Developing Written Procedures
for Internal Controls
Presented by:
Sharon B. Robinson, CPA, MBA
Retired!!!!!!!!
October 5, 2011
Today’s Agenda
 What internal controls are
 Internal Controls Framework
 Types of Internal Controls
 Why and how policies and
procedures enhance internal
controls
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When all else fails, …..
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…Read the directions?
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Internal Controls
Internal controls are the structure, policies,
and procedures used to provide reasonable
assurance that an organization’s objectives
are achieved in the following areas:
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Safeguard assets
Effective and efficient operations
Reliable financial reporting
Compliance with applicable laws and
regulations
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Key Concepts

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Internal control depends on people People at every level are accountable and
responsible for their own processes and
transactions.
Managers are responsible for developing
and implementing policies and
procedures. They also monitor how well
policies and procedures are adhered to.
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Quotable Quote
“There are two ways to stop fraud—one
is to lock up everything around you, and
the other is to surround yourself with
ethical people.”
--Chris Linton, CFE
New Zealand’s Inland Revenue Department
Fraud Prevention and Investigation
from GAO publication
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Internal Control Advantages
Can reveal and minimize errors and
omissions
 Discourages employee theft
 Protects assets
 Improves public accountability
 Standardizes management practices
and procedures

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Who’s Responsible for Internal Controls ?
 Management
 All Employees
 Internal Auditors?
◦ Internal auditors evaluate the
effectiveness of internal controls
 External Auditors?
◦ Provide independent assessment on the
reasonableness of financial reports
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Everyday Examples
 Use a PIN with your ATM card.
 Lock your doors (house, car,
etc.).
 Review credit card statements
and other bills before you pay
them.
 Don’t leave blank checks and
cash lying around.
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COSO Integrated Control
Framework
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Components of Internal Control
1.
2.
3.
4.
5.
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring
Government Finance Officers Association of LA ~ October 5, 2011
Control Environment
 Tone at the top
 People are the core of it all.
◦ Ethics
◦ Competence
◦ Integrity
 Make everyone conscious of
controls
 All of the other elements of
internal control are based here.
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Control Environment

Includes:
◦ Organizational structure
◦ Formal policies and procedures
◦ Delegation of authority and
responsibility
◦ Incentives and rewards
◦ Human resource management,
including commitment to personnel
competency
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Risk Assessment
 The entire organization must
be aware of and deal with all
risks.
 Identify, analyze and manage
the risks related to each
activity.
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Information and Communication
Ensure that all staff are aware of and
trained on policies and procedures
(e.g., staff meetings; information
systems)
 Ensure that the right information is
getting to the right personnel

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Monitoring
 Tests controls to ensure they
are functioning as intended
 Allows the organization to
make corrections to controls
where needed
 Auditors (internal and external)
 Audit Committees
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Control Activities
 Control activities occur
throughout the organization at all
levels and in all functions.
 They can be defined by policies
and implemented through
procedures.
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Control Activities include:
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Approvals
Spending Limits
Reconciliations
Verification
Reviews
Reporting
Segregation of Duties
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Controls Classifications
Internal Controls can be classified
into two major categories:
1. Preventive Controls—stop
problems before they happen.
2.
Detective Controls—find
problems after they happen
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Controls Classifications
• Preventive controls prevent errors or
exceptions.
Examples:
◦ Standard policies and procedures
◦ Proper segregation of duties
◦ System limited access
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Controls Classifications
 Detective controls are designed to
identify an error or exception after
it has occurred.
 Detective controls include:
◦ Exception reports
◦ Reconciliations
◦ Periodic audits
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Human Resources

For example: Hiring ,Contracts –
◦
◦
◦
◦
Approval for hiring a new employee
Hiring checklist is completed
Verification of contract terms
Contract documentation is signed and kept
on file
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Payroll
Timesheets for hourly employees are
kept, reviewed, approved and
submitted by supervisor
 Reconcile payroll reports to timesheets
and ISIS/HR audit reports
 Review all changes to payroll on a
monthly basis
 Ensure that information on terminated
employees is processed immediately.

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Purchasing and Travel
Know what’s being purchased – approvals
 Segregation of purchase, receipt and invoice
approval
 Documentation and approval of travel and
business expenses
 Monitoring and reconciliation of P-card
purchases – tracking through a budget
process

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Budgeting
 Approved budget
 Monitor and report on budget
variance
 Communication of budget issues to
appropriate level
 Ensure proper subcoding for
expense type – remember P-card
purchases!
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Cash Management
Secure cash locations
 Use of lockbox
 Use of receipt books
 Logs identifying receipts and those
who handle cash
 Petty cash log review/reconciliation
 Bank reconciliations performed by
someone other than receiver of cash

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Policies & Procedures:
Who needs ‘em?
Properly established and
implemented policies and
procedures become invaluable for
identifying and delegating
responsibilities, preserving a
consistent level of quality
performance throughout an
organization.
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Part of the Internal Control Structure
Formal written documentation that
instructs, informs, leads, and guides
workers
◦ Written policies
◦ Formally developed and written
procedures
◦ Approvals
◦ Segregation of duties
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Policy Defined
A set of rules and principles
that provide guidance and
require a course of action
 Cover a wide range of issues
 Broad and apply to all
 WHAT needs to be done

