Principles of Internal Control in Cash Management
Larry Brownfield, CPO, OHE – KOA, Inc.
Cash Management
Cash Management
C
C
OURSE
OURSE
O
O
BJECTIVES
BJECTIVES
1.
Identify procedures to help reduce your risk
related to cash management.
2. Describe why separation of duties is
important with cash management.
I
I
DENTIFY
DENTIFY
THE
THE
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
Internal control
consists of all of the related
methods and measures adopted within a
campground to:
•
Safeguard assets
from employee theft, robbery,
and unauthorized use
•
Enhance the accuracy and reliability of its
accounting records
by reducing the risk of errors
(unintentional mistakes) and irregularities
(intentional mistakes and misrepresentations) in
the accounting process.
I
I
DENTIFY
DENTIFY
THE
THE
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
1.
Establishment of Responsibility
: An essential
characteristic of internal control is the
assignment of responsibility to specific
individuals.
•
Control is most effective when only one
person is responsible for a given task.
•
Establishing responsibility includes the
authorization and approval of transactions.
I
I
DENTIFY
DENTIFY
THE
THE
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
2. Segregation of Duties
: Segregation of duties
is indispensable in a system of internal control.
•
The rationale for segregation of duties is that
the work of one employee should, without a
duplication of effort, provide a reliable basis
for evaluating the work of another employee.
I
I
DENTIFY
DENTIFY
THE
THE
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
Segregation of Duties
:
There are two common applications of this
principle:
•
The responsibility for related activities should be
assigned to different individuals.
•
The responsibility for record keeping for an asset
should be separate from the physical custody of
an asset.
•
See handout:
Related Activities
I
I
DENTIFY
DENTIFY
THE
THE
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
3. Documentation Procedures:
Documents provide
evidence that transactions and events have occurred.
•
Documents should be pre-numbered and all
documents should be accounted for.
•
Source documents for accounting entries should be
promptly forwarded to the accounting department to
help ensure timely recording of the transaction and
event.
I
I
DENTIFY
DENTIFY
THE
THE
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
4. Physical, Mechanical, and Electronic Controls:
Physical controls
relate primarily to the safeguarding of assets. Mechanical and
electronic controls safeguard assets and enhance the accuracy and
reliability of the accounting records. Use of physical, mechanical, and
electronic controls is essential.
Examples of these controls include:
•
Safes, vaults, and safety deposit boxes for cash and campground
papers.
•
Locked storage cabinets for inventory and records.
•
Computer facilities with pass key access or fingerprint or eyeball
scans.
•
Alarms to prevent break-ins.
•
Video monitoring deter theft.
•
Time clocks for recording time worked.
I
I
DENTIFY
DENTIFY
THE
THE
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
5. Independent Internal Verification:
Independent internal
verification involves the review, comparison, and
reconciliation of data prepared by employees.
•
Verification should be made periodically or on a surprise
basis.
•
Verification should be done by an employee independent
of the personnel responsible for the information.
•
Discrepancies and exceptions should be reported to a
management level that can take appropriate corrective
action.
I
I
DENTIFY
DENTIFY
THE
THE
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
5. Independent Internal Verification:
Independent internal
verification involves the review, comparison, and
reconciliation of data prepared by employees.
•
In large campgrounds, independent internal verification is
often assigned to internal auditors.
•
Internal auditors
are employees of the company who
evaluate on a continuous basis the effectiveness of the
company’s system of internal control.
•
They periodically review the activities of departments and
individuals to determine whether prescribed internal
controls are being followed.
I
I
DENTIFY
DENTIFY
THE
THE
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
•
6. Other Controls
•
Bonding of employees who handle cash.
•
Rotating employees' duties and requiring
employees to take vacations.
L
L
IMITATIONS
IMITATIONS
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
Internal control is designed to provide
reasonable
assurance
that assets are properly safeguarded and
that the accounting records are reliable.
•
The
human element
is important in internal
control.
•
The size of the campground may impose
limitations on internal control. In a small
campground, for example, it may be difficult to
apply the principles of segregation of duties and
independent internal verification.
A
A
PPLICATIONS
PPLICATIONS
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
TO
TO
C
C
ASH
ASH
R
R
ECEIPTS
ECEIPTS
•
Establishment of responsibility
- Only designated personnel are
authorized to handle cash receipts.
•
Segregation of duties
- Different individuals receive cash, record cash
receipts, and hold the cash.
•
Documentation procedures
- Use remittance advice (mail receipts), cash
register tapes, and deposit slips.
