Session 2Internal Controls for Cash, Banking and Payments

/ Total Session Time: 185 minutes

Objectives: By the end of this session, participants will be able to:

• Define the terms: internal control, internal risk, separation of duties, reconciliation, and physical control

• Describe the categories of internal controls

• List challenges to implementing internal controls for cash, payments, and banking in their own ZHRC/HTI

Slides

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/ This session deals with internal control systems, especially for cash, banking and payments.
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/ In many organizations, internal control systems and practices are not strong enough. Some managers even claim they do not need internal controls because they say, ‘We all trust each other’.
Typical internal control weaknesses include:
• Unclear delegation of authority, that is, who can do what and within what limits.
• Financial tasks are often performed by just one person.
• Procedures are under-developed.
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Slide 10 / / There are several different categories of internal controls, this session will be discussing 4 categories and ways to strengthen these controls in the ZHRCs/HTIs.
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Slide 12 / / • Separation of duties is one of the key concepts of internal control and is the most difficult and sometimes most costly to achieve.
• There should be separation of duties for those activities involving authorization of transactions, custody of assets and recordkeeping. For example, the same person who is responsible for an asset’s recordkeeping should not be responsible for physical control of the asset.
• Having different individuals perform these functions creates a system of checks and balances.
• Example of separation of duties: the duties of ordering goods, receiving goods, authorizing the payment, keeping the accounting records and reconciling the accounts should not fall entirely on the shoulders of one person. This puts too much risk on one person and if they should leave the organization or are absent for long periods, then the finances will grind to a halt.
• It reduces misuse, fraud and theft of resources/money.
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Slide 14 / / • The employee who requests the money should not be the same employee who reviews the request or approves the cheque
• It is common to have more than one signature on a check to help avoid fraud
• There should be sufficient people nominated to ensure efficient administration of payments
• Signatories should be regularly reviewed and the list updated when people leave the organization
• For public institutions the maximum number is 8 signatories while the minimum is 2 signatories
Slide 15 / / A procurement procedure is a prime example of separation of duties in action.
Note: three sessions of this course are devoted to procurement procedures.
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Slide 17 / / Another category of internal control is performing reconciliations.
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Slide 20 / / This is an important check for accuracy and completeness of the accounting records. It also can provide an early indication of potential fraud.
Slide 21 / / • Bank reconciliation also shows the causes of any differences between the bank statement and the bank account register which is kept by the ZHRC/HTI.
• The reconciliation is then used to make any adjusting entries to the bank account register or cash book kept by the ZHRC/HTI.
Refer to Handout 2.1: Performing Bank Reconciliations on page XX of participant handbook.
Slide 22 / / The items listed on the slide are all transactions that are not recorded by the bank. Since there are many transactions which are not recorded by the bank, the organization’s records might not match.
Slide 23 / / If a discrepancy is found, it must be noted in the petty cash register as either an ‘Expense – Unidentified’ or a ‘Surplus – Unidentified’. Discrepancies must be reviewed by a manager and resolved.
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Slide 27 / / Refer to Handout 2.2: Security of Cash and Handout 2.3: Internal Controls on pages XX-XX of participant handbook.
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Slide 29 / / • Every officer must report to the Accounting Officer if the officer believes such facilities are not available.
• Officers are fully instructed in all aspects of cash handling. No officer is made responsible for holding cash without being provided with suitable means of safeguarding it.
• Cash storage used at a particular time will depend largely upon the value and quality of cash to be stored, the length of time to store it, circumstances in which the collecting or handling officer operates, and storage facilities available.
• Particular attention should be paid to mobile cash.
Slide 30 / / Refer to Worksheet 2.1: Create a Bank Statement Reconciliation on page XX of participant handbook.
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/ Handout 2.1: Performing Bank Reconciliations

Bank

A bank is a commercial or state institution that provides financial services, including issuing money in various forms, receiving deposits of money, lending money, processing transactions and creating credit. A commercial bank accepts deposits from customers and in turn makes loans. Banks are a separate organization from a ZHRC or HTI with their own separate books of account. It is a legal requirement that Treasurers deposit cash and cheques with their banks daily.

Operations in the Bank

Banks record transactions reversely from customers’ cash book records. In order to understand how banks record transactions, you have to understand the following:

 Banks recognize depositors as creditors whereas bank customers recognize the bank as a debtor.

 On receipt of deposits, banks debit their cash book and credit the customer account. Similarly, when customers withdraw, banks credit their cash books and debit the customer’s account.

 Monthly or on request, banks send statements to their customers detailing the transactions made in their accounts. This statement is a replica of the customer’s account in the bank. The statement issued by the banks to their customers is commonly known as a bank statement.

What is a Bank Reconciliation?

A bank reconciliation checks the accuracy of the Bank Analysis Book entries and the Bank Statements. It verifies the accuracy of your ZHRC/HTIs bookkeeping and helps to identify problem areas.

What is a Bank Reconciliation Statement?

