JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND

TECHNOLOGY

SCHOOL OF HUMAN RESURCE AND DEVELOPMENT

MASTERS

IN BUSINESS ADMINISTRATION

UNIT TITLE: ACCOUNTING SEMINAR

UNIT CODE: HCBA 3202

TOPIC:

THE EFFECTS OF INTERNA CONTROL ON CASH MANAGEMENT

STUDENT NAME: ABSHIR NUR MOHAMAED

STUDENT NUMBER: HD333-C005-1475/2014

LECTURER: Adet. N. Kachi

NOVEMBER 2014

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ABSTRACT

I was inspired to undertake this study paper as a result of the increased publications in the country about the mismanagement of cash in many institutions and that the management of these institutions were dismissed and sometimes accused of misappropriations.

The study paper set out to establish the effectiveness of internal controls on cash management. This was a result of poor implementation of internal controls procedures by management.

Based on the literature review, I recommended that for an effective internal control system, there should be minimization of cash transactions, segregation of duties, surprise cash counts, rotation of staff, and authorization of transactions and control of source documents among others.

Keywords: the effects of internal control on cash management

Nb.Need to improve on:

-The purpose of the study-Approach used in the study-Findings of the study-Recommendations of the study

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TABLE OF CONTENTSTILE PAGE………………………………………………………………………i

ABSTRACT …………………………………………………………………….ii

TABLE OF CONTENTS……………………………………………………….iii

1.0 INTRODUCTION…………………………………………………………...1

1.1 DEFINITION OF CONTROL…………………………………………...1 1.2 DEFINITION OF INTERNAL CONTROL……………………………….1

1.3DEFINITION OF CASH MANAGEMENT ………………………………...2

1.4 PROBLEM STATEMENT………………………………………………….22. 0 LITERATURE REVIEW…………………………………………………..4

2.1 INTERNAL CONTROLS…………………………………………………...4

2.2 TYPES OF INTERNAL CONTROLS………………………………………5

2.3 QUALITIES AND FEATURES OF A SOUND INTERNAL CONTROL………………………………………………………………………62.4 OBJECTIVES AND IMPORTANCE OF INTERNAL CONTROLS………8

2.5 GUIDELINES TO STRONG INTERNAL CONTROL SYSTEMS………..9

2.6 INTERNAL CONTROLS OVER CASH MANAGEMENT………………112.7 IMPACT OF INTERNAL CONTROL OVER CASH MANAGEMENT ………………………………………………………………………………….13

2.8 LIMITATIONS OF INTERNAL CONTROL SYSTEMS………………...14

2.9 CASH MANAGEMENT…………………………………………………..14.3. O CONCLUSION…………………………………………………………………………………21

4.0. RECOMMENDATION…………………………………………………….22iii

2.0 (1) INTRODUCTION- (Please consider changing the number to the one in brackets)

2.1 (1.1.)DEFINITION OF CONTROL The term “Control ”is any action taken to mitigate or manage risk and increase

the probability that the organization’s process will achieve its goals or

objectives(David McCoy June 7 2010)

(Determine from the two definitions the most appropriate one for the study

with justification)

1.2 DEFINITION OF INTERNAL CONTROL

The term “Internal controls” in the modern times consists of policies and

procedures established by an organization to provide a reasonable assurance that

the organization related objectives will be achieved (Meigs and Meigs, 1998).

They help to examine and evaluate the organization’s cash management

processes and other related financial risks, and facilitate the making of

recommendation for achievements of the firm’s key objectives.

Foulks (2004) defines these procedures to include; segregation of duties,

authorization of transactions, job rotations, reconciliations, proper

documentation, to mention but a few.

In today’s communities, it’s generally accepted that organizations, both private

and public, have internal controls to reduce on the level of financial risks,

promote effective cash management mechanisms and increase productivity.

The term “Internal Control ”was adopted by the Anglo-Saxons (“Internal

Auditing”) and refers to the unit of Internal Control which aims at the evaluation

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of the sufficient functioning of the Internal Control System, that is the secondary

functions (Controls) and suggests that there is room for improvements in cases

where weaknesses are being discovered (Financial Postman magazine, 2004).

