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Financial Internal Controls Analysis Checklist

03 Jul 2017






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:
  1. To successfully achieve your business objectives
  2. To generate reliable financial reports
  3. To prevent fraud and misappropriation of your assets
  4. 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.
 
You should also read:
 
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.
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Financial Internal Controls Analysis Procedures Guide

Internal Controls Analysis checklist for the balance sheet accounts—
  • Petty cash 
  • Checking and savings accounts 
  • Investments 
  • Receivables 
  • Capital assets 
  • Payables
Internal Controls Analysis checklist for income statement accounts—
  • Revenues 
  • Payroll disbursements 
  • General disbursements
Internal Controls Analysis checklist for petty cash 
  • Count petty cash fund(s)
  • Reconcile to balance in general ledger 
  • Test a sample of reimbursements to fund
Internal Controls Analysis checklist for cash reconciliation 
  • Prepare proof of cash (this includes end of year and randomly selected months)
  • Trace deposits and expenditures back to cash records 
  • Analyze other reconciling items
  • Analyze transfers between accounts
  • Verify year end balances
Internal Controls Analysis checklist for cash activity 
  • Receipts journal 
  • Trace account totals to general ledger and trial balance 
  • Trace amounts to subsidiary ledgers 
  • Examine supporting documentation
  • Disbursements journal 
  • Trace account totals to general ledger and trial balance 
  • Trace amounts to invoices 
  • Trace amounts to signed orders 
  • View cancelled checks
Internal Controls Analysis Checklist for capital assets 
  • Complete or analyze inventory of capital assets 
  • Analyze documentation for acquisitions and disposals 
  • Analyze disbursements for unrecorded assets 
  • Analyze insurance coverages
Internal Controls Analysis Checklist for account payables 
  • Accounts payable 
  • Analyze listing and compare to invoices 
  • Search subsequent expenditures for unrecorded payables 
  • Search for retainage amounts on long-term contracts 
  • Payroll liabilities 
  • Trace liabilities to tax returns 
  • Analyze subsequent expenditures for payment 
  • Other long-term debt 
  • Analyze debt activity schedule 
  • Analyze documentation of principal and interest payments
Internal Controls Analysis Checklist for general revenues 
  • Compare actual revenues to budgeted and prior year amounts for variances
Internal Controls Analysis Checklist payroll disbursements 
  • Prepare payroll summary by quarter 
  • Reconcile totals to general ledger 
  • Trace random payroll 
  • Verify hours and rate of pay 
  • Recalculate amounts 
  • Trace amounts and general ledger
Internal Controls Analysis Checklist for general disbursements 
  • Compare actual expenditures to budgeted and prior year amounts for variances 
  • Trace sample of expenditures to supporting documentation and verify information 
  • Examine large expenditures
Internal Controls Analysis Checklist for financial statements 
  • Trace amounts to general ledger or journals 
  • Check for complete financial statement reports

 

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