How audit standards affect your business

Electrical Apparatus, Mar 2007 by Wiersema, William H

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Conflicting duties potentially result in errors or downright fraud. In broadest terms, segregated duties include authorizing transactions, keeping records, and safeguarding assets. Part of segregation of record keeping is preventing unauthorized individuals from access. It is desirable to restrict computer access to those files necessary for an employee's job.

Where complete segregation of conflicting functions is not possible, certain policies can assure that it occurs. For one thing, duties can be rotated. For another, employees can be required to take vacations, during which others perform their work.

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There is also no substitute for independent, knowledgeable review of critical accounting functions. In smaller companies, the owner-manager may best perform these. Critical review can make the difference in establishing an appropriate control environment. Some of the crucial areas for such review include financial statements, bank reconciliations, journal entries, credit approval decisions, past due accounts receivable, accounts receivable write-offs, unmatched documents, and checks issued.

Basic accounting records must be retained, including the general ledger, journal entries, journals of sales, purchases, cash receipts and cash disbursements, and month-end account details, including accounts receivable and accounts payable.

Inventory transaction journals and month-end perpetual listings are also desirable. As part of month-end procedures, supporting details must be reconciled to the general ledger and maintained in a file for subsequent reference.

Accounting records rely on a chart of accounts for posting into financial statements. The chart of accounts must allow for an appropriate level of detail to manage the business. Otherwise, significant, unusual items may be hidden from view.

Journal entries should be numbered and bound together with their supporting documentation. Both the preparer and reviewer should sign off. Only authorized individuals should be allowed to prepare them. Without control, journal entries are dangerous. They convey the power to commit fraud as they can be used to camouflage any number of improprieties.

For each transaction, an audit trail should provide the date and time recorded and by whom. Computer systems can identify the user and terminal as well. Accounting systems should make this trail explicit.

For example, posted data should not be susceptible to modification after the fact without a complete record of what was changed when. Software popular with smaller companies may lack this control. Many programs, for example, allow unlimited changes to information after the fact. Payees on checks, amounts, or even dates can change with the stroke of a key. Auditors of entities that use those systems must be aware of the risks they entail.

The nearly universal use of computers for accounting systems has affected internal control concerns significantly. Common to practically every audit area is the assurance of mathematical accuracy and automated posting controls.

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How audit standards affect your business

Electrical Apparatus, Mar 2007 by Wiersema, William H

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