Cash & Systems of Internal Control

   Cash can be defined as many things. Currency, Coins, Money orders and bank drafts are all considered forms of cash. Cash in banks may be in the form of checking and savings account while cash in business may be in the form of postage stamps and promissory notes. Nevertheless, cash is the currency of trade. For a business to perform either in terms of profit or in the stock market, the amount of cash it has on hand is called business liquidity. In the stock market, rising interest rates can jeopardize a company’s stock. Rising interest means accumulating debt. If the company does not have liquid assets on hand, this debt becomes worse and easily reflected on the stock charts. Not being able to meet the cash requirements also mean bankruptcy even though a company might have a high net worth of long-term assets! With liquidity also comes employee theft and error! Systems of internal control are considered the best form of insurance policies. This system must be properly designed as well as procedures followed if one is to secure their cash!

   First of all, the systems of internal control must be properly designed. This means assigning areas of authority and responsibility. Next, accounting records must be maintained by separate personnel. Also, employees are to be checked regularly if they are following internal control procedures. Then, employee bonding is highly encouraged. This includes rotation of duties and assigning holidays. Most importantly, mechanical equipment like check protectors and time clocks must be used whenever possible. Check protectors emboss accurate and forgery-proof figures while time clocks keep track of employee schedule. A CCTV or security camera may also be helpful for employee tracking. Since most major theft cases are electronic, taking control measures to secure electronic transactions may also be a key in systems of internal control. Placing ATM’s in secured locations as well as internet security may be a key in systems of internal control! Regular and independent reviews are highly recommended for designing systems of internal control!

   Following the design, establishing procedures for this design are equally important. Employees handling cash or cashiers and accountants are not likely to be mixed together with few exceptions. It is recommended to deposit cash receipts the very same day. A record of all cash receipts is preferable in the form of invoices and bank statements. The use of all cash must be controlled by making cash disbursements by check. Checks are not to be written or signed unless by approved invoices and vouchers. Authorization of checks must be done someone other than the one who signs the checks. Checks are to be signed and countersigned. Invoices and vouchers used to support the checks must be stamped paid! The most important procedure is to establish labor division in such a way that two people cannot get together to conceal a fraud! For example, replenishing petty cash fund would be done by a separate entity rather than petty cash custodians to analyze the expenditures from the vouchers at the same time. Signature forgery is another fraudulent instrument. To avoid forgeries, banks usually keep signature cards to double check if the signature is valid on checks signed for personal or business use.

   In conclusion, systems of internal control are considered effective means to combat theft and mishandling of cash in the business world! Insurance of liquid assets may also be considered a procedure in systems of internal control.

Source: (John R. Cerepack & Brian W. Carpenter, “Systems of Internal Control“)

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