According to Miller and Bailley (1989), internal control is a systematic review

and a subjective investigation of one element and encompasses the verification

of the specific information as these are determined from the general practice.

The internal control helps the company to achieve its goals using a systematic approach of assessing the effectiveness of handling dangers (IIA, 1999).

Internal controls involve cash planning which is done through cash budget together with the statement of cash inflow (between cash inflow and outflow), therefore it is the role of the firm to manage, match receipt and payment so that there are no redundant surplus cash balance which is a cost to an organization. (Kakuru 2000)- Ok and very good

1.3 DEFINITION OF CASH MANAGEMENT

“Cash management” According to Van, H (1985), involves managing the monies of the firm in order to maximize cash availability.

Cash management is an essential tool which aims at establishing the financial position of the organization. Pandey, (1980) notes that, cash management is the set of guidelines established by management to ensure that the organization has optimal cash balances at any time to meet organization’s goals. (Needed at least 2 citations in this passage)

1.4 PROBLEM STATEMENTBusiness enterprises will only succeed if their cash resources are managed properly. Among other aspects the inflow and out flow of cash is of a prime importance in any business.

Cash being a means through which other factors of production like labor and materials are financed it is susceptible to fraud and theft. This is because most organizations forget in most cases that the strength of the internal controls influences the level of success and the effective management of its cash resources.

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1.3 Purpose of the Study

The study purpose is to find out whether cash management policies adopted by

selected Small and Medium Enterprises have impact on their survival.

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2. 0 LITERATURE REVIEW.

INTRODUCTION

2.1 INTERNAL CONTROLS

SAP stands for Systems Applications and Products in Data Processing.It was founded in 1972 by WelleSnreuther, Hopp, Hector, Plattner and Táchira.SAP system comprises of a number of fully integrated modules, which covers virtually every aspect of the business management.

SAP 16, defines the system of internal controls as being “the plan of organization and all the methods and procedures adopted by the management of an entity to assist in the achievement of management’s objective of ensuring practicable, orderly and efficient conduct of its business, including adherence to management policies.

It also includes the safeguarding of assets, prevention and detection of fraud and errors, the accuracy and completeness of the accounting records and the timely preparation of reliable financial information.

According to De Paula (1989), internal control is the whole system of control established by the management in order to carry on business of the enterprise in an orderly manner to ensure adherence to management policies: safeguarding the assets of the entity and secure as possible completeness and accuracy of records.

It consists of policies, procedures, practices and systems that facilitate the achievements of organization’s objectives (Cheng, 2001).

Internal controls are regarded as indicators of the whole system of controls financial or otherwise established by the management in conduct of business including internal checks, internal audits and other forms of control (Spicer and Pegler, 1998).

According to (Council Institute of Chartered Accountants) CICA of England and Wales, internal controls is the whole system of controls, financial and otherwise, established by the management in order to carry on the business

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of the Company in an orderly manner, safeguard its assets and secure accurate and reliable records.

According to Walter B. Meigs, a system of internal controls consists of measures employed by a business for the purpose of:

2.1.1 Safeguarding its resources against wastes, fraud and inefficiency

2.1.2 Promoting accuracy and reliability in accounting and operating data2.1.3 Encouraging and measuring compliance with Company’s policy and2.1.4 Judging the efficiency of operations in all divisions of the business

Management therefore, is responsible for maintaining an adequate accounting system with serious internal controls according to the size and nature of the organization and all methods and procedures adopted by the management to achieve its goals (Ramsway, 1994).

The scope of internal controls extends beyond the accounting controls and includes all operational controls such as quality control, budgetary control, work standards, periodic reporting, internal checks and internal audit.

According to Jain (1997), besides internal checks and internal audit, the two important areas of the internal control include; Administrative control, which includes the systems that are related to decision making processes leading to management authorization of transactions.

Cooper and Hybrid (1984) state that internal controls reduce the like hood of crisis and result in efficient and effective delivery of services, protecting of assets , reliable management reporting , compliance with laws and regulations and protections.