•
Physical, mechanical, and electronic controls
- Store cash in safes and
bank vaults; limit access to storage areas; use cash registers.
•
Independent internal verification
- Supervisors count cash receipts daily;
treasurer compares total receipts to bank deposits daily.
•
Other controls
- Bond personnel who handle cash; require vacations;
deposit all cash in bank daily.
A
A
PPLICATIONS
PPLICATIONS
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
TO
TO
C
C
ASH
ASH
D
D
ISBURSEMENTS
ISBURSEMENTS
Cash is disbursed to pay expenses and liabilities or to
purchase assets.
NOT BEST PRACTICE!
NOT BEST PRACTICE!
•
Establishment of responsibility
- Only designated
personnel (treasurer) are authorized to sign checks.
•
Segregation of duties
- Different individuals approve
and make payments; check signers do not record
disbursements.
•
Documentation procedures
- Use pre-numbered
checks and account for them in sequence; each check
must have approved invoice.
A
A
PPLICATIONS
PPLICATIONS
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
TO
TO
C
C
ASH
ASH
D
D
ISBURSEMENTS
ISBURSEMENTS
Cash is disbursed to pay expenses and liabilities or to
purchase assets.
NOT BEST PRACTICE!
NOT BEST PRACTICE!
•
Physical, mechanical, and electronic controls
- Store
blank checks in safes with limited access; print check
amounts by machine with indelible ink
.
•
Independent internal verification
- Compare checks to
invoices; reconcile bank statement monthly.
•
Other controls
- Stamp invoices PAID.
A
A
PPLICATIONS
PPLICATIONS
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
TO
TO
C
C
ASH
ASH
D
D
ISBURSEMENTS
ISBURSEMENTS
Cash is disbursed to pay expenses and liabilities
or to purchase assets.
NOT BEST PRACTICE!
NOT BEST PRACTICE!
Petty Cash Fund
- A cash fund used to pay
relatively small amounts.
BEST PRACTICE!
BEST PRACTICE!
Use of a Bank
…
Contributes significantly to
good internal control over cash
.
See Handout for suggested procedure
See Handout for suggested procedure
R
R
EVIEW
EVIEW
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
Internal Controls
Internal Controls
•
Hire with trustworthiness as a criteria
•
Fiscal responsibilities in position descriptions
•
Duties divided—no start to finish handling
•
Procedures and forms to support controls
R
R
EVIEW
EVIEW
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
Internal Controls
Internal Controls
•
Reduce cash transactions
•
Cash sales only at cash registers
•
Spot checks throughout cash handling processes
•
Avoid use of petty cash, use company purchase cards
•
Situational awareness
R
R
EVIEW
EVIEW
P
P
RINCIPLES
RINCIPLES
OF
OF
I
I
NTERNAL
NTERNAL
C
C
ONTROL
ONTROL
Separation of Duties
Separation of Duties
•
No one person handles a transaction from
start to finish
•
Used for cash handling, payroll, timekeeping
•
Options include outsourcing; controls created
in accounting software
W
W
HAT
HAT
ABOUT
ABOUT
C
C
REDIT
REDIT
C
C
ARDS
ARDS
?
?
PCI compliance (payment card industry
compliance)
Payment card industry (PCI) compliance is
adherence to a set of specific security
standards that were developed to protect card
information during and after a financial transaction.
PCI compliance is required by all card brands.
W
W
HAT
HAT
ABOUT
ABOUT
C
C
REDIT
REDIT
C
C
ARDS
ARDS
?
?
PCI compliance (payment card industry
compliance)
1. Build and maintain a secure network
•
Install and maintain a firewall configuration to
protect cardholder data.
•
Not use vendor-supplied defaults for system
passwords and other security parameters.
W
W
HAT
HAT
ABOUT
ABOUT
C
C
REDIT
REDIT
C
C
ARDS
ARDS
?
?
PCI compliance (payment card industry
compliance)
2. Protect cardholder data
•
Protect stored cardholder data.
•
Encrypt transmission of cardholder data
across open, public networks.
W
W
HAT
HAT
ABOUT
ABOUT
C
C
REDIT
REDIT
C
C
ARDS
ARDS
?
?
PCI compliance (payment card industry
compliance)
3. Maintain a vulnerability management
program
•
Use and regularly update anti-virus software.
•
Develop and maintain secure systems and
applications.
W
W
HAT
HAT
ABOUT
ABOUT
C
C
REDIT
REDIT
C
C
ARDS
ARDS
?
?
