08-Apr-19

ACCOUNTING FOR CASH AND

INTERNAL CONTOLS
By
Abdullatif Essajee
&
James Kamau

Internal Controls System

Policies and procedures managers use to:

– Protect assets
– Ensure reliable accounting
– Promote efficient operations
– Urge adherence to company policies

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Objectives of Internal Controls

To provide reasonable assurance that:

i. Assets are safeguarded and used for business purposes.

ii. Ensure accurate, reliable accounting records

iii. Promote operational efficiency

iv. Compliance with laws and regulations for both the

company and its employees

Principles of Internal Controls

These are the concepts that require

management to set procedures in place to
ensure company assets are safeguarded.

In other words, these are the principles

management uses to establish the ways to
protect company assets.

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Principles of Internal Controls

The main internal control principles include:

1) Establish Responsibilities
Assigning specific responsibilities to individuals ensures they
understand what their part is in maintaining internal control. If an internal
control responsibility is consistently overlooked, an effective internal
control system will make it clear who is not performing an assigned task.

2) Maintain Records
Companies deal with large amounts of information or transactions.
Having correct record-keeping procedures will enable companies to
have an accurate history of transactions on hand. Such historical data
allows for the company to refer to it later, if a problem is discovered or if
clarification is necessary.

Principles of Internal Controls

…Cont’d

3) Insurance and bonding key employees

Unfortunately, even the best internal control system may not prevent the
loss of an asset. By insuring assets and bonding employees, an
organization can rest assured that it will be reimbursed for the value of
an asset if the asset is stolen, or otherwise misappropriated.

4) Segregation of Duties
Separation of duties involves splitting responsibility for bookkeeping,
deposits, reporting and auditing. The further duties are separated, the
less chance any single employee has of committing fraudulent acts.

5) Mandatory Employee Rotation

Job rotation and mandatory vacation forces employees to take time off
or change job roles. Employees who commit fraud tend to need to be
continuously working in order to conceal their fraud.

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Principles of Internal
Controls…Cont’d

6) Use Technological Controls

Burglar alarms, electronic keypads and other technology-based security
features can help organizations protect assets. Technology can often go
where people cannot, and can be on the job 24 hours a day without
requiring extra pay or breaks. Smart companies augment their internal
control systems with appropriate and cost-effective technology.

7) Perform Regular Independent Reviews

Companies must review their internal control systems regularly. That
should be done by an individual who did not perform any of the work
being checked. An independent evaluator can objectively report on the
work being done throughout the internal control process and has no
reason to cover mistakes or be overly optimistic about the control
procedures.

Limitations of Internal Controls

Human Error Human Fraud

Negligence Intent to
Fatigue defeat internal
Misjudgment controls for
Confusion personal gain
Human fraud triple-threat:
Opportunity, Pressure, and Rationalization.

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Limitations of Internal Controls…

 Collusion
– Two people working together can circumvent the
internal controls system (ICS) hence controls cannot
completely prevent fraud

 Cost
– The company must weigh the benefits of
implementing controls with the associated cost
 The stricter the ICS, the more it costs
 A complex ICS also strangles the business with red tape
(bureaucracy)

Cash
 One of the most important
assets a business owns.

 Is the primary asset

used to acquire other
assets as well as to pay
for operating expenses.

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Cash

 Most liquid asset.

 Standard medium of exchange.

 Basis for measuring and accounting for all

other items.

 Normally reported as a Current asset.

 Asset mostly expropriated

LO 1

Examples Of Cash…

 Coins,

 Currency

 Demand deposits at the bank (including those in

foreign currencies),

 Items acceptable for deposits in bank accounts, such

as money orders, cheques, and

 Idle cash temporarily invested to earn a return

(Essentially equivalent to cash because they can quickly become available for
use as cash)

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Items Not Considered Cash

 Overdraft without the right of offset

 Restricted cash accounts

 Investments

 Post dated cheques from customers

 Loans to employees
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Control of Cash
An effective system of internal control that
protects cash and cash equivalents should meet
three basic guidelines:

Handling cash Cash receipts

is separated from are promptly
recordkeeping for deposited in a
cash. bank.

Cash
disbursements
are made by
cheque/EFT

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Control of Cash…..
 Preventive controls protect cash from theft and
misuse of cash e.g. issuance of official receipts,
daily banking etc

 Detective controls are designed to detect theft or

misuse of cash and are also preventive in nature
e.g. bank reconciliations, surprise cash counts

Presentation in the Statement of

Financial Position

 Cash is listed among the Current Assets

because it is most current and liquid of all
assets

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Management responsibilities
relating to Cash

 Provide accurate accounting for cash receipts, cash

payments and cash balances

 Prevent losses from fraud or theft

 Maintain a sufficient amount of cash at all times to

make necessary payments plus a reasonable
balance for emergencies

 Prevent unnecessarily large amounts of cash from

being held idle producing little or no revenue

Bank Reconciliation

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Why Bank Reconciliations?

 The balance of the bank statement and the bank
account in the cash book rarely agree.

 Due to timing difference, omissions and errors may

be made by the bank or the firm itself.

 Bank reconciliation statements can be used to

explain the reasons for the differences and to identify
errors and omissions in both documents, so that
corrections can be made as soon as possible.