Foulks (2004), with the same view of internal controls asserts that a system of internal controls put in place depends very much on the size of the enterprise, its business and the type of transactions involved.

2.2 TYPES OF INTERNAL CONTROLSAccording to the international Standards on Auditing (ISA), Risk assessment and internal controls, there are three main types of Internal Controls that should be considered and these among others include;

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I. Preventive controls; these internal controls prevent the occurrence of risks for example separation of duties, recruiting qualified staff and authorization of transactions among others. They also facilitate prevention of fraudulent or erroneous transactions from taking place.

II. Detective controls; these involve errors or frauds that have not been prevented. They include reconciliation, supervision and internal checks where companies use pre-numbered documents for all documents that should be accounted for.

III. Corrective controls; these ensure that detected problems are rectified for example follow up procedures and management action like rotation of staff.

According to Alvin and James, (1993), a company’s internal control structure includes five categories of policies and procedures that management designs and implement to provide reasonable assurance that managements control objectives will be met. This includes the control environment, managements risk assessment, the accounting information and communication system, control activities and monitoring.

2.3 QUALITIES AND FEATURES OF A SOUND INTERNAL CONTROLDe Paula (1990), states that the quality of an internal control system in place depends on;

i) The nature and size of business conducted. Meaning the bigger the size, the more equipped the system should compared to an entity that is small in size and equally businesses that do more of cash transactions should have stronger controls compared to those that do more of their transactions using cheques.

ii) The number of administrative staff employed. Businesses with more number of employees should have controls that monitor the duties of each employee.

iii) The materiality of the transaction involved. Material transactions i.e. transactions that require large sums of money are to be under taken by top people in the administration with proper and genuine reasons that suit the benefit of the organization.

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With the above determinants of an effective internal control system, following qualities form the basis of an effective internal control are as follows;

They should be geared towards goals; The internal control system should aid the organization in attaining its goals and help ensure that all necessary actions are taken in line with managerial directives, applicable laws and policies for achievement of the organization's objectives.

Should facilitate information flow; an effective internal control system requires a flow of information up, down and across an organization. Information systems generate reports which contain operational, financial, and compliance-related information that makes it possible to run and control an organization.

Emphasizes the segregation of duties; segregation of duties is essential for internal control. An organization should ensure that duties and responsibilities in authorizing, processing, recording, and reviewing transactions and events are separated among individuals to reduce the risk of error or fraud.

Facilitate complete documentation; documentation is an integral element in effecting internal control. An organization must therefore maintain complete, accurate and adequate records which can be easily retrieved for examination. Should be future-oriented; feasible internal control system should help the organization plan for the future. The system should ensure safeguarding of assets and funds from inappropriate use or from loss and fraud, and ensuring that liabilities are identified and managed.

An effective internal control should enhance it reliability and trust; sound internal control system ensures that only competent and reliable personnel have authority and responsibility. The employees must be encouraged to follow company policy, and work towards the attainment of operational efficiency and company's goals.

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2.4 OBJECTIVES AND IMPORTANCE OF INTERNAL CONTROLSAccording to Ramsway (1994), internal control in accounting systems aim to achieve the following objectives:

2.4.1 All transactions are carried out with specifications and authorizations by management. Management are charged with the responsibility of ensuring that all transactions are carried out basing on what was specified and ensuring that such transactions are authorized before any payments are done for them.

2.4.2 That transaction is accounted for in the relevant books of accounts regularly, correctly, and systematically according to the accounting policies and procedures and should be accounted in the books where they are supposed to be, for example, orders are to be prepared using purchase order forms.

2.4.3 There is periodic verification and comparison of the assets in existence with accounting records and appropriate action is taken with regard to any difference.

2.4.4 Assets are verified at reasonable intervals and appropriate actions are taken with regards to the discrepancies.

Walter (1986), states that a system of internal controls consists of measures purposely for;

i) Promoting accuracy and reliability in accounting and operations data.ii) Encouraging and measuring compliance with company policy.iii) Judging efficiency of operations in all divisions of the organization.iv) Safeguarding its resources against waste, fraud and inefficiencies.

