TT10: Internal Auditing

October 25, 2001

Auditors often discover frauds committed by members of clients’ own staff. These are not necessarily new recruits – they can be long-serving and valued members of the team.

Theft of stock items is very common. Your company is especially at risk if you hold items of stock that are readily saleable e.g. finished goods. Such thefts are extremely difficult to identify, particularly if small numbers of items are stolen over a long period of time.

Another very susceptible area is, of course, cash. Cash transactions are notoriously difficult to trace. Similar concerns apply to controls over other payment methods such as cheques and electronic money transfers.

The above are problems that are most frequently uncovered by auditors, but there are many others. Of course, if you wait for the auditor to discover the problem, losses will have continued or the culprits may have left the company. Remember, nobody knows your business as well as you do. Whilst the audit will help identify fraud, that is not its primary purpose, so you must be alert to potential problems.
Identify risk areas now

It is vital that each and every business owner identifies risk areas within the business and ensures that adequate controls are in place to reduce the risk of problems occurring in the first place – it’s the old adage ‘prevention is better than cure’. Would you really want to face the embarrassment of publicity surrounding the conviction of an internal fraudster, even if you were able to recover the losses (which is usually impossible anyway)?

Barnes Roffe Topical Tips

  • When it comes to handling cash it is vital that the same person does not account for the cash as well as handle it. This division of duties makes a fraud much more difficult to perpetrate. Similar considerations apply to controls over cheques and electronic bank payments.
  • Physical security checks should be made in respect of valuable stock lines (e.g. cameras) as well as continuous stock-take records which can be used to identify losses on a real time basis.
  • Many business owners are not involved in day-to-day control over accounting and stock systems. Consider undertaking internal audit checks yourself to ensure that problems do not occur. Not only will these internal control checks identify any problems, but the very fact that you undertake them will be a huge deterrent to potential or actual fraudulent employees.
  • Consider creating the role of internal auditor. The savings could be massive. Most large corporations have internal audit departments. The potential problems that they face are similar to yours – the only difference is one of scale.
  • Talk to Barnes Roffe about providing an internal control function or setting out some detailed tests that management should undertake on a regular basis. Once tests are set up by Barnes Roffe you simply complete them in the way specified.
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