Internal Control Checklist
An internal control checklist is intended to give an organization a tool for evaluating the
state of its system of internal controls. By periodically comparing the checklist to actual
systems, one can spot control breakdowns that should be remedied. When followed
regularly, a checklist has the following benefits:
There are fewer audit comments about internal control weaknesses
Management can gain assurance that reported financial results are accurate
There is a reduced risk of asset losses due to fraud
There is less chance that the organization is not complying with any
applicable regulatory requirements
Internal controls are a system of policies, procedures, reviews, segregation of duties, and
other activities that are used to minimize the risk of asset loss, produce accurate
financial statements, and conduct operations in an efficient and orderly manner.
When going through an internal control checklist, the intent is to spot any controls that
are missing or weak. Such a finding does not automatically indicate the presence of a
control problem that requires remediation. If there are offsetting controls elsewhere in
the system, a weak control could be considered acceptable. For example, if a signature
plate is used to sign checks, this could be considered a control weakness, except that a
formal approval is required upstream for every purchase order issued. This offsetting
control ensures that purchases are still approved somewhere in the purchasing system.
The internal control checklist can be massive, and is tailored to the needs of the
individual business. For example, the controls used for a casino (with its heavy use of
cash) are quite different from the controls used in a software development company
(which may never use cash at all). Here is a selection of the controls that might be found
in a typical business:
Payables control checklist:
All invoices greater than $50 are approved by a manager
A three-way match of the purchase order, receiving document, and supplier
invoice is conducted
Blank checks are stored in a locked location
The sequence of check numbers is tracked
Checks are manually signed
Invoices are stamped "paid" when they have been paid
Customer billing control checklist:
All discounts and special prices are confirmed
Invoices are checked for errors
Unmatched bills of lading are reviewed
The sales order total is compared to the invoice total
Statements of unpaid amounts are issued to customers
Payroll control checklist:
Time sheets are matched to a list of current employees
The hours stated on time sheets are approved by supervisors
The totals entered into the payroll system are matched to time sheet totals
The preliminary payroll register is reviewed and approved by the payroll
manager
All payroll checks are manually distributed to the people named on the
checks
Internal Financial Control ( IFC )
