Internal cash control systems and best practices

Internal Cash Control

Question a. There are several weaknesses at the Idaho Company with respect to its internal cash controls. The first is that the company does not have numbered checks. This makes it more difficult to track disbursements. The tracking process is aided substantially when management is able to match each check number with a specific value. Also, Idaho Company does not have sufficient segregation of duties. The treasurer, for example, is responsible for both paying bills and reconciling bank statements. There are two people issuing checks at the company. Additionally, the disbursements are filed in two different places by two different people, according to two different criteria. This will make tracking down individual payments and checks more difficult. There are also basic security issues, such as keeping the checks in an unlocked cabinet, and using only one signing authority on any given check.

Question B. The Idaho Company can take several steps to address these weaknesses in its disbursement process. The first step the company should take is to order checks with numbers. This will make it easier to track disbursements. The second step will be to lock the cabinet that contains the checks, as a basic security precaution, or better yet store them in a safe. Check issuing authority should be consolidated with the treasurer. However, there should always be a second signing authority on any check. All disbursements should be filed in one place, and all by check number. This will make it easier to find record of disbursements and will aid the reconciliation process. If the purchasing agent needs a copy of the invoices, then copies should be made and submitted to the purchasing agent for his/her filing needs. The reconciliation should be conducted by another individual, one without signing authority. This would give Idaho better segregation of tasks. It should also be emphasized the reconciliation should take place monthly.

The new cash disbursement procedures at Guard Dog are consistent with sound internal control principles. The first principle is that of establishment of responsibility. At Guard Dog, there are only two individuals who can sign checks. The second principle is segregation of responsibility. At Guard Dog, purchasing approves checks, the treasury issues them and the accounting department records them. The third principle is to have documentation procedures. At Guard Dog, checks are always prenumbered and issued in sequence. Additionally, there is an invoice for every check.

Guard Dog's system is also strong in terms of physical controls. The checks are stored in a safe. Only the two treasury department members have access to the safe, so the checks are physically secure. The company has also installed a check printing machine, so that the checks are printed in indelible ink. The fifth principle of cash disbursement is that of independent internal verification. This occurs at Guard Dog because the reconciliation is conducted by the assistant chief accountant, not the treasury. There are other controls as well that are consistent with the principles of internal control of cash. The invoices are stamped "PAID" when the check has been issued, for example. Also, in each key department there are two individuals, which allows each individual to take vacations. The checks are compared to the invoices before they are issued. By doing all of these things, Guard Dog is following the principles of internal control of cash disbursements well.

4-2A. a) There are several weaknesses in the internal control. The head usher counts the money unsupervised; financial management and audit is conducted by the same group; regular audits are not conducted; only one employee keeps records; the financial secretary conducts reconciliation and audits; the church lacks fidelity insurance; the financial secretary also counts the cash unattended; checks are made payable to "cash"; there are no controls on minor disbursements and little record keeping of such transactions.

A b) I would recommend the following improvements. For the ushers, they should remain with the head usher while the count is made. Moreover, because ushers handle cash they should not be volunteers who are constantly rotated. They should be trusted individuals. Checks should be made out to the church. Ushers should work in teams of two unrelated individuals. The head usher should conduct the count with the ushers present. The financial secretary should be subject to fidelity insurance. This person should be spelled off for vacation every year. Additionally, this person not count the collections if they are to handle disbursements. The financial secretary should need approval for the petty disbursements they make. The financial secretary should not perform reconciliations. The finance committee should undertake more oversight into petty disbursements made by the financial secretary and demand records be kept of these. The finance committee should hire an auditor to conduct the reconciliation.