PCI compliance (payment card industry
compliance)
4. Implement strong access control measures
•
Restrict access to cardholder data by business
need-to-know.
•
Assign a unique ID to each person with
computer access.
•
Restrict physical access to cardholder data.
W
W
HAT
HAT
ABOUT
ABOUT
C
C
REDIT
REDIT
C
C
ARDS
ARDS
?
?
PCI compliance (payment card industry
compliance)
5. Regularly monitor and test networks
•
Track and monitor all access to network
resources and cardholder data.
•
Regularly test security systems and processes.
W
W
HAT
HAT
ABOUT
ABOUT
C
C
REDIT
REDIT
C
C
ARDS
ARDS
?
?
PCI compliance (payment card industry
compliance)
6. Maintain an information security policy
•
Maintain a policy that addresses information
security
C.F. PCI FAQs (Handout)
C
C
OURSE
OURSE
O
O
BJECTIVE
BJECTIVE
R
R
EVIEW
EVIEW
1.
Identify procedures to help reduce your risk
related to cash management.
2. Describe why separation of duties is
important with cash management.
Q
Q
UESTIONS
UESTIONS
- C
- C
OMMENTS
OMMENTS
Learn about the principles of internal control in cash management, including procedures to reduce risk, segregation of duties, establishment of responsibility, and documentation procedures. Internal control aims to safeguard assets, enhance accuracy in accounting records, and prevent errors and irregularities in the accounting process.
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Presentation Transcript
Cash Management Larry Brownfield, CPO, OHE KOA, Inc. Possible IACET CEU s:
COURSE OBJECTIVES 1. Identify procedures to help reduce your risk related to cash management. 2. Describe why separation of duties is important with cash management.
IDENTIFYTHE PRINCIPLESOF INTERNAL CONTROL Internal control consists of all of the related methods and measures adopted within a campground to: Safeguard assets from employee theft, robbery, and unauthorized use Enhance the accuracy and reliability of its accounting records by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process.
IDENTIFYTHE PRINCIPLESOF INTERNAL CONTROL 1. Establishment of Responsibility: An essential characteristic of internal control is the assignment of responsibility to specific individuals. Control is most effective when only one person is responsible for a given task. Establishing responsibility includes the authorization and approval of transactions.
IDENTIFYTHE PRINCIPLESOF INTERNAL CONTROL 2. Segregation of Duties: Segregation of duties is indispensable in a system of internal control. The rationale for segregation of duties is that the work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee.
IDENTIFYTHE PRINCIPLESOF INTERNAL CONTROL Segregation of Duties: There are two common applications of this principle: The responsibility for related activities should be assigned to different individuals. The responsibility for record keeping for an asset should be separate from the physical custody of an asset. See handout: Related Activities
IDENTIFYTHE PRINCIPLESOF INTERNAL CONTROL 3. Documentation Procedures: Documents provide evidence that transactions and events have occurred. Documents should be pre-numbered and all documents should be accounted for. Source documents for accounting entries should be promptly forwarded to the accounting department to help ensure timely recording of the transaction and event.
IDENTIFYTHE PRINCIPLESOF INTERNAL CONTROL 4. Physical, Mechanical, and Electronic Controls: Physical controls relate primarily to the safeguarding of assets. Mechanical and electronic controls safeguard assets and enhance the accuracy and reliability of the accounting records. Use of physical, mechanical, and electronic controls is essential. Examples of these controls include: Safes, vaults, and safety deposit boxes for cash and campground papers. Locked storage cabinets for inventory and records. Computer facilities with pass key access or fingerprint or eyeball scans. Alarms to prevent break-ins. Video monitoring deter theft. Time clocks for recording time worked.
IDENTIFYTHE PRINCIPLESOF INTERNAL CONTROL 5. Independent Internal Verification: Independent internal verification involves the review, comparison, and reconciliation of data prepared by employees. Verification should be made periodically or on a surprise basis. Verification should be done by an employee independent of the personnel responsible for the information. Discrepancies and exceptions should be reported to a management level that can take appropriate corrective action.
IDENTIFYTHE PRINCIPLESOF INTERNAL CONTROL 5. Independent Internal Verification: Independent internal verification involves the review, comparison, and reconciliation of data prepared by employees. In large campgrounds, independent internal verification is often assigned to internal auditors. Internal auditors are employees of the company who evaluate on a continuous basis the effectiveness of the company s system of internal control. They periodically review the activities of departments and individuals to determine whether prescribed internal controls are being followed.
