Cash, bank, and payroll - Cash controls and petty cash

Learning Outcomes

By reading this article, you will understand key cash and petty cash controls required for the ACCA Audit and Assurance exam. You will be able to explain control procedures to safeguard cash, describe how petty cash imprest systems operate, assess typical payroll and cash risks, and identify suitable audit tests. You will also know how to recommend improvements and spot control weaknesses in cash and petty cash systems.

ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance (AA), you are required to understand the principles and practical aspects of internal controls and audit procedures over cash, bank, payroll, and petty cash. Focus your revision on the ability to:

• Describe control objectives and control activities within cash, bank, and payroll systems.
• Identify and recommend improvements to deficiencies in cash and petty cash controls.
• Explain and test the operations of petty cash imprest systems.
• Discuss and evaluate bank reconciliation procedures and their importance.
• Recognise risks and controls in payroll processing and payment.
• Design appropriate tests of control and substantive procedures relating to cash, bank balances, and petty cash.
• Interpret the audit implications of control weaknesses in cash and payroll systems.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following best describes the purpose of a petty cash imprest system?
   1. To allow unlimited small payments as needed
   2. To monitor and limit cash disbursements
   3. To replace bank payments for large expenses
   4. To avoid documentation for small expenses

2. List two typical control procedures over physical cash held on premises.

3. State one control weakness and one improvement in a petty cash system where only one employee can operate and reconcile the float.

4. Explain the main objective of a bank reconciliation as it relates to internal control.

5. Which two control procedures help to reduce fraud risk in payroll payments?

Introduction

Cash and petty cash are highly susceptible to misappropriation, error, and fraud. Effective internal controls over cash, bank accounts, and payroll are essential for safeguarding assets, ensuring correct recording, and preventing losses. Audit work in these areas is focused on assessing whether proper controls are in place, operating as intended, and sufficient evidence is obtained for the accuracy and existence of cash balances.

Key Term: cash controls
Procedures and activities designed to safeguard an organisation’s physical cash and cash equivalents, prevent and detect theft or error, and ensure proper authorisation and recording of cash transactions.

CASH CONTROLS AND RISKS

Cash system objectives

All entities should control cash receipts and payments to:

• Ensure all cash received is banked promptly and recorded completely.
• Prevent unauthorised payments and losses.
• Restrict access to cash to authorised personnel only.

Controls over cash apply to both cash in hand (physical notes and coins) and cash at bank.

Key Term: segregation of duties
Allocation of different steps in a process to multiple individuals, so no single person controls every stage from initiation to authorisation, recording, and reconciliation of transactions.

Typical cash controls

• Segregate collection, recording, depositing, and reconciliations among different people.
• Use pre-numbered receipt books. Issue receipts for all money received.
• Restrict physical access to cash and safe; limit keys to authorised staff.
• Conduct regular, independent reconciliations of cash and bank records.
• Require management approval for write-offs, refunds, and unusual payments.
• Investigate differences between expected and actual cash.

Worked Example 1.1

A company’s cashier collects cash from customers, prepares the daily deposit, and records the transaction in the accounting system. No one else reviews the deposit or reconciles the bank statement.

Question:
What control weakness exists, and what recommendation would you make?

Answer:
There is inadequate segregation of duties—the cashier can potentially misappropriate funds without detection. Recommendation: a separate employee or supervisor should prepare or review bank reconciliations, independently verify deposit slips, and monitor the cash receipts process.

PETTY CASH AND THE IMPREST SYSTEM

Petty cash is a small fund held for minor business expenses where bank payments are impractical (e.g., postage, office supplies).

Key Term: petty cash imprest system
A method for controlling petty cash by maintaining a fixed amount (the imprest), reimbursed only for actual expenses documented with vouchers, so the sum of receipts plus cash in the box always equals the imprest balance.

Control procedures for petty cash

• Assign responsibility for petty cash to a specific custodian.
• Hold cash in a locked box with restricted access.
• Require supporting receipts and authorisation for each payment.
• Keep a petty cash book, recording all disbursements and reimbursement.
• Imprest amount is restored only after verification of vouchers; management approves reimbursement.
• Count petty cash regularly and independently (e.g., by a supervisor not responsible for disbursements).

Worked Example 1.2

At the month end, a petty cash box has a float of £200. After counting, there is £37 in cash and £163 in properly authorised receipts.

Question:
Is the petty cash imprest system being operated correctly?

