7 Cash Account
Controls and Bank Reconcilliation
Dr. Jacqueline Gagnon
Internal Controls for Cash
A company’s cash ultimately belongs to the owners, after all the debts are paid. And owners want to keep the cash safe. Internal controls are processes in the company to do just that: keep cash safe by avoiding theft and misuse
Essentially, cash is safest when access is granted to only employees who absolutely require it, and when accountability is established through internal processes. Here are some examples of internal controls.
Internal Cash Controls
| Cash Control | Description | Why is it Important? |
|---|---|---|
| Cashing Out | Each cashier counts his cash at the end of a shift and compares to cash received from sales during the shift. Any cash over the required cash float, which is the minimum balance in the till as set by company policy, should be delivered to the manager to be placed in a locked safe. | The process of cashing out requires each cashier to be responsible for the cash received and giving correct change for transactions. Any discrepancies are recorded, and cashiers have to give account for any cash over- or under- the expected till balance. |
| Deposits | Cash and cheques are deposited at the bank frequently. | The safest place for cash is in the bank. Frequent deposits leave less opportunity for theft because cash isn’t lying around. |
| Separation of Duties and Supervision | A different employee should manage each step of the cash cycle: cash collection, cash count, bank deposit, journalizing bank transactions, and bank reconciliationReconciliation: An accounting term that means ”make to equal” or “find out the difference”.. Supervision of these steps also increases accountability. |
An employee who performs more than one cash duty can cover their tracks. Although collusion is possible, co-ordinated theft it is much less likely to occur. As more employees are required to carry out unethical activities, such as stealing cash, it is more likely at least one employee will report to management. |
| Job Rotation | Management should ensure that more than one employee is able to perform each position. | Entrenched employees have more opportunity to steal from the company. When at least two employees perform the same duty, it increases accountability, so that inconsistencies are more likely to be noticed and reported. |
| Maximum Bank Balances | A maximum limit should be set on the chequing account balance. | The chequing account is subject to theft and misuse through debit transactions. For example, someone may find a corporate debit card and spend money using Interac tap or make purchases online. Savings and investment accounts are safer because they are not designed for spending via Interac. Cash should be transferred to these safer accounts unless required for outstanding payments. |
| Two Signatures on Cheques | Cheque payments over a certain threshold should require two signatures from authorized corporate officers. | Requiring two signatures on cheques requires a second set of eyes on a transaction and therefore reduces the chance that an individual with signing rights will create a fictitious transaction and write himself a cheque |
| Maintaining a Safe for Cash and Cheques | Cheques and excess cash should be kept in a locked safe. The safe should be installed in the building. Access to the safe should be provided for authorized officers only. Separate access to the safe from cheque signing rights. | Until cash can be deposited at the bank, it should be locked and inaccessible. Cheques are claims to cash at the bank and subject to fraud. They should be kept locked and inaccessible. |
You may think of other possible internal cash controls. Maybe you’ve seen cash controls at work, when shopping, or in your personal banking. Hopefully, you’ll be curious about how cash is handled and be inspired to keep your own cash safe.
Let’s practice. Below are two scenarios detailing cash controls, or lack thereof. I’ll do the first one, and you try the second scenario on your own.
- My Turn:
- Strong Arms Fat Wallets (SAFW) is a moving company specializing in short-distance residential moves. SAFW operates five moving vans.
-
- These moving vans are not assigned to particular teams. Instead, vans are offered to employees on a first-come first-serve basis.
- Customers pay the movers by cash or cheque when the move is completed. Anyone on the moving team can accept payment and access the cash box inside the moving van. A numbered receipt is given to each customer upon payment.
- Employees do their best to keep the moving van locked to avoid theft of the cash box, but this is difficult particularly on hot days when the van windows are left open.
- At the end of the day, the movers count $100 from the cash box and leave this $100 in the truck as a cash float. All remaining cash is remitted to office staff, along with a record of receipts given to customers
- There is one office staff member responsible for counting cash and matching to customer receipts. If the cash remitted for each van isn’t equal to total customer receipts, the discrepancy is investigated.
- This staff member also ensures that each scheduled move corresponds to a customer receipt, and that the receipts are in numerical order.
- Required:
- Comment on SAFW’s internal controls for cash. What strengths and weaknesses can you identify?
| Strengths | Weaknesses |
|---|---|
| Receipts are given to customers | Vans are not assigned. Forced rotation of vans and a cash count at the beginning and end of day would help ensure that a $100 float is maintained and this $100 is not being stolen by employees. |
| Receipts are numbered, and office staff can investigate if a receipt is given out but not submitted. If the receipts were not numbered, it would be easier for teams to perform unscheduled moves and pocket the cash. | If customers were permitted to pay by direct transfer from the customer bank to SAFW’s bank, it would reduce the amount of cash and cheques in the van. In other words, the bank is a safer place to store cash than a van. |
| Office staff matches scheduled moves to customer receipts to ensure that cash or cheque has been received for each scheduled move. If no matching was done, SAFW would risk employees stealing cash for scheduled moves. | The cash box is not secured in the van. Two cash controls should be implemented: (1) the cash box should be secured by a chain or other method to reduce the risk of cash box theft, particularly given that employees often leave windows down; and (2) the cash box should be locked to reduce the risk that cash is stolen out of the cash box. |
| The team lead should alone be responsible for customer payment and writing receipts. This creates accountability for maintaining the cash balance. If the office staff notice a discrepancy, they know who to approach. | |
| Cash box reconciliations performed by office staff should be documented and signed off by a manager. This reduces the risk of collusion: that two or more employees work together to steal from the company. |
Maybe you found additional possible controls that SAFW could implement to reduce their cash risk. That’s great! Here’s your chance to work through a scenario all on your own.
Your Turn:7—3: Woof Placeholder
Solution:7—3: Solution
Well done! You may have come up with cash controls that aren’t in the solution, and that’s great! This is one time where you can get creative in accounting – to figure out processes that work for a company to reduce their risk. You just need to explain how the control helps the company. Bank reconciliations are a big part of cash control processes. Let’s take a look at these now.