Internal Check - Cash Transactions

Internal Check - Cash Transactions

Checking of all cash transactions should be given utmost importance because employees tend to involve in fraudulent activities by misappropriating cash and manipulating accounts in an organistion. Hence, the auditor should verify the system of internal check in operation with regard to cash receipts and cash payments, which in detail is explained below –

1. Internal Check-Cash Receipts

There should be proper system of internal check as regarding cash transactions as the employee tend to misappropriate cash in an organisation. Cash receipts can be misappropriate in the following manner:

·     Cash receipts may not be entered in the cash book.

·     Cash received may be understated by preparing duplicate receipts for amount less than what is actually received.

·     Cash sales may be treated as credit sales.

The following system of internal check may be adopted as regards cash receipts.

1. All inward remittances should be opened by the cashier in the presence of a responsible officer.

2. On receipt of cash or cheque, it should be immediately entered in cash book or cheque received notebook.

3. All remittances (draft, cheque) must be crossed as ‘account payee only’.

4. Cash and cheques received should be deposited immediately.

5. Bank pay-in-slips should be prepared by a separate person, who is not entrusted with the work of depositing cash in the bank.

6. Cash received after the banking hours should be kept in the locker of the business. The locker should be opened by the cashier in the presence of a responsible official.

7. Printed receipts should be issued for all remittances signed by the cashier and responsible official.

8. Unused receipt book should be kept under lock and key under the custody of the responsible official.

9. Cancelled or spoilt receipts should not be detached from the receipt book.

10. Cash balance should be physically verified by a responsible official by surprise check at frequent intervals.

2. Internal Check-Cash Payments

There should be an effective system of internal check with regard to all payments made by the concern in the form of cash or cheque or bank transfers. Cash payments can be misappropriated in the following ways:

·           Payments may be made against fictitious vouchers.

·           Payments may be made against inflated vouchers.

·           Payments may be made without receipt of goods.

·           Revenue expenses maybe treated as capital expenditure.

Hence, a proper system of internal check is necessary. The following system of internal check should be adopted as regards cash payments.

1. The person in charge of making cash payments should not have any connection with the person responsible for receiving cash.

2. The person responsible for making cash payments should not have access to the books of accounts.

3. All the payments should be paid by way of crossed cheque.

4. After making payment against a particular bill or invoice, the voucher and the supporting bill or invoices should be stamped as ‘paid’ so that the same voucher is not again passed for payment.

5. Unused and cancelled vouchers and cheque books should be kept under the custody of a responsible person.

6. Person who is responsible for preparing the cheque should be clearly specified.

Before passing a bill for payment, it should be ensured that the goods have been received.

7. The bill for which payment is to be made should be sanctioned by the responsible official.

8. Confirmation balances from the creditors should be made through direct correspondence.

9. Proper sanction should be obtained by Directors from higher officials to make payment of transactions of special nature.

10. Bank reconciliation statement should be prepared to reconcile cash and bank balances from time to time.