Cash Book

Question 1

Cash book

Answer 1

• Risks and Control Objectives
• Principal Controls and Tests of Control
• Petty Cash

Risks:
1. Misappropriation of Cash: Cash is highly susceptible to theft or fraud.
2. Incomplete Recording of Receipts: Ensuring all money received is recorded is crucial.
3. Unauthorized Payments: Payments might be made to unauthorized persons or for incorrect amounts.

Control Objectives:
1. All Money Received is Recorded: Ensure completeness of cash receipts.
2. All Money Received is Banked: Ensure all cash is deposited in the bank.
3. Safeguarding Cash: Properly safeguard cash held as cheques, notes, and coins.
4. Proper Authorization of Payments: Ensure all payments are authorized.

1. All Money Received is Recorded
   
   • Control: Segregation of duties; handling of cash should be separate from other accounting functions.
   • Test: Check that segregation of duties exists.
2. Controls Over Receipts by Post
   
   • Control: Supervision of mail opening, listing of all money received, date-stamping mail and cheques.
   • Test: Observe mail opening and cash handling procedures; check recorded amounts against remittance advices.
3. Cash Sales
   
   • Control: Restrict employees authorized to receive cash, use cash tills and till rolls, check cash received against till roll totals.
   • Test: Check amounts in receipt books or on till rolls to paying-in slips, cash book, and bank statements; check for daily bankings and evidence of till roll checks.
4. All Money Received is Banked
   
   • Control: Daily banking, recording cash payments received, checking against amounts banked.
   • Test: Check frequency of banking receipts; ensure receipts are recorded in the cash book and match bank statements.
5. Proper Safeguards Over Money Held
   
   • Bank Controls: Procedures for opening new bank accounts, restrictions on cheque preparation and holding, safe custody of cheque books, no pre-signed cheques.
   • Test: Confirm new bank accounts follow procedures, observe individuals handling cheques, check custody of cheque books, ensure no pre-signed cheques.
   • Cash Controls: Secure storage of notes and coins, limited access to cash, recording of cash receipts and payments.
   • Test: Review nature of cash payments, observe cash custody procedures.
6. All Payments Properly Authorized
   
   • Cheque Payments: Use cheque requisition forms, back payments with documentation, cancel documentation once cheque is prepared, establish authority levels for cheque signing, record payments promptly, sequentially number cheques.
   • Test: Review paid cheques for payee, date, amount, and signature; agree payments in cheque book or BACS listing to accounting records, bank statements, and supplier statements; review supporting documents for payment requisitions; check sequence of cheque numbers.

Imagine a company, XYZ Ltd., handling cash and bank transactions. Here are some potential controls and tests:

1. Segregation of Duties: XYZ Ltd. ensures that the person handling cash is different from the person recording transactions. The auditor checks that these duties are indeed segregated.
2. Mail Receipts: Mail containing cheques is opened under supervision, and all received amounts are listed and date-stamped. The auditor observes this process and checks the recorded amounts against customer remittance advices.
3. Cash Sales: Only authorized employees handle cash sales, and cash tills are used. The auditor checks till rolls against cash book entries and bank statements to ensure accuracy.
4. Daily Banking: XYZ Ltd. deposits cash receipts daily. The auditor checks the frequency of deposits and ensures that recorded receipts match bank statements.
5. Cheque Controls: Cheque books are kept in a safe, and only authorized personnel can prepare cheques. The auditor confirms that no pre-signed cheques are used and observes a payment run to ensure proper controls.
6. Authorization of Payments: All payments are backed by requisition forms and supporting documents. The auditor reviews paid cheques and supporting documents to ensure proper authorization and recording.

By implementing these controls and regularly testing them, XYZ Ltd. can ensure a secure and accurate bank and cash system.

I hope this helps clarify the concepts! If you have any more questions or need further examples, feel free to ask.

