Cash forms the lifeblood of business. Companies rely on cash to meet their operational and strategic needs. Cash allows the company to pay bills, invest in equipment and pay off long-term debt. Customers pay their bills using cash. With cash playing such a vital role in the company’s financial health, internal controls play an even greater role. Companies face the risk of cash handling errors or fraud. Companies incorporate internal controls to minimize the risk of errors or fraud surrounding cash.
Lost or Stolen Cash
One risk companies face is the loss or theft of cash. This occurs in businesses that accept cash payments directly from customers, such as restaurants or retail stores. Internal controls that minimize this risk focus on implementing security measures surrounding the cash. These internal controls include keeping the cash locked up in a vault or cash register, limiting the number of people with access to the cash and performing background checks on any employees entrusted with cash responsibilities.
Another risk companies face is the potential of employee theft. Some employees steal cash from the business, either by removing it from cash registers or by printing company checks to themselves. Internal controls that minimize this risk limit the ability of any one employee to access the cash. These internal controls include assigning different duties to separate employees. For example, one employee might record payments received while another employee makes the bank deposit. Another internal control consists of pairing employees together. When employees open the mail to record payments received, two employees work together. This allows each employee to verify the other’s work.
Improper Use of Cash
Some companies face the risk of employees not using the cash in accordance with the company’s policies. Internal controls to minimize this risk focus on holding employees accountable. These internal controls include documenting all transactions that occur, such as deposits or transfers, limiting each employee’s authorization ability based on responsibility level, and assigning secure logins and passwords to authorized employees. This allows the company to track which employee accesses the cash account and what transactions they recorded.
All companies face the risk of undetected errors. These errors refer to mistakes made by the company or the bank that no one catches. The internal controls that minimize this risk consist of reviewing and reconciling the cash account on a regular basis. Company employees should review deposit receipts to the recorded deposits in the company’s accounting books. The company should also perform regular bank reconciliations to ensure that the bank records match the company records.