Bank and Cash Cycle

Bank & Cash

Study material

Pre-reading
Module
Class notes
Question Bank
Objective tests
 Cycles and how they integrate

1.Finance
2.Bank
and and Cash
Risk management
Investment

Cycles in a 3.Purchases
business 6.Payroll and
Payments

5.Revenue 4.Production
Computers –
and and
Inventory application controls
Receipts
 Pre-reading
Why cashier overages are worse than shortages:
When a cashier has frequent shortages, it could be one of three reasons:
• Not paying attention to his/her work
• Not skilled enough
• Stealing

Reasons for overages:

• You may have cheated a customer, by giving the customer the incorrect change, thus resulting
in more cash in the till. Or you (cashier) might have over charged the customer.
• You may have a dishonest cashier. Here the cashier will under ring for a specific item, and thus
resulting in the till having more money than it should. The cashier will keep track of the amount
that was less than the actual price, and then remove the cash from the till. A cashier could also
void transactions or create “fake” returns for good, and thus remove the money.

Cashiers who balance to the penny is also a concern:

• They use slush accounts: A pot where all of the overages goes in, and then pays any shortages
that might happen in future.
• Theft: A cashier could be stealing from the till by doing various of thing to ensure that the
drawer is even.
 Cycle Activities
• Nature of activities
• Cash balances
• Physical notes & coins
• Overdraft
• Petty cash floats
• Till floats
• Unbanked receipts
• Travellers cheques
• Bank balances
• Current account/ cheque account
• Branches – cash management facility
• Imprest bank account used as a clearing accounts (payroll)
• Investment/ deposit accounts
• Debit/credit/ garage card accounts
• Trust accounts
• Off shore accounts
 Cash & Bank Activities
• Nature of activities
• Integrated into other cycles
• Revenue & receipts
• Purchases & payments
• Investment
• Production & inventory
• Payroll
 Understanding the
business
• Nature of business – how material is cash in the business.
• Understanding the business & risk assessment
• Large volume transactions
• Material amounts
• Risk of fraud & error & theft
Internal Controls and Test of
Controls
• Controls in the bank and cash cycle can be divided into 3
categories:
• Basic controls
• Controls over cash
• Controls over bank account

• NB: Remember the general controls applicable to all

cycles.
 Basic controls
• Segregation of duties for receipt and recording of money.
• Different forms of cash (sales, petty cash, cash loans) should be kept
separately and recorded separately.
• Proper stationery control:
• Receipts, cash sales slips/invoices etc, are numerically recorded;
• Locked away;
• Recorded in a register (sign for issuing and on receipt).
• Money received by mail:
• Opened and counted by two independent persons;
• Recorded in a mail register;
• The person/cashier to whom it is handed over should sign as proof of
receipt.
 Basic controls
• Safeguarding of money:
• Locked in vault, etc. (key control);
• Banked as soon as possible (next day/2x per day, etc.).
• Payments should be made by cheque based on supporting
documentation:
• 2 cheque signatories (mechanical signing - control over
signing plates/under supervision);
• Cancel supporting documentation after payment;
• Signed cheques must not be returned to the beneficiary by
the person who has requested it.
• Post-dated cheques received should be recorded in
register and strictly controlled.
• Loans to employees (IOU) should be properly authorised
by a senior person.
• Adequate insurance should be taken out against theft and
fraud.
 General Test of controls
• Establish whether the control environment supports the control
procedures :
• Supervision and review
• Segregation of duties
• Rotation of duties
• Personnel take leave regularly
• Management control
• Internal audit
• Sufficient stationery control
• By means of:
• enquiries and discussions with personnel/management;
• observation, enquire whether the mentioned controls and basic
principles are applied
• Scrutinise records and documents for extraordinary items
• Test castings and calculations on all selected items, documents and
ledger accounts
 Controls over CASH
Internal Control Test of Control
Cashier must balance cash on a daily basis Enquire about and observe the controls
and must compare it with the source over cash.
documents (receipt, cash invoices, cash
register totals) and record it on a cash
Do a surprise cash count (also attend on
receipt summary:
a surprise basis the daily balancing of
cash):
• Signed by the cashier; • In the presence of the cashiers,
• Independently reviewed by a senior who signs for receipt back of
official; money;
• Counts the money in the cashier's • Agree the cash with the
presence (cashier signs for receipt back supporting documentation
of money); (receipts, cash invoices, cash
• Compare cash with supporting register total);
documentation; • Follow the float through to the
• Shortages should be paid-in by the balance in the ledger;
cashier.
 Controls over CASH
Internal Control Test of Control
Every cashier should only be
At a later stage follow the cash
responsible for his own funds:
counted through to deposit slip, and:
• during lunch, etc. cash/cash
register should be locked and • Agree it with the cash counted;
proper key control exercised. • Agree cheque amounts and
beneficiaries;
Every cashier should be
responsible for his own float - lock • Ensure banked timeously;
in cash drawer/cash-box. • Follow the total of the deposit slip
through to the cash book.
Supervision over cashiers -
senior/camera's, etc.

