Question

You began your new job as the accountant for Morton Company.  You were surprised to find that the company had a $2,000 petty cash fund, which sits in the break room.  The president of the company told you: “Our petty cash system here works quite smoothly.  Since everyone is honest here, everyone has access to the fund for incidentals that might pop up in the course of the business day.  Most of these situations don’t have any receipts tied to them, so I just put the money back in the fund when my secretary tells me that we have run out of petty cash and we debit the amount to Miscellaneous Expense.”  

​

​

​(a) Should you implement some controls on petty cash? Why?

(b) If so, what controls could be used for petty cash?

Answer 1

Requirement a

Though the President is confident about the internal control for petty cash, $2,000 is a tempting sum for theft. Even with only $2,000, if the fund is reloaded frequently, a significant amount of cash could be stolen. For example, if the fund is replenished weekly, then $104,000 ($2,000 ´ 52 weeks) could be subject to theft. The dispute of debiting the amount used to Miscellaneous Expense is a doubtful practice that would normally be highlighted by the independent auditor.

Requirement b

Controls for petty cash include

(1) entitling one person who is accountable for the fund,

(2) retaining a written record of all payments,

(3) necessitating support (receipts) for payments from the fund, and

(4) intermittent review of the funds on hand and the payments by an independent person.