Introduction
The accuracy and validity of business transactions are ensured by the internal controls which companies implement in their accounting and reporting systems. Internal controls are considered as a system within a system however they are crucial for the integrity of the overall accounting system and ensure that system abuse and fraud can be avoided.
It is therefore imperative for the accounting systems to be designed in such a manner that they meet the needs of the organizations and assist them in managing their accounts and at the same time allow checks and balances over different transactions made through the system. In this paper the role of accounting internal controls is discussed and its importance is assessed for addressing issues related to the management of companies most liquid asset i.e. cash.
Main body
Cash is considered to the most liquid asset of any company and is easily transferable therefore it is more susceptible to manipulation and misappropriation (Eisen, 2000). Usually companies do not maintain large quantities of cash within organizations but it really depends on the type of business and business transactions which are taken place. For example, a retailer would be holding larger sums of cash as compared to a manufacturing firm. Cash is maintained and reported in bank account or as petty cash. Various companies’ transactions affect directly cash balances in both these accounts and different transaction risks could be identified which are associated with receipts and withdrawals of cash.
The accounting system relevant to management of cash involves two processes which are check posting and vouchering. It is important to understand these processes and identify the internal controls which should be implemented for ensuring that correct amounts are debited from the cash balance. Voucher system involves preparation of a voucher which is a document which contains instructions regarding the recognition and payment of an obligation (Eisen, 2000).
Every business transaction which requires payment of cash requires a voucher to be created which is stored in the voucher ledger. The segregation of responsibilities for creating vouchers and authorizing the content of these vouchers is important. The voucher system allows control over expenditures and subsequent payments. The voucher register is maintained to record all business transactions which would eventually require payment of cash through checks or debit to petty cash.
Every voucher has a corresponding entry in checkbooks or petty cash register. Details of each transaction entered in the voucher register require to be matched with check register maintained. In businesses where cash is received or paid over the counter for different types of business transactions the need for strict controls is imperative and reconciliation of cash register at the end of shift and handover to the staff from the next shift. In addition to these petty cash fund kept within organization needs to have custodian who is authorized to request for petty cash balance to be maintained and every payment is typically released with a petty cash ticket (Trenerry, 1999).
The controls over purchase and payments require purchase orders to be sent to the supplier, receive goods and invoice and the treasurer or financial controller authorizes payments thorough checks. The internal controls should also involved independent internal verification by employees who are not involved in the cash management process to identify any weaknesses in the system and discrepancies should be reported to management (Weygandt, Kieso & Kimmel, 2007).
Amongst the internal controls over cash bank reconciliation statement is quite useful. Bank reconciliation is a process that allows matching and agreeing upon the balance in the bank’s records with those maintained by companies. Companies’ usually carryout bank reconciliation every month by comparing their checkbook balances with their bank statements and if there is any discrepancy then errors must be reported and removed.
All credits and debits to the bank account could be traced back to the checkbook. Discrepancies could be searched between both documents by identifying the differences between amounts, any checks cancelled or bounced back , checks which are in transit, NSF checks, any charges which bank may have levied upon which are not recorded in the company’s records (Marshall, McManus & Viele, 2003).
Once bank reconciliation statement is prepared then adjusting entries are necessary to be made to remove errors or reconcile the cash balance. Furthermore, controls could be enforced by assigning authorities to those officers who can open company accounts, place standing instructions with the bank for payments or receive bank statements from the bank. Thus, segregation of duties allows companies to restrict the access of individuals to the information shared between the bank and the company.
Conclusion
To sum up the above discussion we could conclude that complexity and extend of internal controls over cash depends upon the size and structure of organizations inclusive of the organizational hierarchy. The accounting internal controls over cash involve those related to recording of transactions, making payments from petty cash or bank accounts and finally reconciliation of bank statement with company’s records. At all levels steps should be undertaken for establishment of responsibility, segregation of duties and documentation procedures.
References
Eisen, P. J. (2000). Accounting. New York: Barron’s Educational Series.
Marshall, D. H., McManus, W. W. & Viele, D. F. (2003). Accounting: What the Numbers Mean. New York: The McGraw-Hill Companies.
Trenerry, A. (1999). Principles of Internal Control. Sydney: UNSW Press.
Weygandt, J. J., Kieso, D. E. & Kimmel, P. D. (2007). Accounting Principles. New York: Wiley Higher Education.