fraud, theft, etc. The average business man is satisfied to take a physical inventory of merchandise once a year, but counts his cash daily. Accountants advocate the keeping of an account with cash in the general ledger. It partakes of the nature of a controlling account since it is debited only with the total receipts and credited only with the total payments at the end of each designated period, usually at the end of each month. Many bookkeepers keep only a cash book and do not keep an account with cash in the general ledger. The bookkeeper simply refers to the cash book for the cash balance when preparing the Trial Balance. The general ledger is supposed to balance, independent of all the other books of account, but will not do so unless an account is kept with cash. Several forms of cash books will be found in use. They have been devised for all sorts of reasons and to meet all kinds of conditions. They run the scale from a cash book with only a general column on each side to a complicated form of cash journal containing all the transactions, either individually or in summary. Then, too, the cash book will be found divided, one being kept for receipts only and another for payments. This division enables two bookkeepers to work on the cash books at the same time, one handling receipts and another handling disbursements. This is an advantage in large concerns, and there is also less chance for embezzlement. In some cases a separate cash book is kept for recording receipts from trade customers only, or one for recording payments to trade creditors only. Imprest System. Since it is important that all receipts be deposited in the bank and all payments be made by check, there has come into use what is known as the PETTY CASH FUND or IMPREST SYSTEM. A certain sum is drawn from the bank by writing a check payable to Petty Cash, the proceeds of which is placed in the care of a petty cashier whose duty it is to pay out small sums below a certain amount. An account is kept with Petty Cash and at certain periods the cashier presents a record of his disbursements supported by vouchers and the fund is replenished. There are slightly different methods in handling the Petty Cash and the different methods should be thoroughly understood. J. W. Baker,* in discussing the Petty Cash Fund, writes: "All cash received should be deposited, and all payments made by check. If it is necessary to make small payments, these should be made from a fund kept on hand for this purpose. This fund is known as the 'Petty Cash Fund' or 'Imprest Fund'. It is created by withdrawing from the bank an amount sufficient to meet these payments. This may be $10.00, $20.00, *20th Century Bookkeeping and Accounting. $50.00, or $100.00, according to the amounts required. Fraud. The professional auditor learns from experience that there are certain methods whereby a bookkeeper may dishonestly abstract funds of a company and still keep his books and accounts in balance. The following are a few of the more common methods which an auditor should always be able to detect during the course of a professional audit: I. The bookkeeper may withhold a part of the cash receipts and make no entry whatever on the books of account, neither recording the receipt of cash nor the credit to the customer's account. 2. The bookkeeper may withhold a part of the cash received and instead of recording it as a cash receipt may credit the customer for an allowance on returned goods. 3. After the cash has been entered in the cash book and properly posted to the correct account, the bookkeeper may alter the cash book footings so that they will show a smaller amount of receipts or a larger amount of payments and then withhold cash equal to the amount of the difference. 4. The bookkeeper may withhold a part of the cash receipts making no entry in the cash book, but may enter directly in the ledger a credit to the customer's account, and, at the same time, make a fictitious debit to some other customer's account in order to keep the ledger in balance. 5. The bookkeeper may pay cash to offset some invoice previously entered fraudulently, the invoice having been charged to some expense account. Of course, the bookkeeper would abstract the cash thus paid and make the proper entry on the credit side of the cash book. 6. A sale to a customer on account may not be recorded at all and when the cash is received the bookkeeper simply withholds it, making no entry therefor. 7. A process of "overlapping" may be resorted to. In this way the bookkeeper may withhold cash as received and substitute therefor subsequent receipts of cash as they come in. This is kept up continuously so as to cover the original discrepancies. Suggestions to Eliminate Possibility of Fraud. If the system for handling the cash and cash items, and for keeping the accounts and records in connection with cash is properly planned, possibility of fraud may be largely eliminated. The policy of internal check should be carefully followed. The following general suggestions will aid materially in planning the system of accounts and the system of internal check so as to prevent fraud in connection with the handling of cash: I. Do not permit the bookkeeper who keeps the personal accounts to act as cashier. The one who records the receipts and payments of cash in the cash book should not have access to the customers' and creditors' ledgers. 2. The entire cash receipts must be deposited in the bank regularly-daily if convenient. When this plan is carried out, the cash receipts will be exactly equal to the deposits in the bank during any month or during the entire fiscal period. 3. All disbursements must be made by check. This does not mean that petty disbursements cannot be made in cash. The petty cash fund can be created and replenished from time to time by check and the petty cashier should be required to account for all disbursements of whatever nature by properly signed vouchers. 