HA1020 Accounting Principles & Practices

Lecture 8: Part A

Internal Control & Cash Management

 Unit Objectives & Learning Outcomes

1 Why do I need accounting skills?

Record business transactions in the journals and ledgers that make up a business’s
2 accounting system

3 Prepare financial statements; and

4 Analyze and interpret financial statements.

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 Lecture 8A: What you will learn

Examine how cash is managed, considering control of cash, cash like

1 similarities e.g. credit cards, EFTPOS, etc.

Learn the three principles of management of cash, and the trends in cash
2 management. And, discuss how companies are cash generators.

Examine internal control and cash payments – how are these managed and
3 cash protected?

Finally, we examine some examples of situations where inappropriate

4 management puts organizations in precarious positions with respect to potential
loss of cash.

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 What is cash?

Cash is a term to:

1. Identify money

2. Duplicates of credit card and EFTPOS (direct debit) sales

3. Other negotiable instruments:

Cheques ( these are becoming obsolete as an old and often unreliable
technology). Note: Banks still issue Bank Cheques!
postal notes that a financial institution will accept

4. “Cash” must be readily available to pay liabilities as they fall due,

cannot be subject to any restrictions
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 Control of cash

Cash is the asset most subject to theft…need a good internal control

system for handling cash and recording cash transactions

3 important principles

1. Separation of responsibility for handling and custodianship

of cash from maintaining records for cash which we call
“segregation”

2. Banking intact each day’s cash receipts

3. Making all payments by electronic transfer or by cheque

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 Control of cash receipts

1. Cash received through the mail

1. Control relies heavily on separation of record keeping and
custodianship

2. Cash receipts from cash sales

1. Use of cash register
2. Pre-numbered sales dockets

3. Cash short and over (called ‘unders’ & ‘overs’)

1. Cash shortage is recorded when daily sales are recorded

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 Internal control and cash receipts

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 Internal control and cash payments

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 Now it is your turn - Internal Control Cases

Comment on the adequacy of internal control:

1. The cashier records the receipt of cash, banks it and also keeps the
ledger

2. The office manager authorizes the payments of salaries and also

prepares sales invoices

3. Our bookkeeper is very loyal and efficient. She handles all the banking
and the records and hasn’t even taken annual leave for five years

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 Now it is your turn - Internal Control Cases

“The cashier records the receipt of cash, banks it and also keeps the
ledger”

Inappropriate – recording and custody not separated. The cashier can

ensure that the initial record matches the bank deposit – it should be the
other way around – and the opportunity to pick up any discrepancy is lost
because he/she keeps the ledger

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 Now it is your turn - Internal Control Cases

‘The office manager authorizes the payments of salaries and also prepares
sales invoices’

Not inappropriate – recording custody and authorization are not an issue.

The office manager can be unreasonably influenced but hopefully there will
be relativity between employees and transparency re salaries. Also,
preparation of sales invoices is reasonable.

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 Now it is your turn - Internal Control Cases

Our bookkeeper is very loyal and efficient. She handles all the banking and
the records and hasn’t even taken annual leave for five years

Inappropriate. There is a direct link between these two activities so there is a

breach of the rule about separation of duties. The company carries risk on
business continuity in case the bookkeeper suddenly decides to claim her
leave and no adequate training has been provided to another person.

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 But why didn’t the auditor stop Wirecard?

Well, is it the auditor’s job? What do auditors do?

Ensure process and system regularities – not recount
and redo all of the accounting.

The sad thing is that a sophisticated crook - especially

now we are so dependent on accounting software – can
coverup fraud for a number of years.

EY in hot seat as did not detect – but

should they have?
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 Summary: What have you learned?

1 We have examined how cash is managed, considering control of cash, cash like
similarities e.g. credit cards, EFTPOS, etc.

Finally, we have examined some examples of situations where inappropriate

2 management puts organizations in precarious positions with respect to potential
loss of cash.
Learn the three principles of management of cash, and the trends in cash
3 management. And, discuss how companies are cash generators.

Examined internal control and cash payments methods – how cash is

4 managed and protected.

Holmes Institute
Applied Business Statistics for Managers
Pathways