General Accounting Controls
Chart of accounts
Accounting procedures manual
The organizational chart to define responsibilities
Absence of entries direct to ledgers
Posting references in ledgers
Review of journal entries
Use of standard journal entries
Use of prenumbered forms
Support for all journal entries
10. Access to records limited to authorized persons
11. Rotation of accounting personnel
12.Required vacations
13.Review of the system at every level
14. Appropriate revision of the chart of accounts
15. Appropriate revision of procedures
16. Separation of recordkeeping from operations
17. Separation of recordkeeping from custodianship
18. Record retention policy
19. Bonding of employees
20. A conflict of interest policy
Cash Funds Controls
Imprest system
Reasonable amount
Completeness of vouchers
Custodian responsible for fund
Reimbursement checks to order of custodian
Surprise audits
No employee check to cash
Physically secure
Custodian has no access to cash receipts
10. Custodian has no access to accounting records
Cash Receipts Controls
Detail listing of mail receipts
Restrictive endorsement of checks
Special handling of postdated checks
Daily deposit
Cash custodians bonded
Cash custodians apart from negotiable instruments
Bank accounts properly authorized
Handling of returned NSF items
Comparison of duplicate deposit slips with cash book
10. Comparison of duplicate deposit slips with detail A/R
11. Banks instructed not to cash checks to the company
12. Control over cash from other sources
13. Separation of cashier personnel from accounting duties
14. Separation of cashier personnel from credit duties
15. Use of cash registers
16. Cash register tapes
17. Numbered cash receipt tickets
18. Outside salesmen cash control
19. Daily reconciliation of cash collections
Cash Disbursement Controls
Numbered checks
Sufficient support for checks
Limited authorization to sign checks
No signing of blank checks
All checks accounted for
A detailed listing of checks
Mutilation of voided checks
Specific approval of unusually large checks
Proper authorization of persons signing checks
10. Control over signature machines
11. Check listing compared to the cash book
12. Control over interbank transfers
13. Prompt accounting for interbank transfers
14. Checks not payable to cash
15. Physical control of unused checks
16. Cancellation of supporting documents
17. Control over long outstanding checks
18. Reconciliation of bank account
19. Independence of the person reconciling the bank statement
20. Bank statement direct to person reconciling
21. No access to cash records or receipts by check signers
Investments Controls
Proper authorization of transactions
Under control of a custodian
Custodian bonded
Custodian separate from cash receipts
Custodian separate from investment records
Safety deposit box
Record of all safety deposit visits
Access limited
Presence of two required for access
10. Periodic reconciliation of detail with control
11. Record of all aspects of all securities
12. Availability of brokerage advice, etc.
13. Periodic internal audit
14. Securities in name of the company
15. Proper segregation of collateral
16. Physical control of collateral
17. Periodic appraisal of collateral
18. Periodic appraisal of investments
19. Adequate records of investments for the application of the equity method
Accounts Receivable and Sales Controls
Sales orders prenumbered
Credit approval
Credit and sales departments independent
Control of backorders
Sales order and sales invoice comparison
Shipping invoices prenumbered
Names and addresses on the shipping invoice
Review of sales invoices
Control over returned merchandise
10. Credit memoranda prenumbered
11. Matching of credit memoranda and receiving reports
12. Control over credit memoranda
13. Control over scrap sales
14. Control over sales to employees
15. Control over C.O.D. sales
16. Sales reconciled with cash receipts and A/R
17. Sales reconciled with inventory change
18. A/R statement to all customers
19. Periodic preparation of the aging schedule
20. Control over collections of written-off receivables
21. Control over A/R write off, e.g., proper authorization
22. Control over A/R written off, i.e., review for the possible collection
23. Independence of sales, A/R, receipts, billing and shipping personnel
Notes Receivable Controls
Proper authorization of notes
Detailed records of notes
Periodic detail to control comparison
Periodic confirmation with makers
Control over notes discounted
Control over delinquent notes
Physical safety of notes
Periodic count of notes
Control over collateral
10. Control over revenue from notes
11. Custodian of notes independent from cash and recordkeeping
Inventory and Cost of Sales Controls
Periodic inventory counts
Written inventory instructions
Counts by noncustodial
Control over count tags
Control over inventory adjustments
Use of perpetual records
Periodic comparison of G/L and perpetual records
Investigation of discrepancies
Control over consignment inventory
10. Control over inventory stored at warehouses
11. Control over returnable containers left with customers
12. Preparation of receiving reports
13. Prenumbered receiving reports
14. Receiving reports in numerical order
15. Independence of custodian from recordkeeping
16. Adequacy of insurance
17. Physical safeguards against theft
18. Physical safeguards against fire
19. Adequacy of cost system
20. Cost system tied into the general ledger
21. Periodic review of overhead rates
22. Use of standard costs
23. Use of inventory requisitions
24. Periodic summaries of inventory usage
25. Control over intracompany inventory transfers
26. Purchase orders prenumbered
27. Proper authorization for purchases
28. Review of open purchase orders
Prepaid Expenses and Deferred Charges
Proper authorization to incur
Authorization and support of amortization
Detailed records
Periodic review of amortization policy
Control over insurance policies
Periodic review of insurance needs
Control over premium refunds
Beneficiaries of company policies
Physical control of policies
Intangibles Controls
Authorization to incur
Detailed records
Authorization to amortize
Periodic review of amortization
Fixed Assets Controls
Detailed property records
Periodic comparison with control accounts
Proper authorization for acquisitions
Written policies for acquisition
Control over expenditures for self-construction
Use of work orders
Individual asset identification plates