An Internal control helps management to meet its responsibilities with respect to financial information. (Warre and fess, 1988)

Internal controls aid in ensuring compliance with the company policy. Management has direct responsibility of maintaining accounting records and producing financial reports, statements that are adequate and reliable. Internal Controls provide assurance that this responsibility is being met. (Woolf, 1986)

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The system of internal controls provides assurance to management that this dependability of the accounting data used in making business decisions. They help in safeguarding organizations resources, promoting accuracy and dependability of the accounting records (Meigs and Meigs, 1984)

2.5 GUIDELINES TO STRONG INTERNAL CONTROL SYSTEMSThe business International money report (1983) prepared, a checklist, presented in Box 11.4, which includes five aspects to assist companies in evaluating their internal control systems. These checklists are as follows:-

2.5.1 ORGANISATIONA formal organization structure, the report said, is important for organizations to achieve their objectives in control through;

I) Setting up an organizational chart and a manual to describe levels of authority and responsibility and hierarchy.

II) Provision of the detailed job description for all employees on a regular basis. To make employees aware of the roles they are meant to play in the organization relating to cash management.

2.5.2 POLICIES AND PROCEDURESI) insist that all employees must take vacation on regular basis. Therefore once they are given regular vacations chances of misappropriations are minimal due to fear it will be unveiled.

ii) Encourage rotation of duties whenever possible, not only as an internal control tool, but also for training purposes. Employees are to be rotated in the different parts of the organization so as to enable them know what happen in the other parts too.

iii) Have outside auditors to make internal control recommendations as part of their annual review. These external auditors will give recommendations about the effectiveness of such controls and appropriate improvements where necessary to facilitate the attainment of the overall organizational objective.

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2.5.3 ACCOUNITING AND RECORD KEEPING.I) To protect assets and records of the assets from misuse.

ii) Establish accountability and duplicate records that are compared to the originals on a regular basis and prenumbered documents that enable easy comparison to the original documents and differences sorted out.

iii) Set up a complete chart of accounts broad enough to encompass and define all the transactions of the Company. Ensure that cash receipts are deposited without delays with an imprest of cash disbursement.

2.5.4 STANDARDS OF PERFORMANCE.I) Budgets should be instituted in the planning periods so that advantages associated like with it like; knowing whether cash surpluses are present, planning for obligations and knowing how to meet them and also the control of expenditure based on the forecasted income and expenditure are possible.

ii) Ensure that the workers are suitably qualified to handle the work assigned to them. The recruitment of employees by the company is done on technical knowhow not on technical know who so that those employed have the competent qualities and can easily understand controls to attainment of the overall business objectives.

2.6 INTERNAL CONTROLS OVER CASH MANAGEMENTInternal controls systems over cash management are divided into control procedures and control environment.

2.6.1 INTERNAL CONTROL PROCEDURES OVER CASH MANAGEMENTThe overall objective of cash management control procedures is minimizing the costs associated with cash. This is achieved by ensuring that adequate controls are put in place to deter cash in appropriations and that their control should strictly be adhered to (Foulks, 2004).

Marwick (1998) highlights the following guidelines to a strong control system over cash management.

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I. Both cash and bank balance reconciliations should be carried out monthly. Cash revenues should be reconciled using the cash register totals, banking, for the period and cash at hand. The bank balance has to be reconciled using the cash register and the bank statement at end of each month or at specific periods as may be deemed fit by management of the organization (Kilnger, 1991).

II. Spot counts and Checks. These are carried out to check the physical cash and cheques at a particular time. This is an efficient control over cash in an organization and audit departments normally carry it out. (Foulks, 2004)

III. Segregation of duties in cash related transactions should be made indicating roles of departments, individuals for functions such as cash collection, cash disbursements, recording and maintenance of cash records, treasury, signing of cheques and other functions necessary for cash management (De Paula, 1990).

IV. Authorization, recording and custody of cash. Controls should ensure that all payments are authorized and approved, all receipts are accounted for and that every transaction is properly recorded in the books of accounts to ensure accountability. (Spincer&Pegler, 1980).

V Source documents. These include receipts, vouchers, cheques, invoices and pay slips.

