cbrock84 Internal controls and audit
Controls exist because a single person who can initiate, approve and record a transaction can also conceal one. Everything else is elaboration on that.
This structures control design and audit readiness. Statutory audit requirements, and regimes such as SOX where they apply, are matters for your auditors and qualified advisers.
The five components an auditor will assess
Segregation of duties is one control activity inside a much larger structure, and a team that has only built control activities will still be told its control environment is weak. Auditors assess five components, and a deficiency in any one undermines the others:
- Control environment — integrity and ethical values, oversight by whoever plays the board role, a structure with defined responsibility and authority, competence for the work assigned, and accountability actually enforced. This is the component small organizations skip and the one that determines whether every other control holds.
- Risk assessment — objectives defined clearly enough to have risks, risks identified and responded to, fraud risk assessed explicitly rather than assumed away, and change identified as it happens. New systems, new people, and rapid growth all invalidate control designs quietly.
- Control activities — the controls themselves, including those over the information systems the records depend on, and evidence that they were performed rather than merely designed.
- Information and communication — quality information available to the people who need it, communicated internally to those who act on it and externally to those who rely on it. A control nobody was told about does not operate.
- Monitoring — someone checks that controls still work, and identified deficiencies get remediated on a timetable rather than carried forward year after year.
Two of these are consistently the weak ones in organizations under a few hundred people: fraud risk is never assessed on the reasoning that everyone is trusted, and monitoring never happens because the people who would monitor are the people who perform the controls.
Segregation of duties
Four capabilities should not sit with one person: initiating a transaction, approving it, recording it, and holding the asset. Any two combined is a risk; three is an unmonitored opportunity.
Small teams cannot always separate these. That is a normal constraint and pretending otherwise produces a fictional control matrix. Where separation is impossible, compensate visibly:
- Review by someone outside the process, on a defined cadence rather than when convenient.
- Exception reporting that goes to someone who is not the preparer.
- Bank confirmations and reconciliations reviewed independently of whoever performs them.
Document the gap and the compensating control. An acknowledged, mitigated gap is a defensible position; an unacknowledged one is a finding waiting to be written.
Design controls that leave evidence
A control that happened but left no trace did not happen, as far as an auditor can determine. Each control needs a stated owner, frequency, what is examined, and an artifact produced as a by-product of doing the work — not assembled afterwards for the audit.
Prefer preventive controls, which stop the transaction, over detective ones, which find it afterwards. Prefer automated over manual: system-enforced approval limits do not have busy weeks.
Approval thresholds
Set limits by value and by risk, not value alone. A low-value payment to a new supplier deserves more scrutiny than a large one to an established counterparty on contracted terms.
Watch for splitting — transactions repeatedly landing just under a threshold is the pattern the threshold creates, and it is straightforward to monitor for.
Audit findings
Treat a finding as information. Fix the cause rather than the instance, and be skeptical of remediation that consists of more careful behavior: the same conditions will reproduce the finding with different people.
Related but distinct: legal-risk:corporate-governance owns board and entity governance,
legal-risk:enterprise-risk owns the risk framework. This skill owns controls over financial
reporting.
Never
- Sign a control matrix that describes separation the team does not actually have.
- Accept a control with no evidence produced in the ordinary course of performing it.
- Remediate a finding with a commitment to be more careful.
- Set approval limits on value alone and not monitor for splitting.