Written authorization for sale
Written authorization for retirement
10. Physical safeguard from theft
11. Control over fully depreciated assets
12. Written capitalization–expense policies
13. Responsibilities charged for asset and depreciation records
14. Written, detailed depreciation records
15. Depreciation adjustments for sales and retirements
16. Control over intracompany transfers
17. Adequacy of insurance
18. Control over returnable containers
Accounts Payable Controls
Designation of responsibility
Independence of A/P personnel from purchasing, cashier, receiving functions
Periodic comparison of detail and control
Control over purchase returns
Clerical accuracy of vendors’ invoices
Matching of the purchase order, receiving report and vendor invoice
Reconciliation of vendor statements with A/P detail
Control over debit memos
Control over advance payments
10. Review of unmatched receiving reports
11. Mutilation of supporting documents at payment
12. Review of debit balances
13. Investigation of discounts not taken
Accrued Liabilities and Other Expenses Controls
Proper authorization for expenditure and incurrence
Control over partial deliveries
Postage meter
Purchasing department
Bids from vendors
Verification of invoices
Imprest cash account
Detailed records
Responsibility charged
10. Independence from G/L and cashier functions
11. Periodic comparison with budget
Payroll Controls
Authorization to employ
Personnel data records
Tax records
Time clock
Supervisor review of time cards
Review of payroll calculations
Comparison of time cards to job sheets
Imprest payroll account
Responsibility for payroll records
10. Compliance with labor statutes
11. Distribution of payroll checks
12. Control over unclaimed wages
13. Profit-sharing authorization
14. Responsibility for profit sharing computations
Long-Term Liabilities Controls
Authorization to incur
Executed in the company name
Detailed records of long-term debt
Reports of the independent transfer agent
Reports of the independent registrar
Otherwise adequate records of creditors
Control over unissued instruments
Signers independent of each other
Adequacy of records of collateral
10. Periodic review of debt agreement compliance
11. Recordkeeping of detachable warrants
12. Recordkeeping of conversion features
Shareholders’ Equity Controls
Use of registrar
Use of transfer agent
Adequacy of detailed records
Comparison of transfer agent’s report with records
Physical control over blank certificates
Physical control over treasury certificates
Authorization for transactions
Tax stamp compliance for canceled certificates
Independent dividend agent
10. Imprest dividend account
11. Periodic reconciliation of dividend account
12. Adequacy of stockholders’ ledger
13. Review of stock restrictions and provisions
14. Valuation procedures for stock issuances
15. Other paid-in capital entries
16. Other retained earnings entries
Every small business needs internal financial controls to help ensure its money is properly managed.
Without them, your business risks employee fraud, cash flow shortages or even bankruptcy.
Here are 17 financial controls every small business should have in
place.
1. Keep business and personal finances separate. Never co-mingle business and personal
finances. If you do make a loan to your business or take a loan from your business, document it
appropriately with a promissory note specifying repayment terms.
2. Conduct background checks before hiring. This is especially important for employees whose
job duties involve finances, such as bookkeeping, accounting, payroll or handling cash.
3. Create monthly cash flow projections. If your actual cash flow falls short of projections,
investigate to find out why.
4. Review your business’s monthly bank statements in detail. Have bank statements sent directly
to your personal email or home address.
5. Review all credit and debit card statements for accuracy. Using payment cards for business
expenses can simplify accounting and tax preparation. However, the more employees have company
credit cards, the greater the chance of fraud. Require employees to document all business expenses
with detailed receipts.
6. Set up inventory control systems. Inventory is often damaged, stolen or lost. Inspect and count
incoming inventory to make sure orders were filled accurately. Designate who can sign for incoming
inventory or release outgoing inventory. Conduct regular inventory of products or materials.
7. Monitor point-of-sale transactions. Count cash in the cash drawer at the beginning and end of
each business day. Use point-of-sale software that requires employees to log in—tracking who is on
the register at any given time reduces the risk of theft.
8. Don't put one person in charge of petty cash. Require a second employee to authorize all petty
cash transactions. Record all transactions, and balance the petty cash once a week.
9. Review all outgoing payments. Compare payments to invoices. Watch for duplicate invoices,
new vendors or multiple invoices from the same vendor in a short time. Embezzling employees often
use these tactics to pay themselves.
10. Require vendors to submit detailed invoices. Avoid vague language on invoices.
11. Sign checks yourself. Require all outgoing checks and payments to be signed or authorized by
the business owner.
12. Review payroll before it goes out. Watch for any variations in the amount. Use direct deposit to
reduce your risk of payroll fraud.
13. Delegate financial duties to multiple employees. If one person is in charge of all your business
financials, such as bookkeeping, payments and payroll, it's easy for them to steal from your business.
14. Check up on employees involved with your business finances. Require these employees to
take annual vacations and have someone else handle their duties. Embezzlement is often discovered
this way.
15. Monitor your use of debt. Your accountant can help you set a maximum debt-to-equity ratio and
a minimum debt-to-cash flow ratio. Stay within these bounds to keep your business from becoming
overleveraged.
16. Plan ahead for business financing. If you have a sudden cash flow crunch, or find an
opportunity that requires a cash outlay, will you be prepared to handle it? Always have a couple of
potential capital sources at the ready.
17. Don't be predictable. Put the element of surprise on your side when watching for employee
misconduct. Perform your financial reviews and audits at random times.
