An internal control system aims to process and record all financial transactions on time. It intends to prevent and detect any possible error or fraud. An effective structure of internal control policies and procedures results in efficient and reliable financial reporting. It is the first line of defense in protecting a company’s assets, such as cash or inventory, against losses from theft or waste.
Looking for Accounting Software? Check out SoftwareSuggest’s list of the best accounting software solutions.
Internal control checks play a crucial role in the efficient use of a company’s resources. The controls in the accounting system can help achieve this goal partly. Whether manual or automated, system controls in place minimize errors, improve employee efficiency, and produce accurate financial information necessary for strategic planning, budgeting, and forecasting.
Below are several internal control checks you need to verify when using accounting software for your recording and financial reporting.
Internal Control Checks to Keep in Mind for Accounting Software
Segregation of duties should not be confined to assigning duties and responsibilities. It has to be extended to granting access to the accounting system. Staff should be given access limited to those functions they are responsible for. Setting permission restrictions helps to safeguard the whole system and the data stored in it.
You can strengthen access controls by implementing password protection and two-step authentication procedures for every staff member. This helps prevent anyone from using another employee’s credentials for whatever reason. Check if the software can handle access logs and usage history to identify culprits and establish accountability when something goes wrong. Also, change the passwords and review user access privileges regularly.
Tracking Physical Assets
It is difficult to manually track your company’s physical assets, which include inventory and fixed assets. As to inventory, you need to manage the receipts and issuances of varied items daily. As to fixed assets, you should know the location, quantity, and condition of the company’s property and equipment.
When choosing accounting software, ensure that the system includes inventory and fixed asset management features. A perpetual inventory system makes it easier to check those items paid to pertain to inventory that has been delivered and is in good condition. Also, the system can verify that goods issued out pertain to items sold or processed to production. On the other hand, a fixed asset management tool aims to avoid theft, keep the properties in good condition, and automatically updates records as to depreciation and amortization.
Unless customers complain, your staff cannot always uncover discrepancies in the account ledgers. The manual process of checking the balance of each account against its details is time-consuming. Getting this done regularly can lead to inefficiencies, backlogs, and late reports.
The chosen accounting platform should be able to conduct regular account reconciliations to ensure that transactions match against the account balances and to detect any error that might result in inaccuracies. With this feature, duplicate or missing transactions can be quickly detected and prevent you from paying twice for the same transaction. Also, the reconciliation uncovers misstatements, material or not, that can affect the financial statements and the decisions that were made based on the reports.
Another significant reconciliation procedure is bank reconciliation. This internal control activity ensures that all cash received has been deposited, and all cash disbursements have been authorized. More often than not, the accounting department performs bank reconciliation the following month. This means that the person assigned to the task needs to reconcile a month of book and bank transactions.
Waiting a whole month to check cash transactions is risky. Fraudulent activities such as theft, skimming, lapping, or embezzlement that happened earlier in the month might be discovered too late. Culprits can quickly tamper the data, hide evidence, and probably resign without anyone noticing the fraud. You can get late to recover the cash lost when employees are either caught or have fled.
Accounting software that can perform day-to-day bank reconciliation procedures will strengthen a company’s internal control. You can confirm transactions every day, note any unrecorded receipts or disbursements credited or debited by the bank, check any bank transactions that you are unaware of, check whether collections are deposited quickly and, most importantly, ensure that cash receipts are deposited intact. This day-to-day control allows you to trace every cent that comes in and goes out of your bank.
Accounting software has inherent internal control checks you must take advantage of. The available systems were created to avoid certain risks that are common to most companies. However, the system is limited to specific built-in tools that may not address critical concerns unique to your business.
The best way to optimize your accounting software is to make sure it works with third-party apps for any deductions that need to be made. For example, a mileage tracker app can be used not just to track distance traveled, but also related expenses such as gas. This information can be automatically included in a tax deduction report at year-end and can help avoid payouts for any unnecessary expenses.
However, third-party apps and programs are developed with different functions and system mapping in mind. Thus, it is necessary that a financial expert reviews the accounting software and assesses the inherent risks to establish strong financial controls.
Accounting software is a cost-efficient and effective tool to manage financial transactions and safeguard your company’s assets. Be sure that you or a professional perform a risk assessment to strengthen internal control checks around the system.