THE INTERNAL CONTROLS OF CASH

INHERENT RISK – is the susceptibility on the nature of the account itself towards
misstatement or fraud.
 There are some asset which have higher inherent risk, example of it is CASH.
 Involve in large volume of transactions.
INTERNAL CONTROLS – should be in place to address inherent risks. These are safeguards
to ensure that cash is protected from fraud or misstatements.
EXAMPLE:
SEGGREGATION OF DUTIES
 Duties involving AUTHORIZATION, RECORDING, RECONCILATION, AND
CUSTODY responsibilities should be segregated properly and not assigned to only one person.
Example: If someone can both authorize a transaction and record them, what is the worst that
could happen. ( Record disbursement )
IMPREST SYSTEM
 Requires that all cash receipts should be deposited intact and all cash disbursements
should be made through checks.
 Disbursements for small amounts are made through petty cash fund.
BANK RECONCILLATION
 Thecash balance indicated in the bank statement may be different from the cash balance
in the books. The differences should be duly accounted for until both sides are balanced.
LOCKBOX
 Rented for a fee and customers are advised to remit their payments directly to the
lockbox account. ( w/o a lockbox it will take time to receive collection from the customers.)
 Lockbox is a more efficient and secured way to collect because the bank takes care of the
collection process.
VOUCHER SYSTEM
 A voucher is prepared for every cash disbursement to ensure that each disbursement is
properly authorized, made for a valid expenditure, and properly recorded.
CASH COUNTS
 Periodic and/or surprise cash counts should be conducted to ensure that the actual cash on
hand matches the balance reflected in the books.
When you conduct cash counts there some issues will rise up!
 Cash shortage – When the cash counted is less than the book balance then there is cash
shortage.
To record a cash shortage: Will use a suspense account.
Cash shortage xxx
Cash on hand xxx
The shortage is closed to: ( fault of the employee, so the employee will pay the missing cash.)
Received from employees/loss xxx
Cash shortage xxx
 Cash overage – when the cash counted is greated that book balance. (The physical cash is
bigger.)
To record a cash overage: Will use a suspense account. ( personal money was mixed up )
Cash on hand xxx
Cash overage xxx

DIFFERENT KINDS CONCEALMENT OF CASH SHORTAGES

LAPPING – happens when the collection of receivable from one customer is misappropriated
and then concealed by applying a subsequent collection from another customer.
KITING – is made possible by exploting the float period (i.e. the time it takes for a check to be
cleared and credited to the company’s account)
3 essential steps for KITING
 STEP 1: A check is written, at the month end, to transfer funds from one bank to another
bank account where the misappropriation was made.
 STEP 2: The “fraudster” would include the check as a deposit (addition) to the account
where he misappropriated the money.
 STEP 3: Because of the float period, the check drawn on the other bank account will not
be reported in the month-end bank statement. The overstatement of cash conceals the shortage.
 Bank Transfer Schedule – shows the dates of all transfers of cash among the various bank
accounts. ( shows the disbursement and deposit date for 2 or more particular bank account)

 Cut-off bank statement – prepared a few days after month end. Its purpose is to help
auditors verify reconciling items on the year-end bank reconciliation. ( we can request a
particular statements from the bank up to a particular date. This will be ensured which check
should be included, credited in terms of the bank statements.)
 Window Dressing occurs when books are not closed at year-end ( and revenues that are
supposed to be in the next period are recognize in this period, and expenses which should be
recognize in this period are recognize next period) and transactions in the subsequent period are
deliberately recorded in the current period to improve the entity’s financial performance or
financial ratios. (We are advancing revenues and we are delaying our expenses, this means sales
will be overstated and expenses will be understated.)
The following transactions in Nelson and Murdock Law firm on the last few days of December:
Received check from wilson on December 26 for 20,000 for sales that happened last
month
Employee wrote a check against the company’s Metrobank account on December 27 for
30,000. (bank transfer)
Received check from Nobu on December 28 for 45,000 worth of sales that happened last
month.
Received check from Stick on December 30 for 60,000 for sales this year.
Employee wrote a check against BDO’s account on December 31 for 40,000
Received check from Karen on January 2, for 40,000. ( not included in the current year)