control, and governance
A petty cash fund is a small amount of cash held by an organization or its separate departments for small day-to-day expenditures. Petty cash carries risks beyond monetary value, as the manner in which management handles petty cash may be indicative of broader management approaches to an organization’s internal controls. It is widely used by organizations of all sizes, and internal auditors need to be aware of associated risks as well internal controls in place to address them.
Petty cash is an example of accepting inherent risks of holding cash against its potential benefits. Internal auditors need to be aware of these risks, which include:
Internal auditors need to understand their organization’s procedure for handling petty cash so they can help ensure controls are in place to mitigate the risk of theft or misuse. Although specific procedures for petty cash disbursement can vary among organizations, several principles are common.
Petty cash is created by withdrawing physical cash from a bank account and opening a corresponding account — typically a petty cash imprest account — in the organization’s general ledger to record and control the funds. Opening a separate account is essential to segregate this item within the general ledger.
A designated employee prepares a prenumbered voucher, which is recorded with detailed information and authorized by a separate designated employee to ensure segregation of duties. Here, both preparer and authorizer rely on supporting documents (e.g., bills, invoices, and receipts) to justify the expense. The voucher is forwarded to the custodian of the petty cash fund who verifies the voucher and supporting documents to ensure authenticity and dual authorization and then disburses the cash under acknowledgment.
At least once a month, petty cash is replenished. All vouchers are sorted and summed up with respect to each type of expense and recorded in the system.
Most of the controls in the petty cash process that address the aforementioned risks are easy to identify — prenumbered vouchers, segregation of duties in the disbursement process, supporting documents to ascertain the authenticity of each disbursement, and acknowledgement of the person receiving the cash and replenishment of petty cash on a monthly basis. However, additional internal controls can be implemented to strengthen the process.
Adapted from "Petty Cash Disbursements," by Umair Danka (Internal Auditor, "Back to Basics," August 2012).
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