Question

PR 8-1b Evaluating internal control of cash            ObJ. 2, 3 The following procedures were recently installed by The China Shop: a. All sales are rung up on the cash register, and a receipt is given to the customer. All sales are recorded on a record locked inside the cash register. b.             Each cashier is assigned a separate cash register drawer to which no other cashier has access. c. At the end of a shift, each cashier counts the cash in his or her cash register, unlocks the cash register record, and compares the amount of cash with the amount on the record to determine cash shortages and overages. d. Checks received through the mail are given daily to the accounts receivable clerk for recording collections on account and for depositing in the bank. e. Vouchers and all supporting documents are perforated with a PAID designation after being paid by the treasurer. f.          Disbursements are made from the petty cash fund only after a petty cash receipt has been completed and signed by the payee. g. The bank reconciliation is prepared by the cashier. Instructions Indicate whether each of the procedures of internal control over cash represents (1) a strength or (2) a weakness. For each weakness, indicate why it exists.

Answer 1

Companies also need control over cash disbursements. Sine a company spends most of its cash by check, many of the internal controls for cash disbursement deals with checks and authorisation of cash payment. Arrange duties so that the employee who authorizes payment of a bill does not sign checks.

Here are five items to be consider when evaluating the internal controls over cash disbursements.

1) Segregation of duties: The foundaton of a good internal control system is segregation of duties. The duties of authorization and recordkeeping (In this case record keeping clerk) should be separated so that one individual cannot complete a transaction from start to finish. The concept behind the segregation of duties is that in order to misappropriate cash, individuals would have to collude, rather than one individual acting alone.

For many businesses, proper segregation of duties can be difficult to achieve. In these instances, comany owners may want to consider the bank statement deliver to them unopened. The owners should then review the bank statements and checks images for any transactions that appear unusual, and follow up those transaction to obtain an understanding on them. This process alone has uncovered many situations like the one describe above.

2) Review Authorised signors: Carefully consider that who your authorised signor are. Those individuals should not have accesss to the blank check stock nor the ability to enter the transaction into the accounting system. The use of a signature stamp, although efficient, may be problematic in that you must have separate controls to ensure that the stamp is not readily available for inappropriate use.

3) Consider Requiring dual signature: Company may also want to consider the use of dual signatures. A dual signature policy includes the establishment of a dollar threshold over which checks require two signature . The utilization of dual signatures establishes an element of segregation of duties for disbursement over a specified-threshold in that these disbursements require more than one individual to authorize the transactios.

4) Remember the wire Transfer: The use of wire transferes has increased significantly over the years, and segregation of duties around wire transfers is paramount. The responsibilities for establishing a wire transfer should be segregated from the responsibility of releasing the wire transfer. If this segregation is not possible, consideration should be given to using a call-back procedure, in which the financial institution will call a specified individual when a wire transfer is initiated. Most important, the call back cannot go to any individual who is able intiate a wire transfer.

5) Reconcile Bank account in a timely manner: The bank reconciliation should be completed in a timely manner by someone who is independent of the cash disbursement process. The bank reconciliation should also include a review of the bank statement and the check images that are returned with the bank statement for unusual transactions. Any unusual items should be investigated and evaluated when necessary.

It is never too late to review the internal controls.While processes often vary among companies, implementing the items in this checklist should significantly reduce the likelihood of your business becoming the subject of another one of this story.

Cash disbursement is how an organizations, govern its use of fund. Disbursement are made to different areas (As described in the question) of the business or different accounts set up for employee benefit and other uses. Organizations develop internal controls by self created rules and regulations for disbursing financial transaction. Such controls are typically required for the organizations to operate, but they come with inherent weeknesses that leaders of the organizations should note

Improper controls: Internal controls are created and decided upon by the business, typically by board of directors for a corporation but by leaders in all types of organizations. These decisions are not always appropriate.Controls can be too lax in some areas, causing security concern concerns, and too strict in others, leading to time consuming and inappropriate funding delays. This is one reason organizations may decide to auditing specifically for internal controls, to get an outside opinion.

Missing controls and specific circumstances: If internal controls are not regulated by an outside authority, there is also a chance that some necessary controls may skip. Like controls over cash disbursement may be at a loss when it is come to disbursement of a new business programme.

Accountability: Accountability refers to security of the internal control and their ability to withstand misconduct and misuse. When dealing with large cash disbursements, embezzlement and another types of theft or frauds are possible. Internal controls that have faulty tracking systems or other issues have poor accountability functions.

Continual adaptation issues: Cash disbursement are rarely made in the same way for the entire life of an organizations. Systems and processes of approval change with the shape of the organizations and with the development of new technology. Security measures can change the channels through which cash moves. Internal controls of an organization may lagging behind if it tries to meet new controls with outdated strategies.