The law requires businesses to prepare internal controls analysis reports for regulation and compliance; but more importantly, bookkeeping internal controls analysis is an appraisal of your financial status that determines your business financial position and forecasts the future trend of your financial health.
For small businesses, the key objective is to appraise your complete financial situation if you are looking for angel investors to fund your business.
The internal controls analysis report also provides relevant information that helps small business owners take action in strengthening their internal controls. But why should you be so concerned about maintaining effective systems of internal controls?
There are four essential reasons:
To successfully achieve your business objectives
To generate reliable financial reports
To prevent fraud and misappropriation of your assets
To minimize your cost of capital
But internal controls is an extensive topic to cover and we will discuss that in the future articles.
Let’s go back to discussing bookkeeping internal controls analysis procedures.
At the bottom, you will find a complete checklist that will guide you to prepare for the most daunting task of understanding and forecasting the financial state of your small business.
First, the basic: plan the internal controls analysis. Here’s how—
Planning the internal controls analysis for small business
You have got to start somewhere.
And planning is a good place to begin your financial internal controls analysis.
Conduct a preliminary analysis. If you performed your financial reports in the previous years, analyze them. Also, analyze your current year financial reports. Check if there are significant changes and if there are certain external factors that may have critical impact on your financial results.
Document your procedures. Documentation is always important. Correct documentation is critical. When you document everything, you get to identify specific employees assigned to a particular roles and responsibilities. It is also important for you to determine whether analysis and reconciliations are conducted by the assigned employee.
Analyze internal control systems. If you don’t have a strong internal control in place, your business could be in trouble. Start analyzing your operational procedures and evaluate any potential risks. Examine compensating controls and analyze your internal control checklist. If you don’t have a checklist, it’s time you prepare one. Should the results of your internal control analysis suggest poor internal control environment, then prepare recommended improvements.
Perform test procedures. Always have checklists and procedures in place for you to follow in the testing phase. It’s important that you perform the established procedures for testing purposes where you can identify loopholes and risks in the general procedure and in accounts specific procedures.
Prepare reports. When you prepare reports, start with the internal controls analysis objective. Identify in the scope what were the procedures performed. In your conclusion, provide your insights related to the financial reports prepared by the assigned company officers or employees and findings with your list of recommendations.
Internal Control Checklist. Every company should have an internal control checklist. The items in the checklist should be analyzed to identify best practices and provide management recommendations to establish good internal control to safeguard company assets and provide accurate financial reporting.