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← Chapter 8 · Cash and Bank Reconciliation
In these notes · Internal Controls over Cash
8.1Types of Cash8.2Dishonoured Cheques8.3Interpreting the Cash at Bank Account8.4Internal Controls over Cash8.5Bank Reconciliation8.6Bank Reconciliation with Errors8.7Effects of Bank Reconciliation Adjustments on ProfitChapter Summary
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8.4

Internal Controls over Cash

Key Concepts

Internal controls are policies and procedures established to:

  • Safeguard assets of the business
  • Ensure business transactions are recorded accurately
  • Comply with laws and regulations

Cash is especially vulnerable because it is highly portable and easily misappropriated. Internal controls over cash help to:

  • Reduce the possibility of theft
  • Ensure cash is well-protected and accurately reported

Four Types of Internal Controls over Cash

Internal ControlExample of Good Practice
Segregation of duties
  • Separate cash handling and cash recording duties among different employees
  • For example: Person A receives and deposits cash; Person B authorises invoices for payment; Person C writes and authorises cheques
Custody of cash
  • Secure cash and cheques in a locked storage
  • Limit access to authorised personnel
  • Deposit cash daily into the bank to minimise overnight cash holdings
Authorisation
  • Require at least two persons to review and approve all payments
  • Require valid supporting documents for all payments before authorisation
Bank reconciliation
  • Compare the business's cash at bank account with the bank statement regularly to identify differences, detect errors, and deter fraud
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How to Remember

Cash is portable and easy to steal — internal controls exist to reduce the possibility of theft and keep cash records accurate.

Common Mistakes
1

Confusing segregation of duties with authorisation. Segregation separates who handles cash from who records it; authorisation controls who approves spending.

2

Thinking bank reconciliation is only needed when a problem is found. Reconciliation should be done regularly (e.g. monthly) as a routine control — not just when discrepancies appear.

Check Your Understanding
State two reasons why a business needs internal controls over cash.
Reveal answerHide answer
(1) To reduce the possibility of theft; (2) to ensure cash is well-protected and accurately reported.
State two internal controls over cash (other than bank reconciliation).
Reveal answerHide answer
Any two of — segregation of duties, custody of cash, authorisation.
Classify each: (a) requiring two signatures on every cheque; (b) having one person receive cash and a different person record it; (c) depositing cash daily into the bank.
Reveal answerHide answer
(a) Authorisation; (b) Segregation of duties; (c) Custody of cash.