Question

Why does a company give particular attention to internal

controls for cash? Why is it important to segregate the duties

for handling cash from the duties for keeping the accounting

records for cash? Describe two advantages of performing

reconciliations of the cash account to the balances on the bank

statements.

Answer 1

Compared to other assets, cash is easier to embezzle. Therefore, frauds related to cash are more common than those involving other categories of assets. Further, in the absence of adequate internal controls, frauds related to cash can be camouflaged for a long time before they are unearthed. A company should therefore give particular attention to internal controls for cash.

One of the important steps in setting up an internal controls for cash is to separate the cash handling duties among different people. Cash handling duties should be segregated across the stages of receiving, depositing, recording and reconciling cash. This would ensure that no single person would have control over the entire cash process.

If duties are not separated, potential outcomes could be:

a. Errors and irregularities going unchecked.

b. Lost or stolen cash receipts.

c. Inaccurate application of cash receipts to department accounts.

Two advantages of performing bank reconciliation:

a. Prevention and detection of errors and fraud.

b. Explaining the reasons why the firm's cash balance as on a particular date differs from the balance as per the bank statement.