This is a form that allows ZHRC/HTIs to compare their Bank Analysis Book entries to their bank statement records. Through this form, ZHRC/HTIs can uncover possible discrepancies.

Why Don’t the Two Records Agree?

There are a number of reasons why the bank balance shown in the book kept by ZHRC/HTI disagrees with the balance shown in the bank statements. These include the following:

(a) Transactions recorded by depositors but not by bank:

(i) Cheques not yet presented for payment

(ii) Deposits in transit

(iii) Errors made in the cash book (bank a/c)

(iv) Dishonoured cheques

(b) Transactions recorded in the Bank Statement but not by the depositor:

(i) Miscellaneous bank charges and credits

(ii) Direct lodgements

(iii) Errors made by the bank in ZHRC/HTIs accounts

(iv) Standing orders (direct debits)

Objectives of a Bank Reconciliation Statement

(a) To highlight the causes of differences between the bank balance as shown in the bank statement and that of the cash book.

(b) To pass the necessary adjusting entries in the ZHRC/HTIs records (i.e. adjusting the cash book).

(c) To prevent or minimize chances of fraud, e.g. through untimely banking and deliberate mistakes/errors made by ZHRC/bank officials.

(d) Provide an automatic alert of keeping records up-to date.

Bank Reconciliation Procedures

Preparation of the bank reconciliation statement follows a step-by-step procedure. Accountants in ZHRC/HTIs need to follow these steps in order to come up with correct bank reconciliation statement. The following needs to be done:

(a) Complete and balance the cashbook (bank a/c) for the period covered by the bank statement.

(b) Compare entries

DR Column of Cash Book=CR Column of Bank Statement
CR Column of Cash Book=DR Column of Bank Statement

(d) Entries which are not ticked, are the cause of differences between the two records.

(e) Adjust the Cash Book (bank column) with genuine entries in the Bank Statement.

Genuine entries = Direct lodgement, standing orders, interest earned etc.

(f) Prepare the Bank Reconciliation Statement by highlighting:

Genuine entries in the Cash Book but not in the Bank Statement
Errors made by the bank in the ZHRC/HTI bank account, e.g. incorrect debiting in the account.

(g) After making all relevant adjustments to the balance in the cash book (bank a/c of ZHRC), as well as those affecting the bank balance, the two adjusted balances must equal i.e. Adjusted Cash Book Balance = Adjusted Bank Balance

Bank Reconciliation Format

Bank reconciliation statements can be presented in different formats as clarified in the two illustrations below.

NOTES:

 Bank reconciliation statements must be produced on a monthly basis on or before the 15th day of the current month for all accounts of the ZHRC/HTI.

 They must be verified and approved by the ZHRC/HTI Treasurer and ZHRC/HTI Director, respectively.

Bank reconciliation statements must be filed systematically.

FORMAT 1: BANK RECONCILIATION STATEMENT AS OF 30th June, 20XX

Balance as per Cash Book / Xxx
Add/subtract adjustment to Cash Book balance:

Direct charges (bank charges)

/ xxx

Direct credits

/ xxx

Cash book errors

/ xxx

Dishonoured cheques

/ xxx / Xxx

Adjusted cash book balance

/ Xxx

Balance as per Bank Statement

/ Xxx
Add: Uncredited deposits / xxx
Add/Subtract: Bank errors
Omissions / xxx
Subtract: Unpresented cheques / xxx / Xxx

Adjusted Bank Balance as per Cash Book Balance

/ xxx

Prepared by…………..………… Title………………………. Date………………….

Verified by…………………….. ZHRC/HTI Treasurer Date………………….

Approved by…………..……….ZHRC/HTI Director Date…………………

FORMAT 2: BANK RECONCILIATION STATEMENT AS AT 30th June, 20XX

Balance per Bank / xxxxx
Add: Deposits in Transit / xxxxx
Deduct: Outstanding Checks / (xxxx)
Adjusted Balance per Bank / xxxx
Balance per Books / xxxxx
Deduct: NSF Check / (xxxx)
Deduct: Bank service charges / (xxxx)
Adjusted Balance per Books / xxxx

Prepared by…………..………… Title………………………. Date………………….

Verified by…………………….. ZHRC/HTI Treasurer Date………………….

Approved by…………..……….ZHRC/HTI Director Date…………………

/ Handout 2.2: Security of Cash

Cash includes coins, notes, postal orders, money orders stamps and cheques.
Every officer having Government cash in his or her possession is held personally responsible until he or she hands it over to an appropriate officer or deposits it in an appropriate bank. He or she must be able, at any time, to account for it in full for the value of cash held as follows:

(a) Disbursement of cash

By producing cash and properly authenticated paid vouchers equal to total cash issued.

(b)Receipts of cash

By equivalent value in receipt form plus any receipts having no official copy of a statement.

