Internal controls are "methods put in place by a company to ensure the integrity of financial and accounting information," and to protect the organization's assets from misappropriation by internal sources (Investopedia, 2013).
Internal controls help to prevent fraud, but they also allow the company to have reliable data on all transactions, which can be used for any number of control purposes. Further, internal controls promote operational efficiency and they encourage adherence to management policies regarding the handling and recording of cash and transactions (No author, 2013).
There are a number of internal controls that can be put into place for the handling of cash. These include the segregation of duties, recording the receipt of cash, having cash handled only be authorized persons, having a copy of any cash receipts sent to the accounting department, verification of the amount received and reconciliation.
Segregation of duties means that the company should implement a system whereby no one individual has full control over the cash. For example, where one person might receive cash, another person might disburse it. When multiple people have a responsibility for managing an organization's cash, it is much more difficult for any individual to take any of that cash. Another key control is to have management oversight of cash handling functions. Cash received, for example, can...
This ensures that the cash received is the same as the cash on hand. Likewise, it is wise for the company to require double signatures on cash that is being disbursed, so that a second party always is aware when cash is being moved out of the organization. This way, no one individual can issue cash without management being aware.
It is also advised that the company institute a system of receipts for cash movements. For example, all cash that is received should come with a receipt. This protects both the person depositing the cash and the person receiving it. For the company, the receipt provides a written record of what cash should be in the system. With the receipt system, a copy of the receipt should be forwarded to the accounting department, to management or to both. This system means that a third party will always have a record of the cash that the organization has taken in. Further, the receipts for cash coming in and going out can later be reconciled with the actual cash holdings. For many businesses, this process takes place daily. The clerk, accounting department, or both might match the cash on hand with the receipts for the day. Thus, if the company takes in $1,000 and disburses $120, the cash on hand should be $880 plus the opening balance. If it is not, then there is either a missing record or missing cash. Often, the discrepancy is something that…
