Internal control systems or cash

25/04/2020 2 By indiafreenotes

Internal Control comprises of the plan of the organization and all the co-ordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data to promote operational efficiency and to encourage adherence to prescribed managerial policies.

Purpose of Internal Control

Let us now understand the purpose of Internal Control from different points of view.

From Auditor’s Point of View

It is very important from the Auditor’s point of view to study and evaluate the system of internal control. To obtain an adequate understanding of the internal control system, that must be tested. The Auditor has to determine whether audit is possible, if yes, then he should determine the scope of audit.

From Client’s Point of View

  • Internal control system provides reliable and accurate data that is necessary for decision making and to run business activity efficiently.
  • Adequate internal control system safeguard business assets, in absence of it, assets of the company may be stolen, misused or accidentally destroyed.
  • Internal control system within organization is necessary to discourage and stop non performing business activities and to protect business from wastage is all aspects of the business.
  • Internal control system insures that rules and procedures are to be followed by business personnel.

Characteristics of Internal Control

Following are the main characteristics of Internal Control usually abbreviated as CROSSASIA:

  • Competent and trustworthy personnel
  • Records, Financial and other Organization plan
  • Organizational plans
  • Segregation of duties
  • Supervision
  • Authorization
  • Sound practice
  • Internal Audit
  • Arithmetic and accounting controls

Limitations of Internal Control

Following are the inherent limitations of Internal Control:

  • Management decision to choose cost effective control system may reduce the effectiveness of internal control system.
  • There are chances of misuse by a person of authority who is operating on internal control system.
  • Objectives of internal control systems may be defeated by manipulation of management.
  • Since internal control system is involved in routine transactions, irregular transactions may be overlooked.
  • Changes in conditions may affect the effectiveness of internal control system.

Scope of Internal Control

Following are the main areas which are generally covered by a good internal control system:

  1. Cash

Here, internal control is applied over payments and receipts of an organization. This is to safeguard from misappropriation of cash.

  1. Control over Sale and Purchase

With proper and efficient control system for transactions regarding purchase and sale of material, handling of material and accounting for the same is must.

  1. Financial Control

It deals with the efficient system of accounting, recording and supervision.

  1. Employee’s Remuneration

Internal control system is applied to preparation and maintenance of records of employees and the payment methods also. It is also necessary to safeguard against misappropriation of cash.

  1. Capital Expenditure

Internal control system ensures the proper sanction of capital expenditure and also the use of it for the purpose intended.

  1. Inventory Control

It covers the proper handling of inventory, minimization of slow moving items or dead stock, proper valuation of stock, recording of it, etc.

  1. Control over Investments

Internal control system is applied to the proper recording of transactions be it purchases, additions, sale or redemption, income on investments, profit or loss on investment.

Internal Control and Auditor

An Auditor should ensure that certain rules and procedures are followed by the business unit he is working on, in spite of the fact that a sound system of internal control is as sole responsibility of the management. The Auditor can simply guide or help the management if he is asked to do so, because he has no authority to prescribe such rules and procedures. The degree of reliance on the system depends upon the effectiveness of internal control system; therefore, the Auditor should review and evaluate the internal control system of an organization to prepare his audit Program.

Review of Internal Control System

Internal control system should be reviewed by the Auditor before star audit as described below:

  • Reviewing the system of accounting entries, whether recorded as per accounting standard or not.
  • To frame audit program according to present circumstances.
  • Frauds, errors and mistakes are likely to be located or not.
  • To review existence of internal audit program and to check the efficiency of internal control system.
  • To review the reliability of reports, records and certificates as presented by the management.
  • To check if there is any possibility of improvement in existing internal control system.

Internal control procedures for the receipt of cash help your small business prevent loss due to employee fraud and accounting errors. These controls are intended to limit access to cash to specified employees and verify that all receipts, refunds or transfers are documented correctly and in a timely manner. Any withdrawals of company cash must be accompanied by the proper authorization from a supervisor or manager. The company should never use cash receipts from customers for petty cash or check cashing.

Job Duties

Separating the key tasks involved in cash processing makes it more difficult for a dishonest employee to conceal fraudulent transactions. The person who receives and deposits the cash should not also perform the reconciliations. This also serves as a double-check to find and correct clerical mistakes and bank deposit errors. In smaller companies, it may not be possible to split the accounting duties between more than one employee. In this case, a supervisor should carefully review the cash receipt logs and reconciliations every month to ensure there are no discrepancies.