IDENTIFYTHE PRINCIPLESOF INTERNAL CONTROL 6. Other Controls Bonding of employees who handle cash. Rotating employees' duties and requiring employees to take vacations.
LIMITATIONSOF INTERNAL CONTROL Internal control is designed to provide reasonable assurance that assets are properly safeguarded and that the accounting records are reliable. The human element is important in internal control. The size of the campground may impose limitations on internal control. In a small campground, for example, it may be difficult to apply the principles of segregation of duties and independent internal verification.
APPLICATIONSOF INTERNAL CONTROLTO CASH RECEIPTS Establishment of responsibility - Only designated personnel are authorized to handle cash receipts. Segregation of duties - Different individuals receive cash, record cash receipts, and hold the cash. Documentation procedures - Use remittance advice (mail receipts), cash register tapes, and deposit slips. Physical, mechanical, and electronic controls - Store cash in safes and bank vaults; limit access to storage areas; use cash registers. Independent internal verification - Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily. Other controls - Bond personnel who handle cash; require vacations; deposit all cash in bank daily.
APPLICATIONSOF INTERNAL CONTROLTO CASH DISBURSEMENTS Cash is disbursed to pay expenses and liabilities or to purchase assets. NOT BEST PRACTICE! Establishment of responsibility - Only designated personnel (treasurer) are authorized to sign checks. Segregation of duties - Different individuals approve and make payments; check signers do not record disbursements. Documentation procedures - Use pre-numbered checks and account for them in sequence; each check must have approved invoice.
APPLICATIONSOF INTERNAL CONTROLTO CASH DISBURSEMENTS Cash is disbursed to pay expenses and liabilities or to purchase assets. NOT BEST PRACTICE! Physical, mechanical, and electronic controls - Store blank checks in safes with limited access; print check amounts by machine with indelible ink. Independent internal verification - Compare checks to invoices; reconcile bank statement monthly. Other controls - Stamp invoices PAID.
APPLICATIONSOF INTERNAL CONTROLTO CASH DISBURSEMENTS Cash is disbursed to pay expenses and liabilities or to purchase assets. NOT BEST PRACTICE! Petty Cash Fund - A cash fund used to pay relatively small amounts. BEST PRACTICE! Use of a Bank Contributes significantly to good internal control over cash. See Handout for suggested procedure
REVIEW PRINCIPLESOF INTERNAL CONTROL Internal Controls Hire with trustworthiness as a criteria Fiscal responsibilities in position descriptions Duties divided no start to finish handling Procedures and forms to support controls
REVIEW PRINCIPLESOF INTERNAL CONTROL Internal Controls Reduce cash transactions Cash sales only at cash registers Spot checks throughout cash handling processes Avoid use of petty cash, use company purchase cards Situational awareness
REVIEW PRINCIPLESOF INTERNAL CONTROL Separation of Duties No one person handles a transaction from start to finish Used for cash handling, payroll, timekeeping Options include outsourcing; controls created in accounting software
WHATABOUT CREDIT CARDS? PCI compliance (payment card industry compliance) Payment card industry (PCI) compliance is adherence to a set of specific security standards that were developed to protect card information during and after a financial transaction. PCI compliance is required by all card brands.
WHATABOUT CREDIT CARDS? PCI compliance (payment card industry compliance) 1. Build and maintain a secure network Install and maintain a firewall configuration to protect cardholder data. Not use vendor-supplied defaults for system passwords and other security parameters.
WHATABOUT CREDIT CARDS? PCI compliance (payment card industry compliance) 2. Protect cardholder data Protect stored cardholder data. Encrypt transmission of cardholder data across open, public networks.
WHATABOUT CREDIT CARDS? PCI compliance (payment card industry compliance) 3. Maintain a vulnerability management program Use and regularly update anti-virus software. Develop and maintain secure systems and applications.
WHATABOUT CREDIT CARDS? PCI compliance (payment card industry compliance) 4. Implement strong access control measures Restrict access to cardholder data by business need-to-know. Assign a unique ID to each person with computer access. Restrict physical access to cardholder data.
WHATABOUT CREDIT CARDS? PCI compliance (payment card industry compliance) 5. Regularly monitor and test networks Track and monitor all access to network resources and cardholder data. Regularly test security systems and processes.
WHATABOUT CREDIT CARDS? PCI compliance (payment card industry compliance) 6. Maintain an information security policy Maintain a policy that addresses information security C.F. PCI FAQs (Handout)
COURSE OBJECTIVE REVIEW 1. Identify procedures to help reduce your risk related to cash management. 2. Describe why separation of duties is important with cash management.
