CHAPTER ONE – CASH CONTROL AND PETTY CASH

I CASH CONTROL

 Since cash is the most liquid of all assets, a business cannot survive and
prosper if it does not have adequate control over its cash. Cash is the asset
that has the greatest chance of “going missing” and this is why we must
ensure that we have strong internal controls build around the cash
process.
 Since many business transactions involve cash, it is a vital factor in the
operation of a business. Of all the company’s assets, cash is the most easily
mishandled either through theft or carelessness.

 Account for all cash transactions accurately so that correct information is

available regarding cash flows and balances.
 Make certain that enough cash is available to pay bills as they come due.
 Avoid holding too much idle cash because excess cash could be invested to
generate income, such as interest.
 Prevent loss of cash due to theft or fraud.

 The need to control cash is clearly evident and has many aspects. Without
the proper timing of cash flows and the protection of idle cash, a business
cannot survive.
 Companies protect their assets by:

 segregating employee duties,

 assigning specific duties to each employee,
 rotating employee job assignments, and
 Using mechanical devices. Like having cameras, scanners etc

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  Although businesses vary their specific procedures for controlling cash
receipts, they usually observe the following principles:

 Prepare a record of all cash receipts as soon as cash is received. Most thefts
of cash occur before a record is made of the receipt. Once a record is made,
it is easier to trace a theft.
 Deposit all cash receipts intact as soon as feasible, preferably on the day
they are received or on the next business day. Undeposited cash is more
susceptible to misappropriation.
 Arrange duties so that the employee who handles cash receipts does not
record the receipts in the accounting records. This control feature follows
the general principle of segregation of duties given earlier in the chapter, as
does the next principle.
 Arrange duties so that the employee who receives the cash does not
disburse the cash. This control measure is possible in all but the smallest
companies.

 Companies also need controls over cash disbursements. Since a company

spends most of its cash by check, many of the internal controls for cash
disbursements deal with checks and authorizations for cash payments. The
basic principle of segregation of duties also applies in controlling cash
disbursements.

 Following are some basic control procedures for cash disbursements:

 Make all disbursements by check or from petty cash.
 Obtain proper approval for all disbursements and create a permanent
record of each disbursement.
 Many retail stores make refunds for returned merchandise from the cash
register. When this practice is followed, clerks should have refund tickets
approved by a supervisor before refunding cash.
 Require all checks to be serially numbered and limit access to checks to
employees authorized to write checks.

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  Require two signatures on each check over a material amount so that one
person cannot withdraw funds from the bank account.
 Arrange duties so that the employee who authorizes payment of a bill does
not sign checks. Otherwise, the checks could be written to friends in
payment of fictitious invoices.
 Require approved documents to support all checks issued.
 Instruct the employee authorizing cash disbursements to make certain that
payment is for a legitimate purpose is made out for the exact amount and
to the proper party.
 Stamp the supporting documents paid when liabilities are paid and indicate
the date and number of the check issued. These procedures lessen the
chance of paying the same debt more than once.
 Arrange duties so that those employees who sign checks neither have
access to cancelled checks nor prepare the bank reconciliation. This policy
makes it more difficult for an employee to conceal a theft.
 Have an employee who has no other cash duties prepare the bank
reconciliation each month, so that errors and shortages can be discovered
quickly.
 Void all checks incorrectly prepared. Mark these checks void and retain
them to prevent unauthorized use.

 “Everyone has heard a story about a seemingly great employee who has
worked in the business for many years, who would never do anything
wrong and who treats, the business like his or her own. And yet, that
person is discovered using the company’s check book to pay personal
expenses.”

These cash control procedures are based on and fall into 4 main areas, which are
listed below.

1. Segregation of duties prevents employees from concealing errors or

irregularities.

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 2. Asset accountability ensures that assets are accounted for, properly
documented and secured, and trackable to specific cash handlers.
3. Physical security focuses on the safety of people and the proper
maintenance and control of assets.
4. Reconciliation procedures ensure proper documentation and approval of
transactions.

Segregation of duties

Ideally, the functions in the table below should be performed by different

individuals to maintain a system of checks and balances. Sometimes, however,
staffing levels require that one individual perform 2 or more of the functions.

Function Example of duties

Recordkeeping  Ring, process, post/ validate cash register
transactions.
 Record sale transactions manually.
 Prepare cash receipt back-ups.
 Post only charges/ payments to an accounts
receivable system.
 Collect and forward all records of sales activity, cash
register readings, and sales adjustment (i.e., voids,
refunds/ returns, inventory adjustments, daily and
monthly balancing records and sales audits) to the
department's accounting office for proper
reconciliation to the general ledger.
Authorization  Approve voids, refunds, and other correcting entries.
 Approve departmental deposits.
 Approve cash transfers.
 Approve movement of assets.
 Approve anything that is unusual.
Asset custody  Access any fund ("cash").

