Question

You have just taken on a role as Accountant for a garden and giftware shop called Allenby Home & Garden. The Chief Executive Officer (CEO) has asked you to review the organisations internal controls and asks you to re-allocate roles between all staff and yourself to maximize internal control of cash, and improve current procedures to assist this. The current staff and roles are as follows: • Jane (Sales Assistant) works at the cash register which has a float of $200. Most in-store customers pay by cash, but if they are unable to pay immediately, Jane will sometimes allow them to pay in instalments for their purchase. When this is done, she will record the transaction in the sales ledger. Jane can also refund customers if requested by the customer. The cash in the till is reconciled every Friday by Jane against till records and updated on the accounting system against Cash Sales. The cash received during the week is given to Trish for banking, and the float is returned to the till. • Trish (Accounts Clerk) works in Accounts and prepares sales invoices for wholesale customers and inputs accounts payable invoices. When accounts payable invoices need paying she identifies these invoices, and writes a cheque from the cheque book stored in her top drawer. Trish also opens all the mail, and records cheques and cash received from credit customers on the accounting system, and does a weekly banking of all cash and cheques received. Trish also records electronic payments received against customer accounts, and does a monthly reconciliation of the bank statement against the accounting records. Trish reconciles and reimburses the petty cash tin that is kept in the safe and used for milk/coffee/tea purchases for the lunchroom and any other small ad-hoc purchases. • John (Chief Executive Officer) co-signs cheques with Trish. • Your role (Accountant) has not yet been fully defined other than managing internal controls, preparing general journals and monthly/yearly financial statements. Required: i) Explain how you could re-allocate tasks mentioned above between existing staff and yourself to maximise internal control of cash? [15 marks] ii) What additional procedures would you recommend to maximise internal control of cash? [5 marks]

Answer 1

ANSWER (i)

CASH is most liquid asset of business which requires to control to prevent embezzlement of cash by staff or any other person.

Effective internal control is required to ensure the proper maintenance of cash in business. Internal control on cash is become compulsory when business is carried in cash (Most transactions are undertaken in cash). Of all the company’s assets, cash is the most easily mishandled either through theft or carelessness. To control and manage its cash, a company should:

· Cash transactions are properly recorded

· Reconciliation of cash on timely basis

· Avoid maintain so much cash in hand

· Prevent cash loss through 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.

The existing roles of staff of Allenby Home & Garden are summaries as follows-

JANE (Sales Assistant):

· Handled Cash Register

· Record The sales in Sales Ledger

· Allow purchase on credit to customers

· Refund of amount to customers

· Reconcile the cash balance and update accounting system accordingly

           Trish (Accounting Clerk):

· Prepare sale invoices for wholesale customers

· Settle the amount of creditors(Account Payables) through Cheque

· Receive cash from customers and record in accounting system

· Reconcile Petty Cash

  

          JOHN (CEO):

· Co-signs cheques with Trish

         

On the basis of above exiting allocation of Tasks in Allenby Home & Garden, The followings are the ways through which internal control of cash maximized-

I. Segregate the duty to handles cash register or entry in sale register between JANE & Trish. JANE will handle cash register and Trish maintain Sale register so that JANE cannot manipulate the sales figure or embezzle the cash.

II. Other person should be involved in Credit sales like approval of higher officer like CEO in this case or any other person authorize by CEO.

III. Refund on customer claim is allowed on a specific procedure like condition of goods sold and requires the approval for the same.

IV. Person handle the cash receipt and person who is recording of transaction Must be different. JANE should not be allowed to update accounting Records.

V. Arrange duties so that the employee who receives the cash does not disburse the cash.

VI. 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. Thus, instead of Depositing cash on weekly basis, cash should be deposited in bank on next business day.

VII. 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 bogus invoices. Thus, TRISH should not be allowed to record cheques and cash received from credit customers in the accounting system.

VIII. Monthly bank Reconciliation should be done by person who is not involve in the transactions. In this case Employee other than TRISH or JANE allow to make bank reconciliation.

IX. As an Accountant,

(1) Continuously review the internal control

(2) Identify any loop falls in internal control of cash and establish additional internal control

(3) Proper segregate duties and responsibilities of staff along with the management

(4) Ensure the effectiveness of Internal control in business

ANSWER (ii)

Additional procedure for maximize Internal Control of cash-

Ø Physical verification of hand-counting cash and any physical assets tracked in the accounting system.

Ø Carry out daily or weekly trial balance of cash as per nature of business

Ø Surprise Check

Ø Feedback from customer and implement other require control accordingly

Ø Recording of transaction with accuracy and standardized way

Ø Approval of authority is required on sensitive area like disbursement of cash

Ø Keep the assets of companies in protection

Ø Business owners should insist that employees who perform the company’s accounting/bookkeeping duties take a vacation every year and designate a back-up person to cover their responsibilities during that leave. Ideally the vacation should be at least a week long and occur over a month-end when the books are being closed.