Five Internal Auditing Controls
Segregation of Duties (P): Dividing responsibilities among different staffs prevents a single staff from authorizing and recording the financial transaction under his/her custody. The purchasing clerk has the right to prepare the invoice, but she is not supposed to make the payments. These are two sensitive responsibilities that should not be executed by the same individual since they pose a high probability of perpetuating fraud. Therefore, the purchase clerk should only prepare invoices and leave the other responsibilities to other individuals.
Physical Check (D and C): Inventory physical check detects and corrects any difference that may exist in the company’s stocked goods. In this scenario, the physical check will help the company to know whether the goods were received or the purchase clerk used some of the goods in the warehouse and treated them as received purchases (goods from non-existing vendor) to commit fraud. This is the purchasing department manager and store manager responsibility.
Standardized Documentation (P and D): Standardized documentation prevents and detects the misinterpretation of items. Analyzing the transaction records such as inventory receipts, internal requests and invoices involving goods from the non-existing vendor may reveal that there were no goods which were received or the goods were received through the purchase clerk arrangements with intentions of stealing from the company. The internal audit team helps the accounting and finance departments in maintaining standardized documentation.
Approval Authority (P): Having a policy that places authority to approve financial transactions to specific managers will minimize the chances of fraud as demonstrated in this situation. In this case, there should be a particular staff endowed with payment approval authority whom the purchase clerk should have sought permission from before sending the check for goods received. This internal control reduces the levels of fraud perpetuation, and it is the responsibility of the company management.
Access Controls (P): Setting in place mechanism that limits and controls access to particular accounting areas through lockouts, passwords and access logs prevents unauthorized users from accessing the accounting system. In this situation, the purchase clerk should not be allowed to access physical stock since he/she can use this loophole to commit fraud. This control should be implemented by the management.