Apply The Concept Of Internal Control By Designing Steps For Segregation Of Duties In The Cash Handling Process AIOU 5417 481

APPLICATION OF INTERNAL CONTROL SYSTEM

Responsibility for the application of the internal control system rests with the management. The auditor may help, advise, and report but has no power to demand that an adequate system of internal control should exist. The final responsibility remains with the management. In an efficiently controlled organization, there must be clear lines of demarcation between the responsibilities and duties of the staff, and these can only be operated in conjunction with properly compiled records of the various activities of the business and by the circulation of written information as to the duties of the staff.

The system of internal control in respect of various aspects of a business is given below:

Cash Receipts

Cash book requires too much concentration of internal management because liquid position often decides whether company is going well or not. The steps which should be taken into consideration for proper check are nearly the same in cash receipt and in cash payment because these are just left and right sides of cash books, and require the same check and balance.

  1. Every check book and cash book must be under lock and key whereby only a responsible officer allows the cashier to open and use.
  2. Receipts should be pre-numbered. Unused receipts should be kept under the control of a responsible official. If possible, receipts should be signed by more than one person.
  3. Spoiled or cancelled receipts should never be detached from the file, otherwise it will be difficult to satisfy the auditor.
  4. The internal check system, once installed, must be maintained. This may involve checks at irregular intervals by responsible members of the staff or the internal audit department, if there is one. Likewise, arrangements must be made to meet exceptional circumstances, such as staff illness or holidays, addition of some items of work, etc.
  5. The receipt of cash, including the opening of post, should be made under the supervision of a responsible official. All cash receipts should be immediately recorded for subsequent checking purposes at a later stage. All cheques, money orders, and postal orders should be cancelled on receipt by means of a stamp with a crossing of “Not Negotiable”; “Account Payee Only”.
  6. Instructions should be given with regard to receipt of cash by cashiers, travelers or otherwise, and the manner in which they are to be evidenced must be stated. For example, receipts should be issued for all cash (as opposed to cheques received).
  7. Specific instructions must be given to members of staff for handling of all cash receipts and payments as well as with regard to the recording and checking thereof.
  8. All moneys received must be recorded, cross-checked and banked frequently, preferably daily.
  9. Duties as to preparation of bank paying-in slips and actual banking should be stated. Preferably, this should be done by two different persons.
  10. Paying-in slips should not be prepared by those receiving and recording cash, and such slips should be checked regularly against the documents recording receipts of cash.
  11. Cash for disbursement purposes should never be taken out of cash received.

Cheque Payments

The following aspects should receive attention:

  1. As far as possible, payments should be made by crossed cheques.
  2. Supporting documents for payments (vouchers) should be serially numbered and safeguarded to facilitate checking at any later stage.
  3. Signatures on bills of payment should be obtained at various stages, thus ensuring no payment of the same bill twice.
  4. Define authorities and their limitations as to sanction the amount for payment.
  5. Ensure payment in time to obtain the benefit of discounts.

Cash Balances

  1. Rules should also be laid down concerning the safekeeping of moneys retained on the premises after business hours.
  2. Stated procedures should exist for the handling of funds of employees such as unclaimed wages, holiday funds, etc.
  3. Bank reconciliations should be prepared at regular intervals, if possible by a person whose work is independent of receiving and disbursement of cash. If an internal audit department exists, the regular checking of such reconciliation should be required.
  4. Specific policy must be made with regard to the amount of cash to be held as petty cash balances for day-to-day petty disbursement purposes.
  5. Persons allowed access to balances should be specified.
  6. All petty cash floats should be maintained on the Imprest system.
  7. Rules should exist to ensure that cash floats are checked by responsible staff at frequent intervals.

Purchases

Authorization – Procedures must be laid down to cover the requisition and authorization of purchase orders. Certain firms should be listed with whom orders are to be placed having been specified by those with authority to do so. Order forms should be kept in safe-custody. Policy should be made for purchases through quotations and open tender.

Receipt of Goods – The flow of goods received from their receipt, inspection, acceptance, and transfer to departments and authority of those concerned should be laid down. The checking of purchase orders against goods received must be arranged.

Accounting – Proper allocation of duties must cover:

  • Checking invoices received.
  • Maintaining a daybook system (whether slip system or otherwise) regarding purchases and purchase returns.
  • Writing-up of the ledger accounts and checking of suppliers’ statements.

