Internal Controls Becoming Compliant

Design & Implementation of Internal Controls. Design: Need to show that a framework is in place to establish internal controls and is designed to prevent material misstatements in the financial statements. Implementation: Need to show that this framework not only exists, but is being implemented throughout all divisions through documentation of processes, flowcharting, walkthroughs, identification of key controls etc… Design & Implementation of Internal Controls. Design: Need to show that a framework is in place to establish internal controls and is designed to prevent material misstatements in the financial statements. Implementation: Need to show that this framework not only exists, but is being implemented throughout all divisions through documentation of processes, flowcharting, walkthroughs, identification of key controls etc… Work to be Performed

Requirement to Ensure the Effectiveness of Internal Controls. Update for any design changes or additional controls. Testing of the key controls in all major cycles. Remediation of any ineffective controls to ensure all key controls are working as expected. Requirement to Ensure the Effectiveness of Internal Controls. Update for any design changes or additional controls. Testing of the key controls in all major cycles. Remediation of any ineffective controls to ensure all key controls are working as expected.

Framework used to develop, identify and enhance a company’s internal controls. Key is understanding the interrelationships between an organization’s objectives, the components of the framework and the individual units and activities. Purpose is to identify what controls are in place, and should a breakdown occur (i.e. material misstatement), a method of identifying where and how. Framework used to develop, identify and enhance a company’s internal controls. Key is understanding the interrelationships between an organization’s objectives, the components of the framework and the individual units and activities. Purpose is to identify what controls are in place, and should a breakdown occur (i.e. material misstatement), a method of identifying where and how. Framework

5 components of the Framework: 1) Control Environment: Structure and foundation of the company. 2) Risk Assessment: Identification and analysis of risk 3) Control Activities: Policies, procedures and technology used to achieve management of control and risk 4) Information & Communication: information flow between management and employees. 5) Monitoring: continuous oversight of control by parties outside of the process. 5 components of the Framework: 1) Control Environment: Structure and foundation of the company. 2) Risk Assessment: Identification and analysis of risk 3) Control Activities: Policies, procedures and technology used to achieve management of control and risk 4) Information & Communication: information flow between management and employees. 5) Monitoring: continuous oversight of control by parties outside of the process. Framework

Example - Company X Project Plan 1) Assess control environment. 2) Identify key risks. 3) Determine key business processes & sub-processes. 4) Document/Map key processes & sub-processes. 5) Identify key controls/breakdown in controls within the processes. 6) Perform walkthrough. 7) Remediate for any changes as required. Project Plan 1) Assess control environment. 2) Identify key risks. 3) Determine key business processes & sub-processes. 4) Document/Map key processes & sub-processes. 5) Identify key controls/breakdown in controls within the processes. 6) Perform walkthrough. 7) Remediate for any changes as required.

Example - Company X Key Risks Revenues are being recognized correctly Bucketing of expenses on the financials statements are correct Controls over payroll process Controls over disbursements and purchases Accuracy of accounts receivable and billings Spreadsheet control Segregation of duties in finance department IT – access to source code, data transfers Controls over tax accounts, filings, accounting… Key Risks Revenues are being recognized correctly Bucketing of expenses on the financials statements are correct Controls over payroll process Controls over disbursements and purchases Accuracy of accounts receivable and billings Spreadsheet control Segregation of duties in finance department IT – access to source code, data transfers Controls over tax accounts, filings, accounting…

Example - Company X Key Business Processes: Finance and Accounting Monthly reporting Revenue recognition Journal entries Marketing & Sales Billings and Collections Payroll & HR Disbursements IT Tax Key Business Processes: Finance and Accounting Monthly reporting Revenue recognition Journal entries Marketing & Sales Billings and Collections Payroll & HR Disbursements IT Tax

Example - Company X Billing and Collection Cycle Sub Processes Customer Acquisition Setting up of customer into system Product Shipping & Handling Order Entry Process Recording of revenues (Maintenance, license, professional services) Cash collection/application Account maintenance and management Billing and Collection Cycle Sub Processes Customer Acquisition Setting up of customer into system Product Shipping & Handling Order Entry Process Recording of revenues (Maintenance, license, professional services) Cash collection/application Account maintenance and management

Example - Company X Cash Collection Sub Process Flowchart Check Received from Client by reception Enter payment received into system. Ensure accuracy of data entered, and that reference number given Collections clerk ensures that the total deposit amount and # cheques per the system agree to the bank book. Print cash receipts report, attach all cheque stubs, and pull all related invoices that have been paid AR manager ensures all cheques match the customers and invoice amounts. Any discrepancies sent back to clerk. (Key Control) Print 2 copies of daily deposit slip. File copy with the Daily Deposit Slip file. Attach all supporting documents to the slip and provide to treasury to be deposited to bank. Review performed by second clerk. Any discrepancies are followed up and investigated. Print out opening AR sub ledger, cash receipts journal and new invoice listing. Perform reconciliation of closing AR balance per sub ledger. (Key Control) System ensure no duplication of reference numbers Copy of check made for client records