Reasons for differences between the

Cash book balance and the Bank
statement balance

1. Uncredited items
These are deposits paid into the bank that do not
appear on the Bank statement.

2. Unpresented cheques
They are cheques issued by the firm that have not yet
been presented to its bank for payment.

3. Standing order
They are standing instructions from the firm to the bank
to make regular payments.

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Reasons for differences between the

Cash book balance and the Bank
statement balance…
4. Direct debits
They are payments made directly through the bank.

5. Bank charges
They are charges made by the bank to the company for
banking services used.

6. Dishonoured cheques
These are cheques deposited but subsequently
returned by the bank due to the failure of the drawer to
pay.

Reasons for differences between the Cash book

balance and the Bank statement balance…

7. Credit transfers / direct credits

They are money received from customers directly
through the banking system.

8. Interest allowed by the bank

They are interest received for deposits or fixed deposits.

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Nature of the Cash book and

Bank statement

Cash Book (Bank column only)

Debit represents an increase Credit represents an decrease

Bank Statement
Cr Dr Balance

(represents (represents (represents

increase) decrease) the amount
owed to
the clients)

THINGS TO REMEMBER
 The Bank Statement and the Bank Account
are a mirror image of each other

 Receipts are shown in the debit column of the bank

account but appear in the credit column of the bank
statement

 Payments made are recorded in the credit column of

the bank account but the bank shows them in the
debit column of the statement
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Bank reconciliation…

Refresh:
 The Adjusted Cash Book is the company’s own record
of money received and spent

 The Bank Statement is the banks record of money

received and spent by the account holder. This is
viewed from the banks perspective

 The Bank Reconciliation Statement is then prepared to

reconcile (or fix) the two records and check for any
errors that have occurred

Steps in preparing a bank

reconciliation

i. Update the cashbook with the items appearing in

the bank statement and not appearing in the
cashbook except for errors in the bank statement.
Adjustments should also be made for errors in the
cashbook.
ii. Compare the debit side of the cashbook with the
credit side of the bank statement to determine the
uncredited deposits by the bank.
iii. Compare the credit side of the cashbook with the
debit side of the bank statement to determine the
unpresented cheques.

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Steps in preparing a bank

reconciliation….. Cont’d

Finally, prepare the bank reconciliation statement which

will show:

a) Unpresented cheques
b) Uncredited deposits
c) Errors on the bank statement
d) The updated/adjusted cashbook balance

Bank reconciliation statement

format #1

Balance at bank as per cashbook (updated) xx

Add: Un presented cheques x

Errors on Bank Statement (see note 1) x x

Less: Uncredited deposits x

Errors on Bank Statement (see note 2) x (x)

Balance as per the bank statement xx

Note 1: These types of errors will have an effect of increasing the balance at bank e.g. an
overstated deposit or an understated payment by the bank.
Note 2: These types of errors will have an effect of decreasing the balance at bank e.g. an
understated deposit or an overstated payment by the bank, or making an unknown payment

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Bank reconciliation statement

format #2

Balance at bank as per bank statement xx

Add: Uncredited deposits x

Errors on Bank Statement (see note 1) x x

Less: Unpresented cheques x

Errors on Bank Statement (see note 2) x (x)

Balance at bank as per the cash book xx

Note 1: These types of errors will have an effect of increasing the balance at bank e.g. an
overstated deposit or an understated payment by the bank.
Note 2: These types of errors will have an effect of decreasing the balance at bank e.g. an
understated deposit or an overstated payment by the bank, or making an unknown payment

Illustration
Bakari, a sole trader received his bank statement for the month of March 2019. At that
date the bank balance was Sh. 706,500 whereas his cash book balance was Sh.2,366,500.
His accountant investigated the matter and discovered the following discrepancies:

1) Bank charges of Sh.3,000 had not been entered in the cashbook.

2) Cheques drawn by Bakari totaling Sh.22,500 had not yet been presented to the bank.
3) He had not entered receipts of Sh.26,500 in his cashbook.
4) The bank had not credited Mr Bakari with receipts of Sh. 98,500 paid into the bank on 31st
March 2019.
5) Standing order payments amounting to Sh.62,000 had not been entered into the cashbook.
6) In the cashbook Bakari had entered a payment of Sh.74,900 as Sh.79,400.
7) A cheque for Sh.15,000 from a debtor had been returned by the bank marked “refer to
drawer” but had not been written back into the cashbook.
8) Bakari had brought forward the opening cash balance of Sh.329,250 as a debit balance instead
of a credit balance.
9) An old cheque payment amounting to Sh.44,000 had been written back in the cashbook but
the bank had already honored it.
10) Some of Bakari’s customers had agreed to settle their debts by paying directly into his bank
account. Unfortunately, the bank had credited some deposits amounting to Sh.832,500 to
another customer’s account. However acting on information from his customers Bakari had
actually entered the expected receipts from the debtors in is cashbook.

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Illustration .. Cont’d

Required:

1) Prepare Bakari’s adjusted cashbook as at 31st March

2019

2) Prepare the bank reconciliation statement as at 31st

March 2019.

End of Topic 7

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