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  Access stored cash or other assets.
 Maintain custody of petty cash or change fund.
 Maintain access or custody of returned checks.
Reconciliation Performed at a supervisory level or by department's
accounting office

 Compare funds collected to the accounts receivable

postings.
 Compare collections to deposits.
 Compare a surprise count of the asset inventory to the
appropriate records.
 Compare departmental records of revenue (sales) to
the general ledger.
 Once reconciliation is complete, all records of
reconciliation process should be stored by the
department accounting office along with all records
pertaining to sales activity.

Asset Accountability

The functions in the table below enable cash handlers to maintain a proper
accountability structure.

Function Example of duties

Individual  Identify every transaction to an individual.
 Assign each cash handler a separate drawer.
 Assign each cash handler a separate password.
 Perform a background check for each cash handler.
Cash  Secure all funds properly.
 Document all movement ("transfers") with receipts.
 Secure all cash transactions in a safe place.
 Give a receipt to every customer.

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  Do not share safe combinations and passwords.
 Secure keys properly.
Process  Know where an asset is at all times.
 Document all transfers with receipts.
 Prepare, maintain, and secure all receipts.

Physical Security

The physical security functions in the table below ensure the safety of people and
assets.

Function Example of duties

Monitoring  Use an armoured car or a police escort to transport cash.

 Open and close a cash handling station with two people
Present.
 Store assets properly.
 Alert the police with an alarm system as necessary.
 Secure keys properly.
 Change safe combinations annually or when there is turnover o
 Avoid counting cash when visible to others.
Physical layout  Follow the risk management standards.
 Store assets and cash properly.
 Avoid counting cash when visible to others.
 Install and utilize the proper alarm system.
Personnel pre-screening  Perform background checks on all prospective cash-handling em
 Fingerprint all prospective cash-handling employees.
Inventory control  Report shortages and overages to the appropriate contacts.
 Secure keys properly.

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Reconciliation

The functions in the table below ensure proper documentation and approval of
transactions.

Function Example of duties

Transaction  Collect receipts.
recording,
 Reconcile daily receipts to the cash register totals.
documentation
and follow-up
Authorization and  Reconcile the receipts issued to maintain numerical
approvals order.
 Reconcile and verify the register beginning and ending
balances.
 Perform surprise cash counts on any time or during
staff changes.
Segregation of  Reconcile bank accounts to major cash handling
duties deposits.
 Perform receipt number reconciliation control.
 Reconcile and control register transaction/ dollar
values.
 Control and authorize error, void, and/ or refund
transactions.

Basic Cash Control: Principles & Practices

Pre-condition 1: Cash handlers are authorized

Three Major Control Tasks

Unit supervisors and managers must ensure that all cash handlers are properly authorized to handle cash.

 Verify the employee's employment history (applicable to new hires)

 Request employee fingerprint/background check - (applicable to all employees who handle cash
unless the dollar amount involved qualifies for one of the exceptions allowed by company policy)
 File proper documentation (applicable to all employees who handle cash)

Pre-condition 2: Maintain separation of duties

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One of the most important steps your unit can take to protect cash -- and you the cash handler -- is to
separate cash handling duties among different people. This way, no one person has control over the entire
cash handling process. This principle is called Separation of Duties or Segregation of Duties.

Principle - No one person should have complete control over a transaction.

Practice - In separation of duties at least two people are involved in any cash handling transaction.

Control Tasks

Separate cash handling duties, whenever possible, to different people

Dual Custody

Watch police officers on patrol, Loomis guards transporting cash, or a grocery clerk depositing cash to a safe.
When working on high risk tasks, they always work in pairs. One person carries the cash and makes the
deposit, the other monitors for safety and keeps the other partner in view.

Involving two people in a critical cash handling task is a special application of Separation Duties called Dual
Custody. At a Company, whether you are depositing cash to a drop box, counting cash, or engaging in any
such critical task, having two people engaged in that activity together is an important practice.

Practicing dual custody:

 Encourages cash handlers to check each other

 Reduces the opportunity for robbery and theft
 If loss does occur, protects cash handlers from unwarranted suspicion

Step 1 - Accept Cash and Endorse Checks

Principle: Document cash and checks properly

Thousands of dollars exchange hands daily on companies, usually in the form of cash, checks and credit cards.
Cash transactions are not things, but events that begin and end. Unless they're documented, there is no way
to track the movement of money. This has big consequences.