Example - Company X Cash Collections/Application Narrative 1. Once cheque is received ensure that it is not post dated, and a copy is made should there not be a cheque stub attached. Entering payment into the G/L 2. When entering receipt of payment into the system, ensure that the sub ledger being impacted, date, client code and amount are all accurate. 3. Ensure that an appropriate reference number is also given for ease of tracking payments (either cheque #, software deposit or quote number). 4. Once all cheques have been entered into the system, ensure that the total deposit amount and number of cheques per the system matches the bank book. Once this has occurred, select post and then file in the system. 5. Print the summary total of all cheques for the day and ensure second clerk reviews this to ensure that the totals agree to the bank book. Any discrepancies should be followed up. Cash Collections/Application Narrative 1. Once cheque is received ensure that it is not post dated, and a copy is made should there not be a cheque stub attached. Entering payment into the G/L 2. When entering receipt of payment into the system, ensure that the sub ledger being impacted, date, client code and amount are all accurate. 3. Ensure that an appropriate reference number is also given for ease of tracking payments (either cheque #, software deposit or quote number). 4. Once all cheques have been entered into the system, ensure that the total deposit amount and number of cheques per the system matches the bank book. Once this has occurred, select post and then file in the system. 5. Print the summary total of all cheques for the day and ensure second clerk reviews this to ensure that the totals agree to the bank book. Any discrepancies should be followed up.

Example - Company X Cash Collections/Application Narrative (cont) 6. On a monthly basis, print out the opening AR sub ledger, all cash receipts and new invoice listing. Perform a reconciliation of the closing A/R (opening + new invoices – cash receipts = closing A/R). Investigate any discrepancies when reconciling to the AR sub ledger. (Key Control) 7. Print the Cash receipts report and attach all cheque stubs to this report and give this to the collections manager to pull the related invoices that have been paid. AR manager should review to ensure cheques are being applied to proper customers and amounts are accurate. (Key Control) 8. Print 2 copies of the daily deposit slips. Attach one copy to the cheques and give this, the bank book and cheques to be deposited to the treasury clerk to deposit at the bank. 9. File the second copy with the Daily Deposit Slips file. Cash Collections/Application Narrative (cont) 6. On a monthly basis, print out the opening AR sub ledger, all cash receipts and new invoice listing. Perform a reconciliation of the closing A/R (opening + new invoices – cash receipts = closing A/R). Investigate any discrepancies when reconciling to the AR sub ledger. (Key Control) 7. Print the Cash receipts report and attach all cheque stubs to this report and give this to the collections manager to pull the related invoices that have been paid. AR manager should review to ensure cheques are being applied to proper customers and amounts are accurate. (Key Control) 8. Print 2 copies of the daily deposit slips. Attach one copy to the cheques and give this, the bank book and cheques to be deposited to the treasury clerk to deposit at the bank. 9. File the second copy with the Daily Deposit Slips file.

Action Plan Planning begins assessment of Company’s needs and working down to the divisions level. Once methodology finalized, to be applied consistently to all subs. To engage an accounting firm to assist. Level of involvement to be determined. Timeline detailed on following slide. Planning begins assessment of Company’s needs and working down to the divisions level. Once methodology finalized, to be applied consistently to all subs. To engage an accounting firm to assist. Level of involvement to be determined. Timeline detailed on following slide.

Timeline TBD – Presentation on ICFR TBD – Define scope, plan project (assess control environment, risk assessment, processes and cycles) TBD – Train personnel TBD – Document IT general controls TBD - Substantially complete Documentation of entity controls, process and controls, and validation of process documentation of pilot sub and distribute to other subsidiaries TBD – Revalidate the project approach TBD – Presentation on ICFR TBD – Define scope, plan project (assess control environment, risk assessment, processes and cycles) TBD – Train personnel TBD – Document IT general controls TBD - Substantially complete Documentation of entity controls, process and controls, and validation of process documentation of pilot sub and distribute to other subsidiaries TBD – Revalidate the project approach

Conclusion Ensure this becomes a key priority. Education of our Employees. Communication within your group and with head office. Plan accordingly – likely to take longer than you think. Ensure this becomes a key priority. Education of our Employees. Communication within your group and with head office. Plan accordingly – likely to take longer than you think.

Conclusion Questions? If you have any questions about these services or how I can help you achieve your internal controls goals, please contact me at Questions? If you have any questions about these services or how I can help you achieve your internal controls goals, please contact me at