How is internal control built in a small company? 5 simple rules
Even with few employees, errors and abuse can be prevented. Five practical rules and what they protect against.
Small companies that think "everyone here is one of us, control is unnecessary" often change their minds after their first big loss. Internal control is not a large department or expensive software. It is a handful of simple habits.
Let us look at the example of the "Toza Uy" cleaning service (7 employees).
What are the 5 rules?
| Rule | What is done | What it protects against |
|---|---|---|
| 1. Segregation of duties | The person who pays and the person who records are different people | one person's error or fraud going unnoticed |
| 2. Two signatures | Large payments require the approval of two people | hasty and unjustified payments |
| 3. Regular reconciliation | Every week the bank statement and the cash book are reconciled with the records | "lost" money going unnoticed for a long time |
| 4. No payment without a document | A receipt or invoice for every expense | unjustified expenses |
| 5. Surprise checks | From time to time the manager counts the till and the warehouse without notice | long-running shortages |
How can duties be segregated when there are few employees?
"Toza Uy" has only one accountant. So the accountant prepares payments, but the director approves them in the bank. At month end, the director reviews the bank statement personally. Simple, but effective.
How does internal control affect an audit?
The auditor first assesses internal control. If control is strong, the auditor tests smaller samples. As a result, the audit is faster and cheaper.
Test yourself
5 questions on this topic: pick an option or reveal the answer.
Under ISA 315 as revised in 2019, how many components make up an entity's system of internal control?
Internal control at "Gulobod sut" is very strong; the auditor performed tests of controls and confirmed that they operated effectively. Under ISA 330, what happens to substantive procedures for material account balances (for example, receivables)?
Under the IESBA Code of Ethics, which fundamental principle includes the auditor's duty to take steps so that staff working under their authority have appropriate training and supervision?
The cashier of Sahro Qurilish LLC took part of the cash from the till and, to hide the shortage, entered a fake payment document in the cash book. Under ISA 240, what type of misstatement is this?
The auditor has four different pieces of evidence about the bank balance of "Uchtepa logistika". According to the general rules in the application material of ISA 500, which of them is usually considered the most reliable?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- General principles of internal control (international practice) · general approach
- Rules and example · prepared by the author