Internal Controls Provide Effective Insurance Against Fraud

Small and Medium Sized Enterprises (SMEs) Must Have Effective: 

Internal Controls

Of the many sizes a business may be, it is the SMEs that are most vulnerable to fraud, theft and errors. SMEs generally have weak internal controls which often stem from unaware business owners and management. Internal controls are rules, procedures and mechanisms a company employs to promote accountability, ensure the integrity of accounting and accounting information, as well as prevent fraud. Consolidating effective internal controls ensures the assets of the business remain free from fraud. It also assists in financial information accuracy and reliability, while ensuring compliance meets the necessary requirements. 

Cash Receipts

There are many important areas where each small business or enterprise must examine their internal controls, and cash receipts is a good place to start. Cash is the most liquid of all assets, but the use of cash receipts is a common risk area, as cash receipts are easily available and easily mishandled due to their nature. This leaves the use of cash receipts open to fraud.

Safeguards that can be used include controls such as: 

  • Segregation of duties between accounts receivable and a different employee accepting cash receipts.
  • Ensuring cash received is deposited daily if large amounts of cash are involved.
  • The use of a cash register or some other form of documentation.
  • Always ensuring enough cash is on hand to provide change, and so avoid messy notetaking regarding monies ‘lent’ from elsewhere to provide clients with change.

Bank Accounts and Credit Cards

A review of cheques, as well as cash register and bank statements, will assist in reducing risks, particularly when performed on random days. Reconciliation of bank accounts regularly, and separation of cash disbursements and purchases for approval, will prevent fraud and errors. Additionally, such controls should be in place for business credit cards, and card holders should be accountable for providing supporting documentation of purchases.

Purchases and accounts payable

Keeping supporting documentation obtained from suppliers, including invoices, purchase orders and receipts, is crucial for protecting physical assets and reviewing payments. In relation to inventory purchases, this can be a significant risk area for fraud and error, and relevant procedures should be implemented to inspect the condition of goods and for counting items.


Similar to cash receipts and many other business procedures, segregation of the payroll officer and distribution of pay is essential to any business. Additionally, bank account deposits should be reviewed to ensure there are no duplicate bank accounts.

Segregation of duties is crucial to all systems involved in the finance and operations of a business, and it can be the greatest opportunity for SMEs to streamline their operations. Reconciliations for bank accounts, accounts receivable and accounts payable should be completed on a regular basis, at least monthly. And owners and management should ensure extensive review and approval of procedures and processes employed in the business, as well as ensure adequate supervision of employees, and create a culture of fraud awareness. 

We specialise in assisting Small and Medium Enterprises (SMEs) and can provide further advice for improving procedures and controls. We offer internal audits for clients to improve risk management, control and governance processes. For more information, contact one of our Audit Specialists today on 03 9835 8200 or alternatively complete your details below and we’ll be in touch.

About the Author
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Emma Freund , Melbourne
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