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Cash Controls

Cash consists of currency on hand and demand deposits at banks or other institutions that are available for the business's immediate use. Negotiable instruments such as money orders, certified cheques, cashier's cheques, personal cheques and bank drafts are also usually considered to be cashBecause cash is liquid and portable, it is the asset most likely to be stolen or used improperly in business. As a result, 
cash control issues are some of the predominate issues related to internal controls

The Sarbanes-Oxley Act of 2002 laid out new requirements for financial reporting for U.S. public companies who file with the SEC. Specifically, section 404 of the Sarbanes-Oxley Act dealt with new internal control provisions for these companies. For example, this section required that managers of publically traded companies provide both (a) a statement of management's responsibility for establishing and maintaining adequate internal controls, and (b) a statement outlining management's assesment of the effectiveness of their internal control structure and procedures. The Securities and Exchange Commission (SEC) voted to adopt these measures, among others, on May 27, 2003.1 These reporting requirements help reinforce the Act's requirement that companies maintain strong and effective internal controls. 

In the Act, internal control is broadly defined as the procedures and processes used by a company in order to achieve three goals: (1) safegaurd its assets, (2) process information accurately, and (3) ensure compliance with laws and regulations. The Act provides a framework outlining the five elements of internal controls: (1) the control environment, (2) risk assessment, (3) control procedures, (4) monitoring, and (5) information and communication

Cash Control Processes and Procedures

Control of cash payments should provide reasonable assurance that payments are made for only authorized transactions and that cash is used effectively and efficiently. There are a number of different processes and procedures that a company can undertake to reinforce a strong control environment. 

Employee Procedures:

Segregation of Duties: 

Cash is generally received at a cash register or through the mail. When we segregate duties, we ensure that one employee collects the cash, another records the cash entry, and another deposits the cash at the bank. This reduces the opportunity for theft, reduces schemes like lapping when customer cheques are involved. 

Rotating Duties:
The duties of employees are rotated between roles. Fraud or error may be discovered when a new employee takes over a task. 

Independent Checks on Performance:
When a cashier returns her drawer, there should be a specified amount of cash in the change fund. This can be verified by the manager, or even simpler, the next cashier should check to make sure the change fund she is given is the right amount. This is an example of a simple independent check. 

Proper Authorization:
We reduce the risk of fraud or error by ensuring only competent, trusted employees are allowed to make cash transactions on the companies behalf. 

Bonding:
Most companies bond individuals that handle cash by paying a bonding company for insurance against theft by the employee. If the employee steals, the company is reimbursed through this insurance. 

Document Procedures:
Having cash travel with documents that describe it reduces risk. As well, ensuring that source documents are received by the accounting department quickly reduces the risk that duplicates will be recorded, changes are made, or source documents are lost. 

Invoices:
Cash is received in the mail when customers pay their bills. Most companies design their invoices so that customers return a portion of the invoice, called a remittance advice, with their payment. Cash may also be received from customers through electronic funds transfers (EFT). Customers may authorize automatic electronic transfers from their checking accounts to pay monthly bills. 

Voucher System:
voucher system is a set of procedures for authorizing and recording liabilities and cash payments. It may be either manual or computerized. A voucher is any document that serves as proof of authority to pay cash or issue an electronic funds transfer. 

Physical Controls:
Physical controls make sure that cash on hand is physically secure. 

Cash Register:
One of the most important controls to protect cash received in over-the-counter sales is a cash register. A predetermined amount of money that is given to each cash register clerk in a cash drawer is called a change fund. The change fund should only hold enough cash to handle customer transactions, excess cash should be kept in a safe location. 

Petty Cash Fund:
A petty cash fund is a special-purpose cash fund that allows the business to keep (and control) a small amount of cash on hand to pay small amounts where it would not be practical for the business to write cheques: items such as paying for coffee, unexpected office supplies, deliveries, or cabs, for example. As well, the petty cash fund typical has a custodian (one competent person in charge of it), and uses a voucher system. 

Bank Accounts:
A major reason that businesses use bank accounts is for internal control. This is because bank accounts reduce the amount of cash on hand, provide an independent record of cash transactions, and facilitate the transfer of funds using EFT systems, which automates the collection of cash and reduces the risk of error or fraud. Daily bank deposits are made so that excess cash does not remain on the premises. 

Bank Reconciliation:
A summary received from the bank of all chequing account activity is called a bank statement. A bank reconciliation is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger in order to determine the adjusted cash balance. 

Lockboxes:
As well, banks facilitate the use of lockboxes. Lockboxes are post-office boxes under the care of the bank branch. Companies can have customer cheques mailed directly to a lockbox, and the bank directly handles the deposits and provides the company with a summary of all the details of the deposits. This reduces processing time for cheques, and reduces error or fraud. 


References:

1. SEC Implements Internal Control Provisions of Sarbanes-Oxley Act. Retrieved from: http://www.sec.gov/news/press/2003-66.htm.

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