## **Learning Outcomes**

After reading this article, you will be able to explain the significance of cash control and security within the accounting function. You will understand the principles of segregation of duties and authorisations, identify typical weaknesses in cash handling, and describe procedures used to protect an entity’s cash and accounting records. This knowledge is essential for both day-to-day work and exam performance in ACCA FA2.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand how cash and other assets are safeguarded in the accounting process. Focus your revision on:

- The importance of internal controls in maintaining accurate cash records
- The purpose and application of segregation of duties within the accounting system
- The need for proper authorisation of transactions, particularly cash movements
- Methods for preventing and detecting fraud or error in the handling of cash

## **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 internal control measure reduces the risk of fraud by ensuring that no single individual has control over all stages of a cash transaction?
   a) Physical security
   b) Segregation of duties
   c) Regular staff rotation
   d) Audit trails

2. True or false? Authorisation of payments by an independent manager is unnecessary if payment amounts are small and routine.

3. List two typical duties that must be kept separate to achieve adequate segregation in cash handling.

4. Why is it important for cash receipts to be promptly recorded and deposited?

## **Introduction**

Cash is a high-risk asset and often targeted for theft or misuse. Maintaining effective control over cash requires robust procedures, clear roles, and enforced authorisations. Segregation of duties and proper authorisation of transactions are essential to reduce risk, limit opportunities for error or fraud, and support accurate financial records. These controls are commonly tested in both daily business operations and the ACCA FA2 exam.

> **Key Term: internal control**
> Systems and procedures implemented by an entity to ensure assets are safeguarded, transactions are properly recorded, and errors or fraud are prevented and detected.

## **Segregation of Duties**

Segregation of duties is a key internal control that means no one person is responsible for all aspects of a transaction. By dividing key processes among several employees, the potential for deliberate fraud or accidental error is reduced.

### Typical Segregation in Cash Processes

Effective separation involves distinct people completing each of these tasks:

- Receiving and recording cash
- Authorising cash payments
- Reconciling bank and cash records
- Approving and reviewing reconciliations

> **Key Term: segregation of duties**
> The internal control requirement that duties related to authorising, processing, recording, and reviewing transactions are divided among different people.
>
> **Key Term: fraud**
> Intentional misrepresentation or theft of assets, typically for personal gain.

### Examples of Inadequate Segregation

If a staff member can accept cash, record it in the accounts, and reconcile the bank records, undetected misappropriation is possible. Segregation ensures that errors or irregularities by one employee are likely to be identified by another.

### **Worked Example 1.1**

An employee in a small office is responsible for both collecting cash from customers and recording all cash receipts in the accounting system. At month end, the same employee reconciles the bank account.

**Question:** What control risk arises, and how should the duties be segregated?

> **Answer:** When one person handles both cash and all related records, it is possible for them to take cash without detection, by failing to record receipts. To reduce risk, cash collection, record-keeping (posting receipts), and bank reconciliations should be assigned to separate staff members.

## **Authorisation of Transactions**

Authorisation is a formal control step requiring that cash payments and receipts are approved by a responsible individual before being executed. This may be achieved via signatures, limits of authority, or documented approval procedures.

> **Key Term: authorisation**
> The documented confirmation by a responsible person that a transaction is permitted, typically by signing an instruction or approving a payment.

Approval limits should be set based on employee responsibility. For example, junior staff may authorise small purchases, but only a manager can approve payments above a threshold.

Authorisation records should be retained as evidence for auditors or in case of dispute.

### **Worked Example 1.2**

A company policy states that all cheques over \$1,000 require both the finance manager's and the director’s signatures. A payment for \$1,500 is made with only the finance manager’s signature.

**Question:** What control weakness is present, and what should have occurred?

> **Answer:** The payment did not follow the documented authorisation policy. Without proper authorisation, the risk of unauthorised or fraudulent payments increases. Controls require that both signatures be present before processing the payment.

### **Exam Warning**

> Failure to comply with specified authorisation procedures, including dual signatories or approval limits, is a frequent cause of exam errors. Always check who must authorise transactions and ensure evidence is retained.

## **Cash Handling Controls**

Control of cash involves more than segregation or authorisation. Procedures must be in place to:

- Record cash receipts immediately and issue receipts
- Deposit cash in the bank daily
- Lock cash in secure safes with restricted access
- Periodically count cash and compare to records
- Investigate differences and obtain explanations

> **Key Term: cash reconciliation**
> The process of comparing recorded cash balances to physical cash on hand and bank statements, investigating and correcting any differences.

## **Fraud Prevention and Detection**

Segregation of duties and authorisation controls help prevent and detect:

- Theft of cash by intercepting receipts
- Fictitious payments or unapproved purchases
- Concealment of errors

Regular review and independent reconciliations increase the likelihood that fraud or mistakes will be spotted swiftly.

### **Worked Example 1.3**

A cashier and a bookkeeper collude to steal cash: the cashier omits some receipts and the bookkeeper adjusts records. What control is missing?

> **Answer:** Collusion can overcome basic segregation. To mitigate, periodic surprise cash counts and independent review by management are required.

## **Summary**

Strong cash control relies on dividing responsibilities, requiring formal authorisations, and carrying out independent checks. Segregation of duties ensures that no individual can process and approve their own work. Authorisation policies limit who can approve payments and receipts, adding further protection. These practices are essential to prevent errors and fraud, and are regularly tested in the ACCA FA2 exam.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- State the purpose of internal controls over cash assets
- Explain segregation of duties in cash receipt and payment processes
- Describe authorisation controls and evidence requirements
- Identify typical weaknesses that may lead to fraud or error
- Outline procedures for safe cash handling, recording, and reconciliation
- Recognise the importance of periodic review and management oversight

## **Key Terms and Concepts**

- internal control
- segregation of duties
- fraud
- authorisation
- cash reconciliation

Cash control and security - Segregation of duties and authorisations