Petty Cash Disbursements
Risks associated with the organization’s lockbox funds are anything but petty.
August 01, 2012
Although an organization's petty cash fund is inherently prone to fraud and abuse, it often receives minor attention during an internal audit due to its low materiality. A petty cash fund is a small amount of cash held by an organization or its separate departments for small day-to-day expenditures. Petty cash is a convenient alternative to issuing checks — which could cause delays in payment or receipt of goods and services, waste resources required to review every entry in the books, and lead to associated bank charges for small transactions. With the avoidance of issuing checks for minor expenses, the term petty cash appropriately indicates the low value of the transactions.
Still, petty cash carries risks beyond monetary value, as the manner in which management handles petty cash may be indicative of broader management approaches to an organization's internal controls.
The most widely used system for petty cash is called an imprest system, where a maximum amount of cash is decided on the basis of frequency and amount of day-to-day disbursements. For example, an organization may establish a US$200 petty cash fund and use it to pay all qualifying expenditures. On the date of adjustment, all expenditures paid are reimbursed back to the petty cash fund. Therefore, if US$45 remains at the date of adjustment, US$155 will be added to the petty cash fund to replenish it to the initial US$200.
Petty cash is widely used by organizations of all sizes, and internal auditors need to be aware of associated risks as well internal controls in place to address them.
Petty cash is an example of accepting inherent risks of holding cash against its potential benefits. Internal auditors need to be aware of these risks, which include:
- Waste. Wasting resources on activities not in line with business objectives.
- Misappropriation of funds. Employees could embezzle the funds for personal expenses or "borrow" cash by removing some at the beginning of replenishment and returning it at the time of reconciliation.
- Human error. In a process where adjustment of disbursed funds takes place at a later date (e.g., the end of a month), there is a risk that human error may go undetected until the date of adjustment.
Internal auditors need to understand their organization's procedure for handling petty cash so they can help ensure controls are in place to mitigate the risk of theft or misuse. Although specific procedures for petty cash disbursement can vary among organizations, several principles are common.
Petty cash is created by withdrawing physical cash from a bank account and opening a corresponding account — typically a petty cash imprest account — in the organization's general ledger to record and control the funds. Opening a separate account is essential to segregate this item within the general ledger. Although petty cash is of low materiality, cash is always a sensitive item and requires effective internal controls.
A designated employee prepares a prenumbered voucher, which is recorded with detailed information and authorized by a separate designated employee to ensure segregation of duties. Here, both preparer and authorizer rely on supporting documents (e.g., bills, invoices, and receipts) to justify the expense. The voucher is forwarded to the custodian of the petty cash fund who verifies the voucher and supporting documents to ensure authenticity and dual authorization and then disburses the cash under acknowledgment. In the case of advance payments, invoices and receipts would arrive after payment has been made and be reconciled to the amounts advanced. If any unused cash remains from the paid petty cash voucher, it is added back into the petty cash fund by issuing a prenumbered and approved replenishment voucher (with acknowledgment from the petty cash custodian to signify the cash has been received by the custodian and is included in the petty cash).
At least once a month, petty cash is replenished. All vouchers are sorted and summed up with respect to each type of expense and recorded in the system. At this point, the suspense account and physical cash (if any) should be equal. The petty cash fund is replenished by the amount of total expenditures incurred during the month.
Most of the controls in the petty cash process that address the aforementioned risks are easy to identify — prenumbered vouchers, segregation of duties in the disbursement process, supporting documents to ascertain the authenticity of each disbursement, and acknowledgement of the person receiving the cash and replenishment of petty cash on a monthly basis. However, additional internal controls can be implemented to strengthen the process.
- The preparer of the petty cash voucher should maintain sequentially numbered vouchers and a journal that reflects the amount of cash currently held by the petty cash custodian. The custodian should then reconcile the amounts on vouchers and the amount of physical cash against the petty cash imprest account.
- Periodically (e.g., monthly), an independent designated employee should conduct a surprise review of petty cash on hand by comparing the physical cash and vouchers against the total imprest balance. This procedure ensures the sum of both totals is equal to the total petty cash that was initially disbursed.
- The petty cash, and its supporting documents and vouchers, should be kept in a secure environment under limited access by designated employees.
- The employee overseeing the petty cash process should establish a maximum threshold for individual petty cash expenditures.
The imprest limit also should be reviewed periodically on the basis of the frequency of petty cash replenishments. Frequent replenishments because of fund exhaustion may suggest that the imprest limit should be increased. Conversely, if there are less frequent replenishments, the imprest limit should be reduced.
An Important Function
A well-managed petty cash function often goes hand in hand with a strong internal control environment. Although of limited financial materiality, petty cash often carries a significance that transcends its size. A regular audit of the petty cash function can help ensure the cash is used correctly, stored appropriately, and handled by authorized employees.