RISKS AND CONTROLS IN THE CASH DISBURSEMENT PROCESSES (STUDY OBJECTIVE 4, continued)

AUTHORIZATION OF TRANSACTIONS

Only the accounts payable department should authorize the processing of a cash disbursement transaction, according to the need to satisfy a vendor obligation. The authorization occurs when the accounts payable department matches the purchase order, receiving report, and invoice, and then forwards these matched documents to the cash disbursements department. In addition, designated members of management should be given responsibility for authorizing the actual payments by their signatures on the face of the check. This means that only one or a few people should have check-signing authority. The bank will keep records of the signatures of those authorized check signers and should not pay a check unless it bears the signature of an authorized party. Finally, all bank accounts that are established in the company's name should be authorized by the board of directors.

Many companies establish special cash disbursement authorization policies and procedures applicable to large checks whereby a dual signature requirement is in place for checks over a specified dollar amount. Dual signature means that two people sign the check. This additional control requires the approval and signature of two authorized persons, thus reducing the risk of a significant fraud or error. The company's bank plays a crucial role in enforcing this policy, as it must not pay checks over the threshold amount unless two authorized signatures are included.

SEGREGATION OF DUTIES

Effective segregation of duties reduces the likelihood of undetected errors or fraud by providing accounting control over the cash disbursement processes. If the purchasing, receiving, accounts payable, and cash disbursement functions are segregated, then the opportunity for theft or error within the processes should be minimized. No person should have the ability to initiate a false purchase transaction and simultaneously pay for it and account for it. Ideally, individuals within the cash disbursements department should not have check-signing authority and should not have access to the cash account or to the company's accounts payable records. In addition, information systems operations and programming related to the cash disbursements and accounts payable departments should be separate from those having responsibility for custody, authorization, or record keeping within those functions.

ADEQUATE RECORDS AND DOCUMENTS

An accounts payable subsidiary ledger and a cash disbursements journal are fundamental records in the cash disbursement process. Also, the practice of issuing checks on prenumbered forms creates a record of the sequence of transactions. And the orderly maintenance of accounts payable records facilitates effective cash management techniques.

SECURITY OF ASSETS AND DOCUMENTS

Access to cash should be limited to the authorized check signers. Physical controls should be in place in the areas where cash is retained and disbursed. Similarly, the company's supply of unused checks should be protected and controlled. Access to the records should be limited to designated persons within the accounts payable and cash disbursements functions.

INDEPENDENT CHECKS AND RECONCILIATION

The cash disbursements journal and accounts payable subsidiary ledger should be reconciled to the general ledger control accounts on a regular basis. Also, someone separate from the cash disbursements and accounts payable functions should be responsible for reconciliation of the bank statement on a monthly basis. Procedures for adequate reconciliation of the bank account include the direct receipt of the bank statement by the designated employee so that no others may have an opportunity to alter the document. If copies of checks are returned with the bank statement, these checks should be completely reviewed for dates, payees, and signatures.

COST–BENEFIT CONSIDERATIONS

When a company processes a large volume of cash disbursements, it should consider the implementation of internal control procedures to ensure the accuracy of those transactions. Some other situations that may warrant increased controls include the existence of complex vendor arrangements or discount terms, decentralized or widely dispersed cash disbursements, cash disbursements via currency (rather than by check), high volumes of purchase returns, and cash disbursements denominated in foreign currencies.

Exhibit 9-18 is a summary of certain controls and risks related to the cash disbursement process.

Exhibit 9-18 Cash Disbursement Controls and Risks