Internal Controls - Transaction Cycles / Business Processes

1. Revenue/Receipt Cycle

Sales
1. Credit granted by a credit department.
2. Sales orders and invoices prenumbered and controlled.
3. Sales returns are presented to receiving clerk who prepares a receiving report, which supports prenumbered sales
return credit memoranda.
Accounts Receivable
1. Subsidiary ledger reconciled to control ledger regularly.
2. Individual independent of receivable posting reviews statements before sending out to customers.
3. Monthly statements sent to all customers.
4. Write-offs approved by management official independent of recordkeeping responsibility (e.g., the treasurer is appropriate).
Cash Receipts
1. Cash receipts received in mail listed by individuals with no recordkeeping responsibility.
a. Cash goes to cashier.
b. Remittance advices go to accounting.
2. Over-the-counter cash receipts controlled (cash register tapes).
3. Cash deposited daily.
4. Employees handling cash are bonded.
5. Use of lockbox system
6. Bank reconciliation prepared by individuals independent of cash receipts recordkeeping.

2. Expenditure/Disbursement Cycle

Purchases
1. Prenumbered purchase orders used.
2. Separate purchasing department makes purchases from list of authorized vendors.
3. Benchmarking prevailing prices for items.
4. Analysis of price variances and quantity variances.
5. Purchasing personnel independent of receiving and recordkeeping.
6. Receiving department personnel performs count and inspection of incoming items.
7. Supplier’s monthly statements compared with recorded payables.
Accounts Payable
1. Accounts Payable personnel independent of purchasing, receiving, and disbursements.
2. Clerical accuracy of vendor’s invoices tested.
3. Purchase order, receiving report, and vendor’s invoice matched (3-way match).
4. Timely preparation of voucher package.
Cash Disbursements
1. Prenumbered checks with a mechanical check protector used.
2. Two signatures on large check amounts.
3. Checks signed only with appropriate support. Treasurer signs checks and mails them.
4. Support for checks cancelled after payment.
5. Voided checks mutilated, retained, and accounted for
6. Bank reconciliations prepared by individual independent of cash disbursements recordkeeping
7. Physical control of unused checks

3. Payroll Cycle

1. Segregate: Timekeeping, Payroll Preparation, Recording, Personnel, Paycheck Distribution

2. Time clocks used where possible
3. Job time tickets reconciled to time clock cards
4. Time clock cards approved by supervisors (overtime and regular hours)
5. Treasurer signs paychecks.
6. Unclaimed paychecks controlled by someone otherwise independent of the payroll function (locked up and
eventually voided if not claimed).
7. In case of cash payments, such cash is deposited in a separate bank account.
8. Personnel department promptly sends termination notices to payroll department.

4. Conversion Cycle

Controls
1. Perpetual inventory records for large items.
2. Prenumbered receiving reports prepared when inventory received, receiving reports accounted for. (Purchasing)
3. Adequate standard cost system to cost inventory items.
4. Physical controls against theft.
5. Written inventory requisitions used.
6. Proper authorization of purchases and use of prenumbered purchase orders. (Purchasing)
7. Wall-to-wall counts and cycle counts are performed periodically and variances resolved.

5. Investing and Financing Cycle

Investments
1. Segregation of duties (authorization, recording and custody)
2. Independent agent for custody (stockbroker, bank, trust)
3. Securities not in the custody of an independent agent maintained under a jointly-controlled safe-deposit box
(treasurer + one official).
4. Securities in the name of the company
5. Detailed records of all securities and related revenues (interests and dividends), note of proper classification
of investments.
6. Periodic physical inspection of securities by individuals with no A-R-C responsibility (securities count)
PPE
1. Major asset acquisitions are properly approved by the firm’s board of directors and properly controlled
through capital budgeting techniques.
2. Detailed records are available for property assets and accumulated depreciation.
3. Written policies exist for capitalization vs. expensing decisions.
4. Depreciation properly calculated.
5. Retirements approved by an appropriate level of management.
6. Physical control over assets to prevent theft.
7. Periodic physical inspection of plant and equipment by individuals who are otherwise independent of
property, plant and equipment.
Financing (Debt and Equity)
1. Debt and equity transactions are properly approved by the company’s board of directors.
2. An independent trustee handles bond transactions.
3. A stock registrar and a stock transfer agent handle capital stock transactions.
4. Canceled stock certificates are defaced to prevent their reissuance.