activity.
• Appropriate documentation helps to ensure assets are properly controlled.
• Documents provide evidence of what really happened.

Authorized documents may include:

• Journal Vouchers
• Calculation spread sheets (interest distribution, accruals, etc.)
• Original entry requiring correction
• Vouchers

Key Points

• The documents used to support entries in Accounting Records are University property, not the personal property of employees.
• The records must be retained according to your archive schedule normally 6 years.

Reconciliation

Reconciliation is the process of comparing the entries in the general ledger to supporting documentation and resolving any discrepancies or differences. Accounts Payable, Accounts Receivable, Cash, Property depreciation, Interest Income and other.

Why?

• To ensure the accuracy and validity of the entries and accrual balances.
• To ensure the records are accurately recorded.
• To ensure unauthorized changes did not occur.
• To resolve discrepancies in a timely fashion.

When?

An independent person should perform the reconciliation's regularly, (weekly, monthly, quarterly, annually) and when:

• Month end closing.
• Outside records are available, monthly bank statements.

Steps to Include:

• Agree all exceptions recorded in general ledger to source documents.
• Review infrequent transactions.
• Investigate and resolve differences.
• Initial and date the records to document that a review and reconciliation was performed.

Internal Control Summary

Internal Control Systems Depend On:

• Size of department (number of employees).
• Whether department is centralized or decentralized.
• Complexity of employee schedules.
• Level of management's monitoring and oversight.

Internal Control Elements Include:

• Adequate separation of duties.
• Transactions are authorized and executed by persons acting within the range of their authority.
• Transactions are clearly and thoroughly documented and available for review.
• Reconciliation's are performed regularly.