Systems of Internal Control

    

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   Cash can be defined as many things. Currency, Coins, Money orders, and bank drafts are all considered forms of cash. Cash in banks may be in the form of checking and savings accounts, while cash in business may be in the form of postage stamps and promissory notes. Nevertheless, cash is the currency of trade. For a business to perform either in terms of profit or on the stock market, the amount of cash it has on hand is called business liquidity. In the stock market, rising interest rates can jeopardize a company's stock. Rising interest means accumulating debt. If the company does not have liquid assets on hand, this debt becomes worse and may be easily reflected on the stock charts. Not being able to meet the cash requirements also means bankruptcy, even though a company might have a high net worth of long-term assets! With liquidity also comes employee theft and error! Systems of internal control are considered the best form of insurance policies. This system must be properly designed, as well as procedures followed, if one is to secure their cash!

  First of all, the systems of internal control must be properly designed. This means assigning areas of authority and responsibility. Next, accounting records must be maintained by separate personnel. If the personnel responsible for handling cash also maintain accounting records, there may be a high probability of fraud and theft. Also, employees are to be checked regularly to ensure they are following internal control procedures. A surveillance camera, control procedure checklist and regular documentation are some of the ways employees may be tracked. Not to mention, employee bonding is highly encouraged. This includes rotation of duties and assigning holidays. A focused and happy employee is not only more likely to perform better but also less likely to commit errors or fraud.  Most importantly, mechanical equipment like check protectors and time clocks must be used whenever possible. Check protectors emboss accurate and forgery-proof figures while time clocks keep track of employee schedules. Both these instruments may be crucial in deterring forgery, ID theft and fraud. Since most major theft cases are electronic, taking control measures to secure electronic transactions may also be a key in systems of internal control. Placing ATM's in secured and monitored locations may reduce theft and abuse. Anti-virus software, firewall and VPN for tracking cookies could secure profits for a business by deterring electronic theft. Overall, systems of internal control must be properly designed; hence, regular and independent reviews may be of great importance!

  Following the design, establishing procedures for this design is equally important. First of all, employees handling cash or cashiers and accountants are not likely to be mixed with a few exceptions. Hence, it is recommended to deposit cash receipts on the very same day. Next, a record of all cash receipts is preferable in the form of invoices and bank statements. Also, the use of all cash must be controlled by making cash disbursements by check. More importantly, checks are not to be written or signed unless approved invoices and vouchers are used. Not to mention, authorization of checks must be done by someone other than the one who signs the checks. Moreover, checks are to be signed and countersigned. Then, invoices and vouchers used to support the checks must be stamped paid! However, the most important procedure is to establish a labour division in such a way that two people cannot get together to conceal a fraud! For example, replenishing the petty cash fund may be done by a separate entity rather than petty cash custodians to analyze the expenditures from the vouchers at the same time.  Finally, signature forgery is another fraudulent instrument. To avoid forgeries, banks usually keep signature cards to double-check if the signature is valid on checks signed for personal or business use.

  In conclusion, systems of internal control are considered effective means to combat theft and mishandling of cash in the business world! Backup Insurance coverage for liability, theft, business interruption, etc, may also secure business assets and income like systems of internal control.

Reference: John R. Cerepack & Brian W. Carpenter, "Systems of Internal Control"