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Examples of Policies
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City Ordinances
Leave policy
Conflict of interest
policy
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Sample: Personnel Policy
Statement of Policy
 Employees of the agency are expected to perform their
specific duties and conduct themselves in a manner that
fosters the achievement of the agency's purpose and goals.
The conduct of each employee is expected to reflect a
commitment to:
◦ Putting forth the employee's best effort;
◦ Managing the employee's work time for maximum effectiveness
and efficiency; and
◦ Performing to the best of the employee's ability the duties and
responsibilities of the position.
Disciplinary guidelines are established to communicate the
agency’s view regarding inappropriate conduct and to assure
that fair and equitable disciplinary action is administered
when an employee violates the standards of conduct.
(Source: Florida Employee Handbook)

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Procedures Defined


Detailed work steps that must be
performed to accomplish the
policy’s objective
Apply to specific work tasks,
roles, and departments
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Procedures Examples
 Bank reconciliations
 End-of-period closings
 Grants processing
 Budget development processes
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Why We Need Them
 Part of the internal control structure
 To guide employees and hold them
accountable
 Part of our accountability to the
public
 May be required by local ordinance
 Can cause you to question the way
things are done
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Who writes them?
Management is responsible for
the internal control structure.

◦
◦
◦
Finance  Business Manager
Human Resources HR Director
Citywide  Mayor and/or
governing body
May hire a consultant
 Line workers with oversight

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Policy and Procedure
Development Cycle
Data
Collecting
Monitoring
Drafting
Affirming
Continuous
Cycle
Verifying
Publishing
and Storing
Finalizing
and
Approving
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Development Process

Upper management develops
policy.

Mid-level management
develops procedures.
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Development Process

Multi-Step Process
1. Data Collection –
Policies: regulations, laws
Procedures:
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Talk to employees doing the work
Understand where and how the
process interacts with other
processes
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Data Sources
 State laws, rules, and regulations
 Federal laws, rules, and
regulations
 Search the internet
 Contact similar organizations
(i.e., other cities, universities,
departments)
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Development Process
2.
3.
4.
Prepare a draft of the policy and
related procedures. Add pictures,
charts, examples, where possible.
Verify. Have management and
users read for accuracy and clarity.
Finalize and approve. Upper
management should sign off.
Government Finance Officers Association of LA ~
October 7, 2010
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Development Process
Publish and store.
5.
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Send to applicable workers and support
staff
Remove out-dated policies and procedures
Replace with new ones
Keep in a central easily accessible place (i.e.,
library or intranet)
Affirmation – affected employees should
acknowledge receipt and understanding
7. Monitoring – Update as needed
6.
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SAMPLE
Policies and
Procedures
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EXAMPLE:
Cash Handling Policy and
Procedures
Mississippi
State
University
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EXAMPLE:
Bank Reconciliation Procedures
Bank
Reconciliation
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EXAMPLE:
Purchasing Policy and
Procedures
City of Oneida,
New York
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Effects of
Ineffective Policies and
Procedures
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City of Opelousas
Cash Receipts Not Deposited
During our review, we noted deficiencies in cash management practices
at the Department of Public Works and the Department of Code
Enforcement. Both departments routinely made sales of scrap metal for
cash. Reconciliation of the scrap metal sales with the cash deposits showed
approximately $5,816 of cash from the scrap metal sales was not
deposited into City accounts. In addition to these amounts, we noted cash
collections from the scrap metal sales were routinely deposited into
City accounts months after the receipt of cash. Louisiana law requires
daily deposits of funds whenever practicable.
(Excerpt from Legislative Auditor’s Compliance Report – City of Opelousas- June 29, 2011)
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Procurement Practices
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Between May 5, 2008, and September 17, 2010, the City made 14 payments
to Anderson Ironworks for 10 public works on City-owned structures.
Three of these projects totaled over $7,500.
The City’s procurement policy requires three written or faxed
quotes for projects over $7,500.
City records show only one of the three projects had quotes as required
by the purchasing policy. In addition, only two of the projects were
authorized using appropriate requisitions and purchase orders as required
by the purchasing policy.
The project that included written quotes was approximately $42,000 to
repair the roof and install siding for the City library. The City’s purchasing
policy requires all projects over $10,000 to use formal sealed bids with
invitations to bid and advertisements. In addition, the bids are to be
opened, tabulated, and evaluated by the City Council before being
forwarded to the Purchasing Department with a requisition.
Although the City obtained three written quotes, it had no documentation
supporting the use of a formal sealed bid process or evaluation of bids by
the City Council as required by its purchasing policy.
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Contractual Services
The City pays a contractor $1,200 a month to transport City
residents to doctor’s appointments. He currently transports
two residents, but in the past he has transported as many as
four residents. He works on Tuesdays, Thursdays, and
Saturdays.
 Contractor does not submit documentation supporting the
services he performs for the City. He uses a City vehicle as
well as a City Fuelman card to transport residents to their
treatments. There is no documented City approval for this
practice. The City does not document basic program
activities such as how residents are selected, evidence of
medical need, or residents enrolled. The City Clerk was
unable to provide a formal, written contract detailing the
contractual responsibilities of the parties.
 There is no documentation of competitive procurement as
required by the City’s purchasing policy.

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Wrap-Up
Develop and publish formal written
policies and procedures for all major
processes! Update them regularly.
 Understanding your internal controls
(structure, policies, procedures) is critical.
 Ensure that all employees are trained and
understand.
 Hold people accountable!
 The whole system rests on the PEOPLE.

Government Finance Officers
Association of LA ~ October 5, 2011
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Questions?
Applause?
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