Answer:
Yes. Cash on hand (£37) plus vouchers (£163) equals the imprest (£200). Only properly authorised expenses are reimbursed up to the set float.

Common deficiencies in petty cash systems

• The person issuing cash also records transactions and reconciles the float (poor segregation).
• Cash not regularly counted or reconciled by an independent party.
• Authorisation of petty cash payments left to the custodian with no oversight.
• No supporting documentation for payments.
• Imprest not fixed, or reimbursements made without supporting vouchers.

Exam Warning – Petty Cash

A frequent exam issue is recommending control improvements: always focus on practical steps—such as segregation, documentation, and independent checks. Generic or vague recommendations score poorly in exams.

BANK CONTROLS: RECONCILIATION AND AUTHORISATION

Key Term: bank reconciliation
A comparison of the cash book and bank statement balances, identifying timing or recording differences, and ensuring all receipts and payments are accounted for and properly recorded.

Importance of bank reconciliations

• Verify completeness and accuracy of cash records.
• Detect errors, omissions, unrecorded deposits, or fraudulent payments.
• Evidence of good control if reviewed and approved regularly by someone independent of cash handling and payments.

Key control activities

• Prepare bank reconciliations at least monthly.
• Investigation and prompt correction of differences.
• Management review and sign-off of reconciliations.

Worked Example 1.3

A bank reconciliation reveals several unpresented cheques outstanding for over three months as well as an unexplained difference.

Question:
Why might this indicate a control deficiency?

Answer:
Long-outstanding unpresented cheques or unexplained differences may indicate errors, fraud, or failure to investigate reconciling items. Controls require prompt resolution of such items and regular review by management.

PAYROLL: CONTROLS OVER PAYMENT

Payroll is both a high value and high-risk area for error and fraud (e.g., fictitious or duplicate employees, incorrect pay rates).

Key Term: payroll controls
Procedures designed to ensure employees are paid the correct amounts, only for work performed, and that all payments are properly authorised and accurately recorded.

Key controls in payroll processing

• Segregate preparation, approval, and payment functions.
• Changes to standing data (e.g., rates of pay, new joiners, leavers) require evidence and independent authorisation.
• Timesheets and attendance records are reviewed and authorised by line managers.
• Payroll register and payment list checked by senior staff before payment.
• Payments made electronically or by signed cheques with dual authorisation.
• Surprise checks—such as verifying recipient bank accounts or handing out pay slips in person.

Key Term: segregation of duties
Division of responsibility for transaction initiation, approval, record keeping, and reconciliation between separate individuals, to deter and detect fraud or error.

Common payroll control deficiencies

• Inadequate checks on new starters or leavers—ghost employees may be created.
• Payroll prepared, authorised, and paid by the same employee.
• Little or no review of changes to employee details.
• Dormant employee bank accounts or duplicate payments not investigated.

Exam Warning – Payroll

Marks are lost for “boilerplate” suggestions like “improve staff training” unless specifically linked to a control weakness.

AUDIT PROCEDURES FOR CASH, BANK, AND PETTY CASH

Tests of control

• Observe segregation and authorisation arrangements.
• Inspect documentation for completeness of receipts and payment records.
• Review reconciliations for frequency and review signature.
• Check surprise cash counts and reports of differences.

Substantive procedures

• Re-perform bank reconciliation; verify outstanding items clear after year-end.
• Obtain third-party confirmation of year-end balances.
• Count cash and petty cash on hand at the balance sheet date.
• Trace a sample of petty cash payments to supporting vouchers.
• Review large or unusual payments for authorisation and supporting evidence.

Summary

Effective controls over cash, petty cash, and payroll are essential to prevent theft, error, and fraud. Practical systems such as the petty cash imprest, regular bank reconciliations, and strong payroll controls (with segregation and independent review) should be established and monitored. The auditor must identify, test, and, where necessary, recommend corrective actions for control deficiencies.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain control objectives for cash, bank, and petty cash systems.
• Identify key control procedures over both receipts and payments.
• Describe the operation and control of a petty cash imprest system.
• Spot common deficiencies and suggest improvements to petty cash and cash handling.
• Define the purpose and process of regular bank reconciliation.
• State basic payroll controls and their audit implications.
• Recommend practical control improvements in response to scenarios.
• Select and apply audit tests over cash, petty cash, and payroll.

Key Terms and Concepts

• cash controls
• segregation of duties
• petty cash imprest system
• bank reconciliation
• payroll controls