VI. Supervision and coordination of company activities involving cash, De Paula (1990), states that the internal audit should ensure that the work of each individual is independently checked by other members of the staff.

VII Atwood & Stein (1986), state that rotation of employees from one job o another may strengthen the internal controls. When employees know that other persons may soon take their duties, it s more likely that records will be kept more accurately and procedures will be followed and this will help ensure that fraud and malpractices are minimized.

2.6.2 CONTROL ENVIRONMENT OVER CASH MANAGEMENT.The control environment means the overall attitude, awareness and action of the directors and management regarding the internal control system and is important to the entity.

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The control environment is instrumental in eventual effectiveness of internal controls. It encompasses management philosophy and operation style, organizational plan, well trained personnel, forecasting and budgeting (Zabihollah et al, 2001)

Management should select the right staff, and train them adequately to ensure their performance and rotate regularly to take into account robbery prevention, mismanagement of cash and personal safety (Tumwesigire, 2003)

For supportive management, De Paula (1990), states that management should take appropriate actions to remedy resources management, so as to make internal audit useful.

Independence of internal and external audits, according to Mitch Map (1986), auditors need to be independently free from political or management pressure.

Woolf (1994) highlights the specific controls procedures that could be designed in many organizations to include;

i) Authorization and control of documents. In this case, all documents that are used in the organization are to have a source of their origin.

ii) Checking the arithmetic accuracy of records. Arithmetic accuracy of documents should be done for example checking by the accountant whether figures on the document prepared are right by re calculating and adding them again before final signing is done by the next person in the hierarchy.

iii)Reporting, reviewing and approving reconciliations. The statements of transactions are to be reviewed and approved before being reported for decision making. Comparing the results of cash, security and stock counts with accounting records.

iv) Comparing internal data with external sources of information for example supplier statements. The external information here should be compared with what is available in the organization. For example if the organization owes suppliers ascertain amount, such a figure is supposed to be what the supplier also claims to be his receivable from the organization.

v) Limiting direct physical access to assets and records. Access to organizations assets and records are to done through getting a go head by responsible persons.

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2.7 IMPACT OF INTERNAL CONTROL OVER CASH MANAGEMENT

Internal controls over cash management are of prime importance in any business (Jain, 1993) they help to ensure that;

I) All sums are received and subsequently accounted for.II) All receipts and payments are promptly and accurately recorded.III) No payments are made which should not have been made.

An effective internal control in an organization will not only facilitate the attainment of excellence in its cash management, but will also improve the overall organizational setup in a way by improving;

i) Effective operations. All financial and non financial data, records, information databases and other materials are complete and accurate, protected from loss or damage and able to be readily accessed for the preparation of timely reports.

ii) A clear view of risks. Nature and impact of inherent risk have been identified, assessed and contained to an acceptable level.

iii) Agreement as to which priorities are to be managed.

iv) Cost savings through efficiency gains.

v) Identify and discourage irregularities. Discrepancies and anomalies are minimized, and able to be prompted, detected and corrected.

vi) Safeguard of assets and resources. That will facilitate the usage of assets only for their authorized purposes and are not subjected to removal or sale.

These would prevent paying fictitious vouchers, For example for the goods that are not received, double payments, unauthorized payments, payments for personal expenses, stealing of cash and cheque, crowded lading, and omitting or understating unpresented cheques (Foulks, 2004)

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2.8 LIMITATIONS OF INTERNAL CONTROL SYSTEMS.Internal controls can protect against mismanagement and assure reliability of accounting data. However, it is important to recognize that internal controls can only offer reasonable assurance that management objectives are reached. This is because of certain inherent limitations laid down below.

Employee wrangles. Meigs & Meigs (1984), states that the effectiveness of internal controls largely depends on the persons who implement them. If these persons responsible for exercising controls abuse their responsibility, the control system may not have any impact on the normal working of the business. The employees in collusion with others in the business unit or with parties may lead to circumvention of controls.

Costs involved; a control must be cost effective (Manasseh, 1990). The cost of the control cannot be disproportional to the potential loss due to fraud and error. Thus making some controls not to be instituted merely because they are not cost effective.

