Since cash is the most liquid of all assets, a business cannot
survive and prosper if it does not have adequate control over its
cash. Cash is the asset that has the greatest chance of “going
missing” and this is why we must ensure that we have strong
internal controls build around the cash process.
To control and manage its cash, a company should:
*Make certain that enough cash is available to pay bills as they
come due.
*Avoid holding too much idle cash because excess cash could be
invested to generate income, such as interest.
*Prevent loss of cash due to theft or fraud.
Payments received later are almost always in the form of checks.
Stores prepare a record of the checks received as soon as they are
received. Some merchandising companies have customers send the
payments directly to the bank instead of the company itself.
Although businesses vary their specific procedures for controlling
cash receipts, they usually observe the following principles:
*Prepare a record of all cash receipts as soon as cash is
received. Most thefts of cash occur before a record is made of the
receipt. Once a record is made, it is easier to trace a
theft.
*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.
*Arrange duties so that the employee who handles cash receipts does
not record the receipts in the accounting records. This control
feature follows the general principle of segregation of duties
given earlier in the chapter, as does the next principle.
*Arrange duties so that the employee who receives the cash does not
disburse the cash. This control measure is possible in all but the
smallest companies.
Companies also need controls over cash disbursements. Since a company spends most of its cash by check, many of the internal controls for cash disbursements deal with checks and authorizations for cash payments. The basic principle of segregation of duties also applies in controlling cash disbursements. Following are some basic control procedures for cash disbursements:
*Make all disbursements by check or from petty cash. Obtain
proper approval for all disbursements and create a permanent record
of each disbursement. Many retail stores make refunds for returned
merchandise from the cash register. When this practice is followed,
clerks should have refund tickets approved by a supervisor before
refunding cash.
*Require all checks to be serially numbered and limit access to
checks to employees authorized to write checks.
*Require two signatures on each check over a material amount so
that one person cannot withdraw funds from the bank account.
*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 fictitious invoices.
*equire approved documents to support all checks issued.
*Instruct the employee authorizing cash disbursements to make
certain that payment is for a legitimate purpose is made out for
the exact amount and to the proper party.
*Stamp the supporting documents paid when liabilities are paid and
indicate the date and number of the check issued. These procedures
lessen the chance of paying the same debt more than once.
*Arrange duties so that those employees who sign checks neither
have access to canceled checks nor prepare the bank reconciliation.
This policy makes it more difficult for an employee to conceal a
theft.
*Have an employee who has no other cash duties prepare the bank
reconciliation each month, so that errors and shortages can be
discovered quickly.
*Void all checks incorrectly prepared. Mark these checks void and
retain them to prevent unauthorized use.
Consider the list of common schemes relating to cash payments that is mentioned in the textbook....
options: Obtain the bank reconciliation and trace deposits in transit to the cutoff bank statement. Scan the debits to the fixed asset accounts and agree selected amounts to vendors' invoices and management's authorization. Compare the details of the cash disbursement journal entries with totals posted to the general ledger. Prepare a schedule of interbank transfers. Physically inspect a sample of fixed assets and trace them to the fixed asset subsidiary ledger. Confirm cash balances with the bank. Examine the...
Requirement d. For each control, list a specific misstatement that could result from the absence of the control. (Use each letter corresponding to a specific misstatement only once.) (Click the icon to view the misstatements likely to result from the absence of the controls.) i Misstatements due to absence of the control A fictitious payroll check could be processed for a fictitious employee if invalid employee numbers J. are included in the employee master file. A fictitious payroll check could...
LO 10-6, 10 10-36 Based on an assessment of audit risk, the auditors are concerned with the following two risks: 1. The risk that that the client might be making duplicate payments to vendors. 2. The risk that the client's accounting clerk might be making unauthorized payments to himself. a. Assuming that the client has a manual accounting system, describe how the auditors can design a test to identify the duplicate payments and unauthorized payments. b. Assuming that the client...
1. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? A. Management's failure to renegotiate unfavorable long-term purchase commitments.B. Recurring operating losses that may indicate going concern problems.C. Evidence of a lack of objectivity by those responsible for accounting decisions.D. Management's current plans to reduce its ownership equity in the entity. 2. After obtaining an understanding of internal control and arriving at a preliminary assessed level...
CHAPTER 7 Internal Control and Cash Problem 7-3A Petty cash fund reimbursement and analysis of errors L04 Capital Irrigation has only a general journal in its accounting system and uses it to record all trans. actions. However, the company recently set up a petty cash fund to facilitate payments of small items. The following petty cash transactions were noted by the petty cashier as occurring during April 2017: Apr. 1 Received a company cheque for $300 to establish the petty...
Please read the article and answer about questions. You and the Law Business and law are inseparable. For B-Money, the two predictably merged when he was negotiat- ing a deal for his tracks. At other times, the merger is unpredictable, like when your business faces an unexpected auto accident, product recall, or government regulation change. In either type of situation, when business owners know the law, they can better protect themselves and sometimes even avoid the problems completely. This chapter...
CASE 20 Enron: Not Accounting for the Future* INTRODUCTION Once upon a time, there was a gleaming office tower in Houston, Texas. In front of that gleaming tower was a giant "E" slowly revolving, flashing in the hot Texas sun. But in 2001, the Enron Corporation, which once ranked among the top Fortune 500 companies, would collapse under a mountain of debt that had been concealed through a complex scheme of off-balance-sheet partnerships. Forced to declare bankruptcy, the energy firm...
Case: Enron: Questionable Accounting Leads to CollapseIntroductionOnce upon a time, there was a gleaming office tower in Houston, Texas. In front of that gleaming tower was a giant “E,” slowly revolving, flashing in the hot Texas sun. But in 2001, the Enron Corporation, which once ranked among the top Fortune 500 companies, would collapse under a mountain of debt that had been concealed through a complex scheme of off-balance-sheet partnerships. Forced to declare bankruptcy, the energy firm laid off 4,000...