1. Prevent Theft: Reduce the risk of petty cash being stolen.
2. Proper Authorization: Ensure all petty cash spending is properly authorized.
3. Correct Withdrawals: Ensure only the correct amounts of cash are withdrawn from the bank for petty cash.
4. Complete Accounting: Ensure all petty cash spending is accounted for.

1. Limit Cash Held: Restrict the maximum amount held in petty cash to about one month of spending to avoid holding large amounts of cash that might be stolen.
2. Secure Storage: Keep petty cash in a locked cash box in the office safe or a locked drawer in the accountant’s desk.
3. Record Withdrawals: Record all petty cash withdrawals on a petty cash voucher, which must be sequentially numbered to prevent fraudulent withdrawals and ensure all withdrawals are recorded.
4. Authorization of Spending: All petty cash spending should be authorized in advance by a properly authorized person (not the person withdrawing the cash). Authorization should be indicated by signing and dating the petty cash voucher.
5. Receipts for Spending: Provide receipts for all petty cash spending and attach them to the petty cash voucher.
6. Bank Withdrawals: When money is withdrawn from the bank to top up petty cash, the amount of the cheque should be checked against the total of the petty cash vouchers. The amount withdrawn should equal the total on the vouchers since the last withdrawal.
7. Periodic Checks: Conduct occasional checks of petty cash by a senior person (not the person responsible for holding and issuing petty cash) to ensure no fraudulent activity.
8. Regular Recording: Regularly record petty cash expenses in the petty cash book, including the voucher number for each entry to ensure completeness.

1. Check Cash Limits: Verify that the amount of petty cash held does not exceed the set limit.
2. Observe Storage: Ensure petty cash is stored securely in a locked cash box or drawer.
3. Review Vouchers: Check that all petty cash withdrawals are recorded on sequentially numbered vouchers.
4. Verify Authorization: Confirm that all petty cash spending is authorized by a properly authorized person and that vouchers are signed and dated.
5. Match Receipts: Ensure receipts are provided for all petty cash spending and attached to the corresponding vouchers.
6. Reconcile Bank Withdrawals: Check that the amount of cash withdrawn from the bank matches the total of the petty cash vouchers.
7. Conduct Periodic Checks: Review records of periodic checks conducted by a senior person to ensure no fraudulent activity.
8. Review Petty Cash Book: Verify that all petty cash expenses are recorded in the petty cash book with the corresponding voucher numbers.

Imagine a company, ABC Ltd., managing its petty cash. Here are some controls and tests:

1. Limit Cash Held: ABC Ltd. restricts petty cash to $500, which is approximately one month of spending. The auditor checks that the petty cash balance does not exceed this limit.
2. Secure Storage: Petty cash is kept in a locked cash box in the office safe. The auditor observes the storage location to ensure it is secure.
3. Record Withdrawals: All petty cash withdrawals are recorded on sequentially numbered vouchers. The auditor reviews the vouchers to ensure they are sequentially numbered and properly recorded.
4. Authorization of Spending: A manager authorizes all petty cash spending by signing and dating the vouchers. The auditor checks the vouchers for proper authorization.
5. Receipts for Spending: Receipts are provided for all petty cash spending and attached to the vouchers. The auditor verifies that receipts are attached to the vouchers.
6. Bank Withdrawals: When topping up petty cash, the amount withdrawn from the bank matches the total of the vouchers. The auditor reconciles the bank withdrawal with the petty cash vouchers.
7. Periodic Checks: A senior manager conducts periodic checks of petty cash. The auditor reviews records of these checks to ensure they are conducted regularly.
8. Regular Recording: Petty cash expenses are recorded in the petty cash book with the corresponding voucher numbers. The auditor reviews the petty cash book to ensure all expenses are recorded.

By implementing these controls and regularly testing them, ABC Ltd. can ensure a secure and accurate petty cash system.

I hope this helps clarify the concepts! If you have any more questions or need further examples, feel free to ask.