Most of the controls are directed to anticipate usual type of transactions and not those that are unusual. These transactions of unusual nature may not fail within the preview of internal control (Jain, 1993).

M. Cooper certified Accountant Journal, June (1996) states that no controls however elaborates guaranteed efficient administration, completeness, and accuracy of records and activities of a business giving attention to systems being directed towards routine transactions rather than non routine activities, that with the systems in place.

2.9 CASH MANAGEMENTCash is the basic input needed to keep the business running on a continuous basis; it’s also the ultimate output expected to be realized by selling the service or product manufactured by the firm.

Cash management is concerned with the managing of cash flows into and out of the organization, cash flows within the organization, and cash balances held by the organization at the point of time by the financing deficit or investing surplus cash (IM Pandley)

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Cash is a non earning asset. Excessive cash balances reduce the rate of returns on equity and value of a firms stock. The goal of cash management is to minimize the amount of cash a firm must hold in order to conduct its normal business activities yet at the same time to have sufficient cash to:

i) Take trade decisions in the situation of using of transaction balances, which are held to provide the cash needs to conduct normal business operations in the ordinary course, to make purchases and other payments. For transaction purposes, a firm may invest in short term marketable securities.

ii) Speculative balances to enable the firm take advantage of favorable business opportunities that arises due to changes in the security prices. For example the organization may also speculate on material prices. If it is expected that material prices will fall, the organization can postponed the purchase of materials and make purchases in the future when prices actually fall

iii)Precautionary balances to meet future contingencies or emergencies. Which amounts in this case depends upon the predictability of cash flows. It is considered as a safety margin to act as a financial reserve. They may be in cash or in high-liquid and low-risk marketable securities. Compensation balances to offset the banking costs incurred through the provision of banking services such as check clearing. Banks usually require companies to maintain some deposits in low-interest bearing accounts to cater for the services they render to these companies.

CHART 1: CASH MANAGEMENT CYCLE.

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COLLECTION

BORROW OR INVEST

INFORMATION AND CONTROL

PAYMENTS

Source: IM Pandley Pg 765

2.9.1 CASH MANAGEMENT POLICYThese are set of guidelines established by the business to ensure that it has optimal cash balances at any time. The organization seeks to match the cash receipts and disbursements so there are no redundant surplus cash balances or potentially establishing cash deficits (Kakuru, 1993)

The policy actions help in achieving a match between cash receipts and disbursements by:

i) Ensuring efficient management of cash receipts and disbursements.ii) Advance cash planning, such as Cash inflows and outflows should be

planned so that the organization is not overwhelmed by unanticipated movements in cash flows. The organization should prepares advanced cash budgets that clearly is to indicate anticipated future cash inflows and outflows, in which way, they can guard against possibilities of over spending and problems related to it.

iii)Investments of surplus cash to earn profits returns on planning deficits well in advance. In this context, cash that is surplus can be put to better use say reinvested to enable the organization earn additional income or profits. In which case the organization is to decide on division of such balance between bank deposits, marketable securities and intercorporate lending. ( I.M Pandley, 1975)

iv) Optimum cash levels. Under which a firm is to decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances.

2.9.2 RELATIONSHIP BETWEEN INTERNAL CONTROLS AND CASH MANAGEMENT

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2.9.2.1 INTERNAL CONTROLS ON CASH

According to Sserebe (1997), a good system of internal control for cash should provide adequate procedures for protecting both cash receipts and cash disbursements.

There are three basic principles and procedures that should always be observed.

i) There should be segregation of duties so that the person who keeps the cash receipts, are different from the people who do the recording.

ii) All cash receipts should be deposited in the bank, intact, each day. This prevents the employees from making personal use of the cash for a few days before depositing it into the banks.

iii)All payments should be made by cheque. Small disbursements may be made through a petty cash fund which should be done by responsible persons on genuine reasons that support organization objectives.

