Chapter Six

Internal
Control and
Accounting
for Cash

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Key Features of Internal Control

1. Separation of Duties
2. Quality of Employees
3. Bonded Employees
4. Required Absences
5. Procedures Manual
6. Authority and Responsibility
7. Prenumbered Documents
8. Physical Control
9. Performance Evaluations

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Separation of Duties

When duties are separated, the work of one

employee can act as a check on the work of
another employee. The likelihood of fraud or theft
is greatly reduced.

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Quality of Employees

The ability of cross-trained employees to substitute

for one another prevents disruptions in the
workplace. Job rotation may help relieve boredom
and increase productivity.

6-4
Bonded Employees

A fidelity bond provides insurance that protects a

company from loss caused by employee
dishonesty. To become bonded, an employee’s
background is investigated.

6-5
Required Absences

An employee may be able to cover up

fraudulent activities if he/she is always
present at work. All employees should be
required to take regular vacations and
their duties should be rotated periodically.

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 Procedures Manual

Accounting and other important procedures should be

written in a procedures manual. Periodically,
management should conduct an investigation to see
that required procedures are actually being followed.

6-7
Authority and Responsibility

General authority applies to all members of the

organization. For example, all employees are required
to fly coach and purchase airline tickets from a
specific vendor.

Specific authority applies only to a specific position

within the organization. For example, all checks must
be cosigned by the Controller and Treasurer.

6-8
 Prenumbered Documents

Prenumbered forms are used for all important

documents such as checks, purchase orders, receiving
reports, and invoices. The use of prenumbered forms
helps keep track of all forms issued during a particular
period.

How important is prenumbered checks

regarding the control of CASH RECEIPTS?

6-9
Physical Control

All companies should maintain adequate physical

control over valuable assets that may be
misappropriated. For example, inventory should be
properly stored in a secure location. Serial numbers
should be placed on all valuable assets to assist in a
physical count of these assets.

6-10
 Cash Short and Over
When using a cash register, employees
sometimes make mistakes in collecting cash or
making change for customers. If the cash
register does not reconcile by a small amount at
the end of the day, we use an account called
cash short and over to force a balance.
Assume a cash
register was to have Account Title Debit Credit
a balance of $487.50, Cash 486.50
but contained only Cash short and over 1.00
$486.50 at the end of Sales 487.50
the day.

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 TEST QUESTION: Petty Cash
On April 30, 2006, Southern Company established a
petty cash fund of $1,000. On May 1, 2006, a
disbursement of $250 was made from the fund for
payment of delivery expense. What is the initial entry to
start the fund on April 1st?

What entry should be made on May 1, 2006 to record

this disbursement?

a. debit Delivery Expense, $250; credit Cash, $250

b. debit Petty Cash, $250; credit Cash, $250
c. debit Delivery Expense, $250; credit Petty Cash $250
d. No entry made
6-12
 Performance Evaluation

•Internal controls should include independent verification

of employee performance.
•A physical inventory should be taken at least annually.
An independent reconciliation between the general
ledger balance and inventory should be compared to the
inventory count.
•Auditors should evaluate the effectiveness of the control
system.

6-13
Limitations

Internal controls can be circumvented by

collusion among employees. Two or more
employees working together can hide
embezzlement by covering for each other. No
system can prevent fraud.

6-14