Access

All employees who handle cash should complete a training course on the appropriate procedures before having access to the log and safe. These procedures should be documented in writing and handed to the employee at the start of training. Store all cash in a safe or lockbox until it is deposited in the bank. Only the cash handling clerk and one backup employee should have a key to the lockbox or the combination to the safe. If either of these employees leaves the company or is reassigned to another position, change the lock or safe combination.

Documentation

When a payment comes into the office, the cash processing clerk should immediately record the transaction into the cash receipt log and assign it an identification number. If the payer is present in the office, the clerk should issue a signed receipt listing the date and amount received. The transaction numbers must be unique and sequential so an auditor can quickly see if a cash receipt is missing from the log. If an employee transfers possession of a cash receipt to another employee, both parties must sign a receipt stating the date and dollar amount of the transfer.

Reconciliation

Each day, the employee responsible for preparing the reconciliations should compare the day’s total from the cash receipts log with the daily bank deposits and the cash held in the lockbox or safe. At the end of the month, he will print the general ledger reports for the company’s cash account and compare them to the monthly totals on the cash receipt log. Any discrepancies not due to deposits in transit should be investigated and the reasons noted on the reconciliation report. Each reconciliation must be signed and dated by the person who prepared it.

  1. Segregation of duties: On the accounts receivable side, ensure that the same person who is receiving cash, is not also depositing it and recording it in the accounting records. For accounts payable, ensure that the same person approving payments is not also writing the checks and reconciling the bank account.
  2. Make timely deposits: Cash and checks received at a business should be deposited daily to decrease the chance of the money being stolen.
  3. Review check signing authority: Review the records with the bank to ensure that the appropriate team members have check signing authority. Consider requiring more than one signature for checks above a certain threshold.
  4. Control access to check stock, accounting systems, and cash: Unused check stock should be locked up. Access to computer systems or banking systems where checks can be generated should require strong passwords. Cash and checks waiting for deposit should be securely stored in a safe.
  5. Discourage management override of controls: Management override of existing controls should be strongly discouraged as it sets a poor example for team members about the importance of internal controls, and because external thieves are targeting businesses this way. We have seen thieves pretend to email as the company CEO requesting funds be wired, and the accounting employees follow those instructions without following the normal process and controls for purchases resulting in payments made to cybercriminals.
  6. Reconcile the bank accounts: All bank accounts should be reconciled on at least a monthly basis. Ideally, a person uninvolved in the day to day accounting activities for cash receives an unopened bank statement with canceled check copies to reconcile the bank account from so that the statement activity and canceled checks can be reviewed for irregularities. If there are not enough team members for this to happen, it is important that an owner, manager, or board member obtain the bank statement and review for irregularities prior to the regular bookkeeper preparing the reconciliation.
  7. Utilize technology to help: New technology exists to help businesses prevent theft. Segregation of duties can be easily accomplished via system-based approval processes for purchases and payments. Controls on customer payments received can be gained by streamlining client payment collection via lockbox services. The risk of stolen check stock can be reduced by utilizing a bill payment service. Positive pay systems can be enabled at the bank to ensure fraudulent checks are not paid.

Steps of Cash Control are

  1. Cash transactions of a business are to be accounted for properly to know cash flow and cash balance.
  2. Cash sufficiency is to be ensured on due dates of notes payable.
  3. Idle cash should be minimal because additional cash investment earns more revenue.
  4. Loss caused due to misappropriation and forgery is to be controlled and stopped.

The necessity of cash control is very clear and it has many sides. A business cannot survive without time-related cash flow and proper cash management.

At this stage cash receipts, control and cash disbursement control are discussed.

Controlling of Cash Receipts

A business concern can receive’ cash of sale proceeds immediately after the sale or at an interval of some days or weeks.

A cash counter clerk records cash receipts immediately and posts them into the cash register.

If cash receipts of cash sales are recorded in the cash register in the presence of the customers, it is almost certain that the cashier has recorded be a correct figure of cash in cash register.

At the close of the day, the accountant reconciles the balance of cash register with that of cash register-tape or computer statement (for register concerned).

Later, when a cheque is received for sale, the accountant records it immediately in the books of accounts. A business concern receives cash through cheques from customers after the expiry of a certain period.