Elements of a Good System

Elements of a Good System

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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 for leave, overtime and change of work schedule should be obtained in advance and in writing.

  • 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 it can be falsified. Many frauds 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.

  • Leave and payroll documents should proceed directly for processing after approval by a supervisor and not returned to the employee where they can be falsified. Many frauds (i.e. unauthorized or excessive overtime hours charged) occur after approval.

  • Supervisors should not sign blank timesheets or leave request forms.

  • Corrections or adjustments should be initialed by the supervisor and employee.

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.

  • Appropriate documentation ensures the accuracy and completeness of transactions.

Authorized documents for non payroll transactions may include:

  • Journal Vouchers

  • Calculation spread sheets (interest, distribution, accruals, etc.)

  • Original entry requiring correction

  • RFC’s

Entries on the Time Sheet Report must be consistent with properly authorized leave and payroll documents. These documents may include:

  • Timesheets

  • Leave requests (Request For or Report of Absence)

  • Overtime Authorizations

  • Personnel Action Forms (PAF)

  • Attendance Calendar

  • Extended leave Approvals from Department and/or Human Resources

Key Points for Non Payroll Transactions

  • The documents used to support entries in Accounting Records are Company property, not the personal property of the employees.

  • The records must be retained according to your archive schedule.

Key Points for Payroll Transactions

  • The Time Sheet Report and documents used to support entries on the Time Sheet Report are company property, not the personal property of employees.

  • Supporting documents are retained for 6 years.

  • Use attachments or footnotes to document the reasons for corrections/adjustments to the Time Sheet Report that are not evident.

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. For payroll, reconciliation is the process of comparing the entries on the Time Sheet Report to supporting documentation and resolving any discrepancies or differences.

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.

  • To ensure the employee is entitled to the benefits recorded (annual leave, sick leave, etc.).

  • To ensure unauthorized changes do not occur.

  • To resolve discrepancies in a timely fashion.

When?

Non Payroll

An independent person should perform the reconciliation’s regularly, and when:

  • Month end closing.

  • Outside records are available, monthly bank statements.

  • 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.

Payroll

An independent person should perform a reconciliation of the Time Sheet Report at least annually and when an employee:

  • Transfers;

  • Requests extended leave without pay, or

  • Separates from the Company

Steps to Include:

  • Agree all exceptions (i.e., sick leave, annual leave) recorded on the Time Sheet Report to source documents.

  • Agree anything on the Time Sheet Report that affects gross pay (overtime, Payroll Adjustments) to the actual pay (check register and certification report).

  • Review infrequent transactions such as separation pay calculations.

  • Investigate and resolve differences.

  • Initial and date the Time Sheet Report to document that a review and reconciliation was performed.