Thank you for taking the time to meet with me today and discuss your concerns with internal controls and security. Going public is a big step in the development of a corporation, and you will come under great scrutiny as to your security principles and internal control mechanisms. My colleague has informed me of several examples of how your business operates and I have prepared a few remarks and recommendations for you to address before going public.
Before I delve into the heart of the matter, I would like to remind you of the objectives of internal control practices: first, to safeguard the assets of the corporation, improve the reliability of its accounting practices and ...view middle of the document...
Since he is the sole person responsible for both making and documenting purchases, we believe this presents an infringement on the first principle. We have been aware of instances where a situation like that can be abused, and a fraud scheme could be perpetrated where the accountant might make personal purchases and falsify the records to either not reflect the cost at all, or to reflect the cost as the overstated cost of a totally different asset. We recommend hiring a bookkeeper or assigning the duty to a different individual. Your treasurer may still be responsible for the Purchases, but he should not be maintaining the records as well.
Secondly, your handling of the petty cash drawer presents a breach of the third and fourth principle -- the documentation of procedures and the physical controls. We believe that you should restrict the access to the cash drawer to a single employee, and all other employees who make purchases should obtain the cash through the new cashier. You are already on the right track by requiring the employees who use the petty cash drawer to leave a note explaining the purchase, but this can be taken further -- we believe original receipts and invoices need to be presented in order to ensure that there is no chance for fraud by falsifying information, which can easily be done on a note, but is difficult with an official document provided by a merchant.
The use of pre-numbered invoices is also not recommended because it can create problems later on if items don't arrive on time or are damaged or missing upon shipment. This could lead to an overstatement of assets. This is a 'soft' suggestion, as you can continue using the prenumbered system.
We believe the purchase of the indelible ink machine is a great idea, because the costs associated with such machines are not very high and this provides an excellent layer of protection against mechanical fraud. We fully endorse the purchase, because we believe it will be beneficial in terms of the physical controls...