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Improving Internal Control in Small Business

Segregation duties means the four duties must be spread to different employees in any sized business: (1) Custody assets; (2) record transactions; (3) authorization; (4) reconciliation. It is not only the key to safeguard assets; reduce innocent errors and prevent fraud, but also an audit protection of the owner. CRA examiners want to know internal control exists and observe them in action. Segregation duties is very challenge for small office who lacks office staff. So small business is easy being labeled with “weak internal control”.  Running a business, safety is same as important as profitability. It is imperative to establish segregation duties to safeguard their assets and business no matter the size of your business. Today, lets discuss how to establish segregation duties in 1- person office and 2-person office.

1-person office

Manager/Owner performs all duties of custody assets, bookkeeping and authorization. The manager is responsible for everything of daily running. A CPA engages reconcile accounts at year-end time, do year-end adjustment, issue financial statements and file corporate tax. Innocent errors and inappropriate behavior cannot be identified until year end time. In this case, the owner may think risk is low and he/she knows everything of the business. However, the steps on revenue haven’t been separated among different persons. With limited involvement, CPA is not committed to detect fraud. How the owners show internal control established in case CRA review and audit? My suggestions are:

  • “Transparency”

 Fraud happened in dark and disappeared on transparency. Documentation of revenue generating process such as: how tips are reported and distributed, who is allowed to operate of cash register; mechanical and personal controls to make sure the integrity of cash register is upheld; how money is deposited.

  • Maintain adequate supporting documentation.

Auditors often assume that “if hit isn’t documented, it didn’t happen. Adequate supporting documents provides the evidence to property verified that the appropriate process and control are being used. In addition to keep your bank statements and credit card statements well, it is suggested to use the third-party app such SmartVault to scan and link source documents to your transactions or use QuickBooks online attachment function to attach source documents to your transactions.

  • Perform reconciliation on regular basis

Reconciliation can identity errors on timely basis, it is a powerful internal control tool. It is suggested to perform monthly bank reconciliation and keep reconciliation report well.

2-person office

if you hire a bookkeeper or outsourcing your bookkeeping, you strengthen your internal control through segregation duties.

  • The duties of bookkeeper: Record accounts receivable; authorize and pay bill; Match and add bank feeds; reconcile bank accounts; approve payroll
  • The duties of Owner/manager: Approve and sign checks; sign employee contracts; complete deposit book; approve employee time sheets; distribute payroll; perform bank transfer; review bank reconciliation.

In addition to segregation duties, QuickBooks online has a set of build-in internal control tools, such as close book with password, audit history, audit log, exception to closing date report, users’ permission etc. to help small business owners strengthen internal control. If you want to know how to improve the internal control of your small office, please contact Qing (Jessica) Shi CPA at (403)-408-9765

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