How does management decide what internal controls are necessary?
The first step is to identify key risk areas, which requires analyses of business operations and systems that are currently in place. What areas of the business are exposed and present an opportunity for employees to commit fraud (stealing inventory, misappropriation of funds, falsifying checks, etc.)? All companies should tune in to these popular fraud targets: accounts receivable and payable, payroll and inventory. How can fraud sabotage accounts receivables, and what is the solution? Companies should not delegate accounting duties to one employee. Whenever one person is responsible for every step in a process, you give that employee an opportunity to commit fraud. Here’s how one common fraud scenario plays out: An employee steals from an accounts receivable by taking a receivables check and cashing it for him or herself. To cover it up, the employee takes a payment from another client and applies it to the receivable he or she stole from. (This is called ‘lapping.’) This creates a p