What are the dangers of not having effective internal controls?
Ken Blake
Certified Public Accountant (C.P.A.)
Transcript:
Okay, what do we mean by "internal controls"? Primarily what we are tying to establish is ways of making sure that the business assets are not squandered or otherwise lost through loose accounting procedures. There are a number of areas that internal controls are really important: primarily in the area of inventory and also in the area of sales and cash management. For instance, you want to make sure that you take a physical inventory on a not too infrequent basis. Monthly would be great, quarterly would be not so great but it's still better than just an annual one. This allows you to match up what you think you have in inventory verses what you really have and can identify any shortages.
On the cash management side it's real important that you divide the duties. You don't want the same person that writes the checks to necessarily be the one that's depositing the cash and the receipts every day. It is even worse if you have that same person also doing the bank reconciliation. Naturally, as a small business starting out its hard sometimes to differentiate and move those duties to different people but it is really important to you as the owner to at least maintain control over the bank statement and perhaps have that bank statement sent to you first so that you can review it. And make sure that you get the first look at any checks or anything else that's going through that looks a little strange. Therefore if you can control the information, that's your main focus on internal controls.