2.9.3 INTERNAL CONTROLS OVER CASH SALES RECEIPT

According to (Statement on Auditing Standard )SAS 3000, for all organizations to effectively achieve this objectives the following procedures should be used.

i) All cash sales should be recorded in appropriate books of account for example Company receipts that are to be prenumbered for accountability purposes.

ii) Where cash sales invoices are used, they should be prenumbered and a register should be maintained for cash sales and their copies retained.

iii)Cash receipts should be reconciled daily with either the till rolls or invoices totals, and a daily report made. This will facilitate early detection of misappropriations and fraud that may come up in the recording process.

iv) Daily banking should be checked against the till roll or invoices.v) Security should be provided for the cash, and access to the cash office

restricted. Cash is to kept in the safes that are to be properly locked and kept in a burglary proof location

vi) Surprise cash counts should be done at the counters where cash is received and reconciled with actual receipts and payments of that day.

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CHART 2: CASH RECEIPT CYCLES

Source: SAS 3000

2.9.4 CONTROLS OVER CASH PAYMENTSACCA Students Newsletter (May 1992), revealed that most large embezzlements of cash are accomplished through payment of fictitious invoices. Therefore, procedures for controlling cash payments are equally important, as those for cash receipt. Emphasis should be that all payments are done through cheques and smaller disbursements done through petty cash funds.

(Kiiza 1997 Pg 15) asserts that one of the widely used methods of establishing controls over cash disbursements is the voucher system. This system requires that for every transaction requiring cash payments, it should be verified and approved before a cheque is issued. The author asserted saying, a voucher should be prepared for every expenditure, regardless of whether it is for an expense, purchase of an asset of payments of a liability

CHART 3: CASH PAYMENT PROCESS

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Collection CASH

Sales Finished Goods Production A/Payables

Material inventory

Purchase inventory

A/receivables

Schedules

Payments

Source: Kiiza 1997 Pg 15)

2.9.5 CONTROLS OVER CHEQUE PAYMENTS.

i) Unused cheque should be held in a secure place and the person who prepares cheques should have no responsibility over cash purchase or sales ledger.

ii) Cheques should be signed only when evidence is properly approved that a transaction is available. Cheques should be crossed before being signed. Two signatories at least should be required except perhaps for cheques of smaller amounts. The signing of blank cheques and cheques in favor of the signatory should be prohibited (ACCA,1997)

2.9.6 CONTROL OVER PETTY CASH.

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Select Payment s

Post Payment

Cash clearing

Review payments

Reconcile payments

Create Payments

i) The level and location of cash floats should be laid down and formallyBased on need.

ii) Cash should be securely held. For example in a drawer, with restricted keys. Cash should be kept in safe.

iii)All expenditure should require a voucher signed by responsible person not the petty cashier.

iv) The imprested system should be used into reimburse the float.v) Vouchers should be produced before the cheque is signed for

reimbursement and those vouchers should be cancelled once a payment has taken place.

vi) Rules should exist preferably preventing the cashing of cheques. Petty cash expenses should be budgeted for (ACCA, 1997)

Many scholars have analyzed and evaluated internal controls but little has been done on analyzing the effects of internal controls on cash management in an organization. This will form the basis of carrying out this study on internal controls in order to find out the effect of internal controls and cash management.

3.0 CONCLUSTIONS

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One of the most important areas in the day-to-day management of the firms deals with the management of working capital, which is defined as all the short-term assets used in daily operations such as Cash.

A highly liquid firm has sufficient cash to pay its bills at all times. An illiquid firm is unable to pay its bills when due. In a financial sense, the term cash refers to all money

Items and sources those are immediately available to help in paying firms bills

Cash is the most important current asset for the operations of the business. It is the basic input needed to keep the business running on a continuous basis. It is the money, which the firm can disburse immediately without any Restriction. The term cash includes coin, currency, cheques held by the firm and balances in its bank accounts.

Cash management is concerned with minimizing unproductive cash balances, investing temporarily excess cash advantageously, and to making the best possible arrangements for meeting planned and unexpected demand on the firm’s the firm; cash flows within the firm, and cash balances held by the

Firm at a point of time. Cash management must be thought of in terms of the overall liquidity needs of the firm, specifically its current assets and liabilities. In order to reduce the influence of uncertainties with regard to cash needs and to ensure adequate liquidity, firms have to gauge the need for protective liquidity

However when controls are not made known to others, it becomes something for a few in the organization, or the lower subordinates will look at it as a weapon to fight them than something put in place to attain the organizational objectives.