Safe Custody

Every officer who is required to held government cash must ensure that the means of storage available are both secure and adequate. It must be reported to the Accounting Officer if the officer holding the cash believes such facilities are not available.
The Accounting Officer is responsible for ensuring that cash security arrangements are fully satisfactory. The designated officer holding the cash should be fully instructed in all aspects of cash handling. No officer is to be responsible for holding cash without being provided with a suitable means of safeguarding it.
Security arrangements must be reviewed so as to ensure that changing circumstances have not rendered particular security measures obsolete or unsafe. Cash storage used at a particular time will depend largely upon the value and quantity of cash to be stored, the length of time to store it, and the circumstances in which the collecting or handling officer operates and storage facilities available.
Particular attention should be paid to mobile cash.

Loss of Cheques

Immediately after the loss of a cheque has been discovered, a stop payment order will placed with the bank where the account is kept.

Replacement of the cheque will not be issued unless the bank has confirmed the receipt of the stop order and the cheque was not previously presented and honored. An ERV canceling the lost cheque will be issued and, against the receipts, a voucher will be prepared and a fresh cheque issued.

Handing Over Procedures

When handing over cash, the following actions will be taken:

(i)The Revenue Cash Book and stamp registers will be balanced. Both the out-going and in-coming officers will sign for the amount handed over.

(ii)Both officers will check the amount of cash stamps in the cash box, safe and strong room and see that it agrees with the amount shown in the Cash Book registers.

(iii)Handover statements will be prepared and signed by both officers with a copy sent to the P/S of the Ministry Accounting Officer.

Acceptance of Cheques/Money Order

In accepting cheques for payments, the following steps will help ensure that only those complete and authentic demands are paid:

(a)A payment should only be considered to be in order when:

(i)It has been duly authorized by the responsible officer(s).

(ii)All the necessary supporting documents are attached to the payment voucher.

(iii)A responsible officer has approved the invoices from creditors.

(iv)Payment voucher has been completely written, checked, authorized and passed for payment.

(v)Correct expenditure allocation code has been inserted on the payment voucher and it bears a payment voucher number.

(b)All cheques should be issued serially and the serial numbers accounted for.

(c)All cancelled cheques should be registered and accounted for, and any discrepancy in serial numbers of cheques should be investigated.

(d)It should be a rule to cross cheques (e.g. Account Payee Only or Not Negotiable) unless otherwise permitted by the existing regulations.

(e)When a liability has been discharged (that is, when a Cheque has been written or payment has been made from the petty cash fund), the voucher and all the supporting documents must be stamped “PAID” to preclude the possibility of double payment.

(f)Payment vouchers with all their supporting documents must be serially filed to facilitate auditing.

(g)A good internal control system demands the segregation of duties, such that no one person should handle more than one phase of a transaction without repetition of duties. For example, the Cashier should have no access or control over the accounting records, or Store Keeper should not perform purchasing functions.

(h)Cheque payment vouchers should be distinguished from the petty cash vouchers (P.C.V). Their related Cheque numbers should accounted for, Cheque payment vouchers serially, while the petty cash vouchers should be accounted for by petty cash voucher numbers.

Dishonoured Cheques and Accounting/Adjustments

A dishonoured cheque is a cheque which, after being lodged with a bank, is returned by the bank without payment because of the following reasons:

(a) Insufficient funds in the draw’s Account

(b) Amounts in figures and words differ

(d) The cheque has become stale (the time required to present the cheque to the bank for payment is expired).

(e) One signature is missing

(f) Alterations requiring drawer signature

(g) Signature in cheque not tallying with specimen signatures at bank

Accounting officer of the ZHRC will prepare a payment voucher payable to himself in his official capacity debiting the Revenue Cash Book and crediting the person concerned as an advance in the name of the person concerned. At the end of the financial year, crediting the advance and debiting revenue should close the advances account.
Tenderer will be asked to send a replacement or to pay cash if the cheque was dishonoured on the ground of lack of funds.

All instances of dishonoured cheques shall be brought to the immediate attention of the Accountant General.

All original dishonoured cheques shall be retained and kept in the safe as evidence. Such cheques may represent important prima-facie evidence of debt due to the Government and may be used in any legal action taken to recover the amount due. Where the dishonoured cheque cannot be immediately corrected and represented, the following courses of action shall be taken, namely:

(a) If the cheque has been received in payment of a license or similar pre-paid item, the appropriate revenue item will be debited by the entry of a debit item in the Revenue Cash Book and the relevant Accounting Officer or authority shall be informed in order that appropriate action, such as revocation of the license, can be taken.

(b) If the cheque has been received in settlement of a debt owed to the Government, such as settlement of imprests, the appropriate advance account shall be debited by the entry of the debit item in the Revenue Cash book and the appropriate Accounting Officer shall be informed so that appropriate action can be taken.

(c) If the cheque has been received as a condition for services to be performed by the Government, such as the clearance of goods for custom purposes, then the amount shall be debited, the entry of a debit in the revenue cash book, so an advance account in the name of the person concerned; all necessary steps will be taken to obtain the revenue due.

(d) All of the balance accounts created under (c) shall be closed at the end of the financial year by crediting the advance account and debiting the revenue item. These amounts will then be included on the Register of Losses and dealt with accordingly.