5.2. Cash cycle

Cash is critical for any business - it is used to pay for expenses and acquire assets. How long would employees stick with a company that gave out worthless paychecks? What would happen if a company had no cash to pay vendor bills? These examples (and many others) show why cash is so important, and why it’s so important to protect cash from theft or loss. Below are some controls that might be encountered when dealing with cash and customer accounts.

• Employees in charge of cash drawers and petty cash boxes should be required to confirm balances against a second source (like electronic records for cash drawers, or receipts that go into the petty cash box when money is used). A manager should investigate discrepancies. You might find in practice that managers also reward cashiers who return a perfectly balanced drawer.
• If customer payments are received directly by the business, one person should open the mail and list all cash receipts. The list should be given to a second person, along with the checks, who then deposits the checks. A copy of the list should be sent to the accounting department for recording purposes. An accountant should check the second individual’s deposit slip to make sure everything matches up. The possibility of customer complaints about incorrect amounts due would deter the first person from stealing checks.
  • A lockbox account eliminates the cash receipts process. Customers send checks to the bank, which then deposits the funds into the business’s checking account.
• A credit department (separate from the sales department) should handle the process for issuing customer credits and approving account write-offs.
• A company uses pre-numbered checks, which should be locked up and used in order.

5.3. Inventory cycle

Control over inventory is important because items for sale are often easy to steal. All businesses (even service organizations) need to control purchases in order to combat waste and fraudulent expenses.

• Access to inventory and warehouses should be physically restricted with locked doors and gates.
• If a perpetual inventory system is used, periodic test counts are generally a good idea. During test counts, managers could examine records to determine whether certain items are obsolete.
• Inventory purchases are properly approved by someone who doesn’t also pay for the purchases.
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