Payment Authorisation – Before the payment authorisation is given, the procedures stated must be followed to ensure goods have been properly ordered, duly received and advantage taken of any discounts allowable.

Sales

The internal control should cover the following areas:

Authorisation and Recording

  1. Arrangements should be made to ensure that sales are made at correct prices and under agreed terms of discount.
  2. Authority to pass on orders for production or supply of goods should be properly defined.
  3. Procedure should be laid down regarding goods sent as free, or on terms other than sale.

Dispatch of Goods

  1. Authority for dispatch of goods and evidence thereof should be fixed.
  2. Arrangements should be made for examination and recording of goods dispatched by staff other than those concerned with stocks maintenance or invoicing duties.
  3. Procedure should be laid down for regular comparison of records of goods dispatched with original orders, dispatch notes and invoices.

Accounting

  1. No sales ledger staff should be concerned with cash records or stock and should not be responsible for sales invoicing or sales staff duties.
  2. Separate staff should be engaged on the duties of recording sales and sales returns, maintenance of customers’ accounts, and preparation of statements to customers.
  3. Procedures should be made to ensure that sales returns, price adjustments and special allowances are operated under an efficient system of internal check.
  4. Where goods are dispatched in an accounting period but not invoiced, adequate procedures should be in force to ensure that they are invoiced in the next period, and also that the goods held are not shown in stocks of the company if the sale is included in the earlier period.
  5. Authority should be properly allocated with regard to arrangements for special terms and discounts (and how these shall be evidenced), the writing-off of bad debts and personnel to deal with customers’ enquiries.
  6. Control accounts should be operated on debtors’ ledgers, and reviewed by an independent responsible official.

Wages and Salaries

  1. Allocation of Duties – The internal check system should be operative at all stages in employee remuneration. The work of making up wages sheets should be so divided as to ensure that work is both checked and duties of the employees should also be clearly defined.
  2. Payment of Employees
  • Proper arrangements should be made for drawing and encashment of the wages cheque.
  • The staff making up wage packets should be different from those preparing the wages sheets, and the right amount of notes and change should be drawn in accordance with the wages sheets.
  • The arrangements for payment of wages should include supervision by a responsible official, and payment should be made by a person other than any of those preparing the wages sheet and pay packets. Specific arrangements should be made for dealing with unclaimed wages.
  • Special checks should be made at irregular intervals of balances held in wages departments, such as cash and revenue stamps, etc.
  • In general, reconciliation should be made explaining the difference between total wages and deductions from one period to the next.

Stock Control

The following are some of the main items to be considered:

  1. Receipt of Goods – The procedures for receipt of goods to be followed in dealing with goods inward and outward (including the receipt, checking, passing to departments and recording).
  2. Allocation of Responsibility – Proper allocation of responsibility for safeguarding and maintenance in good condition of stocks, including stock records, authorisation for issues, and regular reconciliation of store records with those of the accounts department. To preserve internal check, those engaged on stock keeping should have no access to stock records in the accounts department.
  3. Outside Stocks – Procedures with regard to stocks held outside the business and likewise goods held on behalf of others, as to authorisation and evidence required for issues to be made. Stock held at outside warehouses should be most strictly controlled and inspected.
  4. Stock-taking Procedures – These are important with respect to independent checks, reconciliation of records, pricing of goods, the intervals at which stocks are taken, including irregular checks from time to time.
  5. Writing off Stocks – The systems to be applied in valuation of stocks, review of slow-moving or obsolete lines, the issue and receipt of returnable packages. The system should also be applied over control of scrap and the authority required for writing-off and disposal of old lines.

Fixed Assets

The following are some of the main points to be dealt with:

  1. The designation of authority to sanction capital expenditure.
  2. The designation of authority to sanction the sale, exchange or disposal of assets, how this is to be evidenced and the internal check regarding this, since it should not be under the authority of one person only.
  3. The maintenance of proper information about all fixed assets acquired by means of accounting records, plant assets registers, etc., and the arrangements for the physical inspection of such assets. Where assets are transferred to sites, branches, or within a group, the maintenance of adequate records and their checking from time to time independently to ensure that such records are up to date.
  4. The fixing of rates of depreciation or arrangement for revaluation, the authorisation of the staff concerned and the evidence to be supplied.

RELATED ARTICLESMORE FROM AUTHOR