Whether you are a non-profit organization, a for-profit company, or an auditor, you have most likely encountered the need to understand what it means to have strong internal controls over cash, controls that are in place and operating effectively. So what exactly is an internal control (IC) and why does it matter?

An internal control is a financial process or procedure that enables the organization to safeguard its assets. When conducting an audit, in order for the auditor to adhere to generally accepted auditing standards in the U.S., the auditor must assess the risk that the financial statements have been materially misstated in some way. To assist in that risk assessment, the auditor will evaluate the internal controls relating to the entity’s preparation of its financial statements. If these internal controls are determined to be strong, the auditor may decide there is a low risk the financial statements have been misstated. If the internal controls are weak, the auditor may decide there is a high risk of misstatement. To help make this determination, one of the areas the auditor will assess is the internal controls over cash. When auditors think of cash, they normally don’t mean cash in a drawer or safe (although these could be relevant), but operating receipts and disbursements.

Normally, the most effective procedures for internal control are those that have the greatest segregation of duties. This means if more people are involved in a process, then it is less likely errors will occur or go unnoticed. Also, it is best if management clearly states the segregation of duties in the organization’s policies, as well as detail each employee’s duties in their job description.

Here are some examples of internal controls over cash:

• Bank Statements
  • The bank statement should be opened by someone that does not write or mail checks. This person should review the bank statement activity and initial the statement indicating their review.
  • If the bank statement is received electronically this person should have read-only access to the online account.
• Bank Reconciliations
  • The bank reconciliation should be performed timely (within a month or less).
  • The reconciliation should be performed by a person that is not an account signer on checks and that is not making deposits.
  • These should be reviewed by someone independent of the accounting function, and they should initial as evidence of review (i.e. a board member).
• Checks
  • Unused checks should be kept in a locked cabinet/closet and should not be maintained by the person who can sign the checks.
  • Use pre-numbered checks and keep a check log
  • Someone other than the person writing/typing the check should review the supporting documentation for each disbursement and sign the check.
  • It is best to not use ATM/debit cards. There is a higher risk of immediate loss of funds without much recourse when using these cards. Credit cards should be the only method of purchases without a check.
  • Bank products such as positive pay can provide an additional control at a relatively low added cost
• Deposits
  • Mail should be opened by a person outside of the accounting department. This person should make a list of the checks received prior to forwarding checks to the accounting department. If large amounts of cash receipts are common, then it is best if mail is opened under dual control.
  • As soon as checks are received in the mail, a restrictive endorsement should be made on the back of the check (for deposit only account #xxxx).
  • Checks and cash received should be kept in a secure location between deposits.
  • Deposits should be made as often as possible (daily or at least weekly).
  • If the organization receives a large volume of checks, use of a lockbox can save time and add an additional control.

Some other items to consider are: making sure the signature cards are up-to-date with the bank (update the signature card as soon as an employee that has signature authority leaves), creating a limit on each check signor’s authorized limit, and possibly requiring two signatures for checks above a certain threshold.

This is not an exhaustive list of control procedures for handling cash, but it is a good place to start. Even if you are a small organization with only a few staff members or volunteers, it is still possible for you to create a proper internal control environment. Taking the time to create a strong internal control environment will help your organization in numerous ways, including providing a positive public opinion of your organization in the eyes of funders/investors, the government, watchdog organizations, and the general public.

Sources and to read more:

• http://www.nonprofitaccountingbasics.org/reporting-operations/general-controls
• http://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_12.aspx#_ftnref8
• http://www.thenonprofittimes.com/news-articles/tips-for-internal-controls-for-big-and-small/

As a general disclaimer, the information provided above is very general and broad in nature, is not represented as complete, and may not apply to taxpayers’ individual situations. We advise all taxpayers to consult a professional advisor regarding their own specific needs. 

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