Internal Control Over Cash Receipts and Payments

Internal Control and Cash Management

  • Context and Source Material: These study notes are derived from Chapter 7 of "Accounting Principles Tenth Canadian Edition" by Weygandt, Kimmel, Mitchell, Warren, and Novak. The focus is specifically on Learning Objective 2: Applying control activities to cash receipts and cash payments.
  • Core Objective of Cash Controls: Effective control over cash is categorized as an essential accounting practice. Its primary purposes are to:
    • Safeguard the asset of cash.
    • Ensure the high-level accuracy of all related accounting records.

Internal Control Over Cash Receipts

  • Establishment of Responsibility: Internal control protocols dictate that only specifically designated personnel are authorized to handle cash receipts. This ensures that if a discrepancy occurs, the individual responsible for the cash at that point in the process can be identified.
  • Segregation of Duties: A critical check and balance involves separating the following roles among different individuals:
    • The receipt of cash.
    • The recording of cash receipts in the accounting system.
    • The physical custody of the cash.
  • Documentation Procedures: Verification of transactions is maintained through the systematic use of:
    • Remittance advices (often received with mail-in payments).
    • Cash register tapes (to record over-the-counter sales).
    • Deposit slips (to verify funds sent to the bank).
  • Physical Controls: Cash assets must be secured through specific physical measures:
    • Storage of cash in secure environments such as safes and bank vaults.
    • Limiting access to these storage areas only to authorized personnel.
    • The consistent use of cash registers for all points of sale.
    • The requirement to deposit cash into the bank on a daily basis.
  • Independent Internal Verification: Ongoing monitoring includes:
    • Conducting daily cash counts.
    • Comparing total physical receipts with bank deposit records to ensure they align.
  • Human Resource Controls: Personnel management strategies used to protect cash include:
    • Bonding: Obtaining insurance against theft by employees.
    • Required Vacations: Ensuring employees take time off so that any ongoing fraud or errors might be discovered by a replacement.
    • Background Checks: Conducting thorough investigations of potential employees before hiring.

Specific Types and Methods of Cash Receipts

  • Types of Receipts: Cash enters an organization through several channels, including:
    • Over-the-counter transactions.
    • Bank debit card transactions.
    • Direct credit card transactions.
    • Mail-in receipts.
    • Electronic Funds Transfer (EFT).
  • Debit Card Transactions: These are classified as cash transactions because the retailer receives the cash directly into their bank account at regular intervals (for example, daily).
    • Net Proceeds: The proceeds received by the business are the net amount after transaction fees have been deducted.
    • Fee Structure: A specific fee is typically charged per individual transaction.
  • Bank Credit Card Transactions: Like debit cards, these are treated as cash transactions where the retailer receives cash directly into their bank account.
    • Fee Structure: Fees for credit cards are generally calculated as a specific percent of the total sale.
    • Comparison: These fees are generally higher than the flat fees associated with debit card transactions.
  • Mail-In Receipts: Specialized procedures are required for mail transactions:
    • Cheques must be endorsed immediately with the limiting instruction "For Deposit Only."
    • Remittance slips should be sent to the accounting department independently of the physical cash to maintain segregation of duties.
  • Electronic Receipts (Electronic Funds Transfer/EFT): The same basic principles of internal control apply to electronic receipts as they do to physical cash. Examples include:
    • Debit and credit card transactions.
    • Peer-to-peer (P2P) payment systems.
    • The direct deposit of government-issued payments.

Internal Control Over Cash Payments

  • Establishment of Responsibility: Procedures must ensure that only designated personnel have the authority to sign cheques or approve electronic payments.
  • Segregation of Duties: To prevent fraud or error, different individuals must perform the following:
    • Approve the payment.
    • Execute the payment (signing or sending).
    • Cheque signers must not be the individuals who record the disbursements in the ledger.
  • Documentation Procedures: Every payment must be backed by evidence:
    • The use of pre-numbered cheques is required, and they must be accounted for in sequential order.
    • Each cheque must be supported by an approved invoice verifying the legitimacy of the expense.
  • Physical Controls: Assets related to payments must be secured:
    • Blank cheques must be stored in a secure location with strictly restricted access.
    • Organizations are encouraged to use electronic payments over physical cheques whenever possible for better tracking and security.
  • Independent Internal Verification: Periodic checks must be performed:
    • Individual cheques must be compared against their corresponding invoices.
    • A reconciliation of the bank statement must be performed on a monthly basis to ensure internal records match the bank's records.
  • Human Resource Controls for Payments: Similar to receipts, controls include:
    • Bonding: Insuring employees who handle disbursements.
    • Required Vacations: Mandating that employees leave their posts periodically to allow for the detection of discrepancies.