4.0. RECOMMENDATION.Basing on the above findings, the following recommendations were made;

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Transactions should be properly controlled without leaving one person to handle a given transaction from beginning to end for example a requisition should be made by one person/department to the logistics department, authorization be done by another, say the financial department, who should first check the availability of resources from the budget pool for such a specific need, and lastly the purchase of the item should also be done by another department, say from the procurement department.

Transactions should always be authorized before processing. Ideally, this must be done by a senior person. Authorization should be done in a way that before the procurement department goes ahead to handle a transaction, a go ahead should be given to them by the responsible department say the finance department, who first check the availability of resources for such transactions and authorize them to buy.

Staff should regularly be rotated such that they have an understanding of what is done in the various departments of the institution. This should be done by rotation of staff say from the procurement department next to the procurement department and to finance, in that sequence such that issues of ignorance being given as excuses after defaulting are avoided once mistakes are made, and it enables getting acquainted to the organizational policies and familiarization of controls by staff.

Mechanisms for detection and correction of fraud and error should be established. In which way, work will become easy. For example, Advanced accounting software should be used to facilitate monitoring of transactions that are to be entered in to such systems. In this way errors and fraud are detected earlier because with such soft ware’s, for every requisition, a voucher is prepared and later its signed by all the key persons before a go ahead is given for the transactions to take place.

Cashiers should not always keep large amounts of cash at the counter. Large sums of money should not be kept at the counter and preferably, they should start depositing money daily at the bank so that issues of theft and misuse of funds are avoided. However, in days where work goes beyond the times when banks are open, they should obtain a money safe where they will keep such large sums of money till the next deposit takes place. These safe should too be placed in the office of the finance controller.

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Surprise cash counts should normally be done on counters. There should be surprise cash counts at the counter to ascertain whether what is reflected in the receipts, say for the restaurant, is the same amount of money at the counter at that time of checking. If there are variances, then explanations should be got immediately and appropriate measures taken.

The organization should regularly prepare cash budgets and cash flow statements. The cash budgets will help the organization monitor their resources allocated for specific expenditures and their level of availability throughout the period. This way they will be able of controlling what they have and avoid over or under spending and hence avoiding their consequences.

All employees should be taught the various controls that do exist over cash. The employees of the organization should be taught about all the controls that exist through organizing workshops and training services so that they will know what is going on in the organization, the controls that exists around them and hence will work as a team to execute their duties.

REFERENCES

Atwood & Stein (1986). De Paula’s Auditing. London: Pitman publishers.23

Coopers & Lybrand (1984). Manual of Auditing, (4TH Ed). UK: Gee & Company Ltd.

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Holmes, A.W., & Burns, D. C. (1979), A guide to auditing concepts, High Holborn House: Thomson learning.

Jam, D. P., (1993). Auditing (1ST Ed).

Kakuru, J. B., (1995), Basic Financial Management. (15th Ed).

Klinger, J. A., (1991). Principles of financial management London: Macmillan Publishers.

Mafabi, E., (1994). Evaluation of internal control systems in Government Corporations.

Meigs & Meigs (1989). Principles of Auditing (8th Ed). Prentice Hall International: UK

Mill, A. H., (1995), Auditing England Institute of Chartered Accountants

Pandey, I. M., (1997). Financial management (7th Ed), Delhi: Pamprintograph

Ramsway (1994). Auditing today, (4th Ed). New Delhi.

Richiute, N. D., (1989), Auditing concepts& Standards.

Saleemi, N. A., (1991). Auditing simplified (4th Ed), Nairobi: Saleemi Publishers.

Biggs, W., (1994). Spincer & Pegler Practical Auditing (15th Ed). London: HFL Publishers Ltd.

Pandey, I.M. (1998). Financial Management. New Delhi: Vikas Publishing House.

Van, H (1985), Cash management

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