4. The check book should be in the custody of the one who signs the checks. This will usually be the cashier. The bookkeeper should not have access to the check book. The suggestions above will not in themselves prevent the fraudulent withholding of cash and failure to properly record receipts, neither will they prevent "overlapping." This can be overcome to a certain extent by arrangements whereby the cash receipts are handled by more than one person. For instance, a list of the cash receipts may be made at the time the mail is opened. The cash and cash items are then given to the cashier for recording and for deposit. In this way, two different persons are charged with the handling of the cash receipts. The bookkeeper may post to the customers' accounts direct from the list, or from the cash book. At any rate, the list of cash receipts should go to an officer of the company who can later compare the total receipts with the total deposits. If customers are billed regularly, any who have not been given credit for the full amount of their payment would be certain to enter a complaint. It will be seen that the object of any arrangement similar to this is to inaugurate an internal check. So much depends upon the volume of business that it is difficult to outline a set of rules; in fact, it would not be good policy to attempt to do so, because a system that would constitute a good internal check in one business, would not necessarily prove satisfactory in another. 2. AUDITING THEORY Counting the Cash. This should be done at the close of business and on the last day of the period under audit if possible. However, it more frequently happens that the audit takes place subsequent to the close of the accounting period, therefore, it is best to count the cash on the first day of the audit at the close of business. Some advocate that it is best to permit the person who is in charge of the cash to handle it and do the actual counting for the reason that he is, as a rule, skilled in the handling of cash. Another reason for it is that if the auditor does not handle the cash in person, he avoids the possibility of becoming involved in any irregularities. In case the cashier or person in charge of cash is permitted to count it, the auditor must, of course, supervise the count with the greatest care. In counting the cash, the auditor must ascertain that all customer' checks, produced as a part of the cash balance, have been properly entered in the cash book prior to the close of business on that date, and should note the dates and descriptions of such checks as well as the dates and descriptions of such advances made of cash and not recorded on the books. Any advances to employees should be carefully investigated, and if they are secured by personal checks the auditor should see that the checks are certified by the bank on which they are drawn before the close of the audit. Any unusual cash items, such as I. O. U.'s, should be carefully listed for investigation. However, the auditor should not adopt an attitude with regard to such matters that will react against him. If an employee owes an item of a few cents because he could not make change, it is not necessary to take the matter up with the head of the department or the president of the company. It is expected that anyone competent to act as either a junior or senior auditor will be able to use the proper discretion in such matters. One will frequently find bad coins that have been taken in unknowingly. These, of course, must be taken into consideration, but it does not justify criticism or fault-finding. Do not adopt the attitude of a detective. Verifying the Bank Balance. Certificates must be obtained from the various banks in which accounts are maintained, as at the close of business, on the same day that the cash balance is counted, preferably on the last day of the fiscal period. If this is not possible, then on the first day of the audit. This is done by presenting to the banks a request signed by the depositor or his agent asking for a certificate showing the balance on a certain date. This certificate should be mailed to the auditor, not to the depositor. Reconciling the Bank Certificate. This is done by checking the deposits with the cash book and vouching the payments with the cancelled checks. The bank balance will naturally vary from the cash book balance on account of checks outstanding. The outstanding checks should be listed for future reference. Where several banks are used as depositories, this becomes more complicated, but the general plan of procedure is the same. Having made a list of the checks outstanding, these may be investigated before the audit is completed, when it will likely be found that most of them have been presented to the bank for payment. Any still outstanding should be especially investigated. "Kiting" Checks. It is well to be familiar with the process commonly known as the "kiting of checks". This can be detected by checking in detail the deposits of the last few days of the fiscal period and comparing with the receipts in the cash book. If a check drawn on one bank by the Company was deposited in another bank without being credited to the bank on which it was drawn prior to the close of the fiscal period, a false balance would be established. Be sure that a check drawn on one bank and deposited in another bank is properly entered. Since it is considered the better practice to deposit all receipts in the bank, it is well to obtain some of the old deposit tickets and compare them with the cash receipts in the cash book to determine whether or not the cash receipts were properly deposited. This can also be determined by comparing the total deposits for any certain period with the total cash receipts of the same period. Working Back the Cash. Usually an audit is made some days after the close of the period. This necessitates the count ing of cash on a later date and working back to the day desired. After the exact cash balance has been determined on the date of audit, add the disbursements and deduct the receipts and the balance for the date desired will be obtained. This should be compared with the cash book balance on the date of the close of the fiscal period. To illustrate this procedure: March 10, 1919, balance per cash book. $12,380.24 Deduct receipts since Dec. 31, 1918.... 4,756.98 |