Page 258 - Accounting Best Practices

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12–21 Use Internal Audits to Locate Transaction Problems in Advance 247
12–21 USE INTERNAL AUDITS TO LOCATE TRANSACTION
PROBLEMS IN ADVANCE
The financial statement is, in a manner of speaking, the cesspool into which all
corporate information flows—that is to say, all transaction errors will wend
their way into this final repository of corporate information. This means that
there can be a large concentration of incorrect data in the general ledger, which
unfortunately is the only source of information from which the financial state-
ments are created. Accordingly, poorly completed transactions upstream from
the general ledger will eventually appear in the financial statements. This
causes a great deal of extra work for the accounting staff, who must frantically
research all of the problems that were caused upstream from the financial state-
ments and issue journal entries to correct them—all in the few days during
which the statements must be completed and issued. This problem will occur
month after month unless something is done to find out where these problems
are occurring and why.
The internal auditing staff can be brought in to discover where these prob-
lems are occurring, why they are happening, who is causing the problems, and
what can be done to fix them. By using the internal auditing staff, the controller
can determine the exact nature of all the problems plaguing the financial state-
ments. Though this best practice does not solve the problems, it at least identi-
fies them, making it much easier for a controller to determine an appropriate
response to each one. The long-term result of this approach is a gradual reduc-
tion in the number of errors in the financial statements, resulting in much less
analysis time by the accounting staff to correct the preliminary version of the
financial statements.
The main problem with this best practice is caused by the internal audit
department and its controlling audit committee. The department recommends to
the audit committee (which is usually composed of members of the board of
directors) a set of investigative projects for the upcoming year, which the com-
mittee typically approves without much discussion. The department creates this
list based on the perceived payback from each potential audit, or because they
are in potentially high-risk areas. If the controller cannot get the transaction
review audit onto this annual project list (and repeatedly so, since this audit
must be repeated time and again), there is no way that the best practice can ever
be completed. It may take a considerable amount of influence with the internal
audit manager or the audit committee to make sure that these audits are regularly
conducted.
Cost: Installation time: