Cash Controls

Cash internal controls is a system used to promote accuracy, prevent theft, and ensure a business has enough cash to pay its debts.

Learning Objective

Explain how internal cash controls benefit a company

Key Points

Internal controls assure achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations, and policies.
According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), internal control has five components: the control environment, risk assessment, information and communication, control activities, and monitoring processes.
Businesses will generally be required to perform an audit at least once a year on all of its financial reports and internal controls, including those controls associated with cash.
Three common types of internal controls for cash include bank reconciliations, voucher systems, and electronic funds transfers (EFT).

Terms

internal control
a process affected by an organization's structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives
internal controls
In accounting and auditing, internal control is defined as a process affected by an organization's structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives [1]. It is a means by which an organization's resources are directed, monitored, and measured. It plays an important role in preventing and detecting fraud and protecting the organization's resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks).
electronic funds transfer
the transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems

Full Text

Every business should have internal controls regarding its financial activities. If designed well, internal controls can prevent theft and fraud. They also ensure that a business's financial statements are accurate .

Balance Sheet

Internal controls are vital to ensure that financial statements, such as balance sheets, are accurate.

While internal control should be designed for every aspect of a business's operation, the controls for cash are arguably among the most important. Since cash is the most liquid asset and the easiest for people to convert for their own needs, it is often the easiest thing to steal or misreport. Therefore, the internal controls associated with cash must be more stringent.

Goals for Internal Cash Controls

Check that the business's actual cash balances equal what is recorded in its financial records.
Ensure that there is enough cash available to pay a business's debts on time.
Prevent the business from having "idle funds"—more cash than is necessary to function. These funds can instead by invested for higher return.
Prevent theft or fraud.

Five Elements of Internal Controls

According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), internal control has five components:

The Control Environment. Every business is different. A business comprised of five people will demand different controls than a company with 500 people. Prior to establishing any set of internal controls, you should consider the business's management philosophy, the integrity of the employees, and the legal requirements established by the state and federal government.
Risk Assessment. Next, you should consider how a business's cash is at risk. Are large amounts of cash kept where employees have access to it? Who is responsible for receiving and depositing cash? Who is responsible for giving cash to settle debts? These are the types of questions that address what possible risks a business may face when it comes to cash.
Control activities. Control activities are steps that a business takes to minimize risks. Examples of control activities include having different employees being responsible for different parts of the transaction. An example of a control activity would be having one person selling the product, another person receiving the money from the sale, and a third person checking to make sure that the agreed sales price equals what was deposited.
Information and communication. Control activities must be designed and then executed by relying on information to be communicated between the people who control different aspects of the transaction. To minimize errors and fraud, the correct information must flow to the right people in a timely manner.
Monitoring. The entire process must be reviewed by upper level management to ensure that every person is complying with their responsibilities. It is also generally required that the business audits its books and review its internal controls at least annually.

Common Cash Controls

Bank Reconciliations: A process where the cash accounts on a business's books are regularly checked against bank statements.
Voucher System: A system focused on documenting every aspect of every transaction to ensure that all required payments are made and are only made once.
Electronic Funds Transfer (EFT): By using services that transfer funds automatically, such as through PayPal, a business can minimize the number of people who have access to its funds. These types of transfers also tend to generate documentation showing when the transaction was made and with whom.

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