Cash must be banked as soon as

possible (next day/ twice a day)
Controls over Petty CASH
INTERNAL CONTROLS

PETTY CASH

o 1 person responsible
o Physical safekeeping
o Limit fund amount
o Define type of expenditure
o Pre-numbered petty cash vouchers
o Payments approved
o Reimbursements
o Exact amount of voucher
o Vouchers/slips cancelled
 Controls over BANK
Internal Control Test of Control
The bank account Select one or two month’s bank reconciliations
should be reconciled • Inspect that the recons have been performed
monthly with the cash • Inspect that the recons have been performed by
book: an independent official
• Independent of the • Confirm by inspection of a signature that the
person that writes reconciliation was reviewed by a senior official.
up the cashbook
• Reviewed by senior
independent official.
 Controls over BANK - EFT
INTERNAL CONTROLS TEST OF CONTROLS
EFT EFT
EFT Payments should have:
o Multilevel passwords from two senior o Enquire about the procedures followed for EFT
employees - must be simultaneously entered payments;
(Payment released by 2 senior officials); o Observed the process followed during EFT payments
o Access should be limited to one computer; to ensure that all controls implemented are followed;
o Access controls over the terminal; o Inspect the reconciliation for a signature by
o Shutdown after 3 unsuccessful access independent person.
attempts;
o Transfers limited to a specific day
 Payroll run 25th each month;
o Completeness
 10 employees = 10 salaries paid;
o Effecting the payment
 2 passwords of 2 different senior
employees;
o After the payment
 Audit trail;
 Bank statement;
 Bank recon;
o Reconciled by person independent of EFT
transaction.
Flow of documentation

BANK CASH
• Cancelled cheques • Cash register reading
• Cheque requisitions • Cash advance documents
• Deposit slips • Cash summaries
• Bank statements • Receipts
• Bank confirmation letter • Physical cash counts
• Cash book
• Bank reconciliation
BANK RECONCILIATION
• The bank reconciliation:
• Obtain the following with managements consent:
• Bank confirmation, Subsequent B/S
• Trace cash book balance to cash book
• Trace bank statement balance to bank statement
• Outstanding deposits:
• Trace through to subsequent bank statements
• Inspect date on deposit slip – before y/e
• Outstanding cheques:
• Trace through to subsequent bank statements
• Inspect supporting doc – valid expense
• Cheques > 6 months - reversed
• Inspect reasons for any other reconciling items
• Cast and re-perform the reconciliation
• Test outstanding cheques on reconciliation for
understatement
• Select cheques through bank after year end and compare
it with the list of outstanding cheques or entry in cash
book after y/e
Risks within the cycle
• Lapping/Rolling
• Misappropriation of receipts in cash from cash sales or
receipts from Accounts Receivable
• Remove cash of R500 and replace with cheque of
R500 received from debtor A
• Later credit A’s account with R500, transferring the
amount to B’s account
Risks within the cycle
• Kiting
• Remove cash and reflect as o/s deposit on bank
reconciliation.
• Later a cheque for fictitious expenses is drawn and
cheque deposited in co bank account – clearing o/s
deposit.
Risks within the cycle
Procedures to detect Lapping/Kiting
Positive accounts receivable confirmations
Surprise cash counts & bank reconciliations
Cash summaries compared to entries in cash receipts
and cash payment records, mail registers, deposit
slips
Questions?