Every time you receive cash, you must engage in three control tasks:

 Accept the payment. If payment is by check, ensure the check is payable to the concerned party
 Record the transaction with a receipt to the customer.
 When not in use, place all cash in a designated secure location.

Step 2 - Prepare Deposit

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So far, you have endorsed the check(s), given a receipt to the customer, and kept your cash in a locked and
secure location. The next step is to complete the proper deposit slip.

Staff working in a main cashiering unit, will complete the bank's deposit slip for Bank of TD/CIBC. Staff
working in all other units will complete a Departmental / Sub Cashier Cash Collections Deposit Form.

Control Task - Use the correct deposit form/slip and document accurately:

 Units run adding machine tape(s) of all checks received and a separate tape for all credit card sales.
Attach the tapes to the corresponding checks and/or credit card receipts.
 Accurately provide all appropriate information on the form. To provide individual accountability, the
preparer and reviewer sign or initial the deposit form.
 Include other supporting documentation.

Step 3 - Deposit Cash - Control Tasks

Minimize the Risk

Count cash in a location where no one outside of the office/unit can see you doing it. If others don't know
that you have cash, especially a lot of cash, they are less likely to be barging in demanding the money.

At the end of the workday, secure all funds and leave the register's cash drawer open so that it is obvious
that the register contains no cash.

When to Deposit Cash, Checks and Credit Card receipts

Sub-cashiering
To prevent too much cash from accumulating at your in-take point, the Company
stations
specifies when you are to deposit excess cash at the Main Cashier's office.
and
Cash Handling
Sub-cashiers and cash handlers (unit personnel) must deposit at least daily.
depts/units

Step 4 - Reconcile Deposits - Control Tasks

Control Task - Investigate all Cash Differences

There will be times when your cash and receipt amounts will be different and won't balance the first time.
This is very common and most often due to clerical errors.

As a cash handler, you must investigate the differences to determine its source. You must account even for
small cash differences, because over time they add up to large losses in the organization.

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Find the Source of Cash Differences

To investigate cash differences, consider the following possible causes:

 Was the cash in the till counted incorrectly?

o Recount your cash, preferably in dual custody
 Was your arithmetic or keying incorrect?
o Run a second tape to double check the accuracy of your 1st tape.
o Running two balance tapes daily is a good habit to get into.
 Was change counted incorrectly back to a customer?
o This is a loss and the reason needs to be documented and reported.
 Were numbers transposed on your receipt/deposit slip?
o If so, double check your figures and slow down next time.
 Is cash missing?
o If so, this is a loss and must be reported.

Step 5 - Report Losses

Though most cash differences can be traced to clerical errors, be especially alert to mysterious losses or
patterns of loss.

 You must report any losses to your supervisor.

 If you feel uncomfortable reporting a suspicious loss to your supervisor, report it directly to the
Director of Internal Audit.

II - IMPREST SYSTEM OF PETTY CASH

The impress system is an accounting system for paying out and subsequently
replenishing petty cash. Petty cash is a small reserve of cash kept on-site at a
business location for incidental cash needs. The imprest system is designed to
provide a rudimentary manual method for tracking petty cash balances and how
cash is being used. The essential features of an imprest system are:

 A fixed amount of cash is allocated to a petty cash fund, which is stated

in a separate account in the general ledger.
 All cash distributions from the petty cash fund are documented with
receipts.
 Petty cash disbursement receipts are used as the basis for periodic
replenishments of the petty cash fund.

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  Variances between expected and actual fund balances are regularly
reviewed and investigated.

In essence, expenses are recognized when new cash replenishments are made
to the petty cash fund from the company checking account. When cash is paid
from the checking account, the entry is a debit to the various expenses for
which receipts are being supplied by the petty cash custodian, and a credit to
the cash account.

Establish Petty Cash Fund

Petty Cash 1000

Bank/Cash 1000

Replenishment of Petty Cash

Various expenses 930

Bank/Cash 930

Unless the amount of cash assigned to the petty cash fund is deliberately
altered, there is no reason why there should ever be another entry into the
account used to document the petty cash balance, since all petty cash
replenishments are coming from the company checking account.

The main feature of this system is the need to document all expenditures.
Doing so is an excellent way to maintain a high level of control over cash
disbursements.

The imprest system is declining in popularity, since many businesses prefer to

use company credit cards for incidental purchases, or have employees pay cash
and then apply for reimbursement through the corporate expense
reimbursement system. Also, the imprest system can cause cash leakage from
a business, either through theft of the cash or because the petty cash
custodian does not do a proper job of recording disbursements.

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