What are the administrative and accounting procedures to safeguard cash against theft and other misshappening?


Cash is the most liquid asset; it can be transferred easily and is susceptible to theft and misappropriation. Therefore, sound cash management involves setting up of administrative and accounting procedures to safeguard cash.  These procedures are known as internal controls over cash.

Internal controls

Internal control procedures adopted for cash follow the general internal control framework that could be applied for other assets of the business, like debtors, investments and fixed assets. Following are the most important internal control procedures over cash:

Employment Procedures
At the time personnel are employed hiring procedures should be able to establish competency and trustworthiness of an applicant. Seeking references and conducting historical investigations are some of the avenues employed to verify an applicant’s record.


Insurance
Because employee behavior and future events cannot be guaranteed it is wise to take out fidelity guarantee insurance cover on employees handling cash.

Use of bank accounts
The use of a bank account is a major control device over cash. Maximum benefits are obtained from the use of a bank account if all cash collections are banked intact as received and all payments are made by cheque. This means there will be no payments made out of daily collections.

Adequate documentation, approval and authorization procedures
Adequate supporting documents should be maintained for all cash transactions. Transactions should be checked for completeness and approved by relevant officers before they are effected. Setting of authorization limits is one of the general control tools.

Separation of duties
Separation of duties is achieved when no single individual has control over a complete cycle of a transaction.  The purpose of separation of duties is such that another can check each person’s work. A cashier for example, should not be recording the Cash Receipts Journal.

Use of physical, mechanical and electronic devices
Access to sensitive locations where cash and sensitive documents ought to be restricted and controlled. Such access control could employ physical, mechanical or electronic devices. Also certain devices like an electronic cash register at a sales counter reinforce internal control. A cash register, for example, will produce a receipt and automatically accumulate total collections for a day. The daily running total can then be checked with remittances made by the cashier. This may prevent pilferage and enhance accuracy of records.

Bank reconciliation
When all cash receipts are deposited with the bank and all payments are made by cheque the cash book becomes a mirror image of the account maintained by the bank. For every deposit made the business will debit the bank account in its books, whereas the banker will credit the business (depositor’s) account. It should be possible to compare the balance of the cash book with the balance as per the banker's books.  Since the bank is an external independent entity, bank reconciliation is a very reliable control procedure. 

Use of Petty Cash Fund
It is not always practical to make all payments by cheque. A taxi driver dropping an executive at the main gate in the morning does not expect a company cheque. For certain payments it is practical, cost effective and convenient to pay in currency and coin. The Petty Cash Fund is a pre-determined amount retained in the office to handle payments of such miscellaneous items.
Not all firms employ all internal controls all the time, as these control procedures, although desirable, they cost money and there is a limit as to what entities can afford.  The basic rule is that generally, controls should be adopted as long as the benefits derived from their use justify the costs.


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