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Control environment health check (Part 1)

Control environment health check (Part 1)

All organisations have financial controls of some sort, whether these are elaborate procedures documented in a manual, or informal reviews done by management. The idea of financial controls is to stop bad things happening in your finances (e.g. mistakes or frauds), or to spot them as quickly as possible if they do happen.

But how do you know if you have any gaps? Are there things you should be doing that you’re not?

This article lists some question prompts for you to consider, to help you check the health of your financial controls and if you have any gaps. The questions are not exhaustive, and some of them will not be necessary for all organisations, but hopefully they will provide food for thought. If your organisation already has all these items covered then give yourself a firm pat on the back!

In total we will cover the following areas: Purchase Cycle; Sales Cycle; Payroll Cycle; Fixed Assets Cycle; Stock Cycle; Financial Reporting Cycle; IT controls; General Control Environment.

This first part will cover the Purchase Cycle and the Sales Cycle, with the other areas being covered in later articles.

Purchase Cycle

  1. New suppliers. Is set-up of new suppliers in the system approved? Where possible, is responsibility for set-up of new suppliers segregated from the responsibility for making payments?

    WHY? Segregation of duties between team members is important in the supplier set-up process to reduce the risk of fraud and error. Segregation of duties means that collusion between different people would be needed to commit fraud.

  2. Purchase matching. Are supplier invoices matched to purchase order and evidence of receipt of the goods (where applicable) before being approved for payment?

    WHY? Purchase matching procedures ensure that the organisation only pays for goods/services it has ordered and received.

  3. Payments. Are cash payments properly approved by someone other than the person responsible for setting up the payment?

    WHY? The most key area to ensure proper approval and segregation of duties between different team members is in the payment process.

  4. Cheques. If the organisation still uses cheque payments or other offline payment methods, are adequate approvals in place over these?

    WHY? Payment methods that are manual or occur less often may present increased risk of fraud or error and so should be monitored closely.

  5. Credit cards. Are company credit cards only used by necessary employees? Is expenditure on company credit cards monitored and approved?

    WHY? Invalid or unwanted expenditure may occur on credit cards if this is not monitored closely.

  6. Employee expenses. Is there a written policy for employee expense claims? Are employees required to submit receipts/invoices to support their expense claims and are these reviewed?

    WHY? A clear expenses policy will help ensure that employees do not claim invalid or excessive expenses.

Sales Cycle

  1. New customers. Are new customers approved to ensure they are appropriate? Are credit checks performed and credit limits set?

    WHY? Performing checks on new customers will reduce the risk that the organisation does business with customers that are inappropriate or cannot pay.

  2. Sales matching. Are sales invoices matched to the customer order/contract and evidence of despatch of goods or performance of service?

    WHY? Sales matching procedures help ensure that only valid income is recognised.

  3. Completeness of income. Are procedures in place to ensure that invoices are raised for all work that has been done?

    WHY? Procedures to check that all work has been billed maximises income and cash flow. If there is a long delay between performing work and invoicing it may be more difficult to recover the cash.

  4. Credit control. Are old debts monitored and is exposure to potential bad debts considered?

    WHY? Closely monitoring old debtors improves the organisation's cash flow and reduces the risk of write-offs

I hope these prompts have provided some points for you to consider. In the next part of the series we will cover the Payroll Cycle, Fixed Asset Cycle and Stock Cycle.

If you would like us to help you review your controls and procedures then please get in touch.

Find out more about Gary Pready

Gary Pready

Gary Pready

Senior Audit Manager