## **Learning Outcomes**

After reading this article, you will be able to identify the core responsibilities of the treasury function and understand effective controls for cash handling and banking. You will learn to describe and apply key internal control procedures that prevent fraud in cash transactions, recognize common types of cash-related fraud, and explain how these concepts appear in the ACCA FFM exam.

## **ACCA Foundations in Financial Management (FFM) Syllabus**

For ACCA Foundations in Financial Management (FFM), you are required to understand the role of treasury and banking systems within an organization. In particular, this article helps you to:

- Explain the objectives and duties of the treasury function in managing cash and banking.
- Identify appropriate internal controls for cash receipts and payments.
- Recognize control activities specifically designed to reduce the risk of fraud involving cash.
- Understand how to apply segregation of duties, authorization, and physical safeguards for cash handling.
- Describe typical cash fraud schemes and methods for detection and prevention.

## **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 is a key internal control in cash handling?
   a) Authorising payments before disbursement  
   b) Allowing only one individual to manage receipts and payments  
   c) Keeping cash in an unlocked drawer  
   d) Permitting cash payments without documentation

2. What is the primary purpose of segregating cash receipt and recording duties?
   a) Increase efficiency  
   b) Reduce double entry errors  
   c) Prevent and detect misappropriation of funds  
   d) Accelerate cash deposits

3. List two typical types of fraud that can occur in cash handling.

4. Why is bank reconciliation considered an essential control procedure in treasury management?

## **Introduction**

All businesses handle cash and bank transactions, making them vulnerable to error and fraud. The treasury function ensures funds are properly managed, recorded, and safeguarded. Reliable cash handling controls and clear procedures are essential to prevent losses. This article outlines the main responsibilities of treasury, highlights key controls for cash and banking, and shows how organizations protect themselves against fraud.

## ROLE OF THE TREASURY FUNCTION

The treasury function is responsible for managing an entity’s cash resources, banking relationships, and liquidity. It ensures cash is available when needed, funds are properly allocated, and surplus balances are managed to maximize value.

> **Key Term: treasury function**
> The department or role responsible for managing an organization's cash resources, liquidity, and relationships with banks.

Typical treasury duties include:

- Monitoring cash balances and forecasts
- Authorizing payments and receipts
- Managing bank accounts and mandates
- Safeguarding cash and negotiable instruments
- Liaising with banks on transactions and facilities

The treasury must implement and operate effective control systems to ensure cash is protected at all times.

## CASH HANDLING PROCEDURES AND INTERNAL CONTROLS

The handling of cash presents unique risks. Failure to implement strong controls can lead to theft, fraud, or loss of funds. Controls must cover all stages: receiving, recording, storing, and paying cash.

### Segregation of Duties

No single person should control all aspects of a cash transaction. This reduces opportunities for theft and helps prevent errors remaining undetected.

> **Key Term: segregation of duties**
> The division of responsibility so that no one individual handles all stages of a transaction, lowering the risk of fraud or error.

For example, one employee opens incoming mail and lists receipts, another records them, and a third makes the bank deposit.

### Authorization and Approval

All cash payments must be properly authorized before release. Similarly, receipts should be checked against documentation to ensure they are valid.

> **Key Term: authorization**
> The process of granting formal approval before performing a financial transaction.

Payments are approved by designated managers and supported by invoices or contracts. Unauthorized transactions should raise an alert.

### Physical Safeguards

Strict measures must be in place to secure cash at all times, both on the premises and in transit.

- Cash should be stored in safes or secure cash boxes
- Access to funds must be restricted to authorized staff
- Large sums should be banked promptly and not held on site

Cash counts should be performed regularly, and discrepancies investigated without delay.

### Record-keeping and Documentation

Every movement of cash must be accompanied by clear documentation—such as receipts, vouchers, payment lists, or deposit slips. All records need to be complete, timely, and accurate.

A daily cash book is maintained, showing all inflows and outflows. Supporting documents are filed for audit and reference.

### Bank Reconciliation

Accounts must be reconciled regularly—typically monthly—by a staff member independent from those handling cash.

> **Key Term: bank reconciliation**
> The process of matching the cash book balance with the balance shown on the bank statement, explaining any differences.

This control detects errors or unauthorized withdrawals and ensures that any issues are flagged and corrected quickly.

## FRAUD PREVENTION IN CASH HANDLING

Without vigilant procedures, fraud relating to cash can occur. Fraud schemes often exploit weak controls or lack of oversight.

### Common Cash Fraud Schemes

- **Skimming:** Cash is taken before it is recorded in the accounting system
- **Lapping:** Receipts from one customer are stolen, replaced later with receipts from another
- **Unauthorized disbursements:** Funds are paid out on false invoices or to unauthorized accounts
- **Falsifying records:** Cash records are altered to conceal theft or loss

### Fraud Detection and Prevention Methods

- Segregate responsibilities for receipt, recording, and banking of cash
- Perform surprise cash counts and audits by an independent person
- Enforce dual control over access to safes or cash stores
- Implement robust approval processes for all payments and refunds
- Reconcile bank accounts promptly and investigate all unexplained items

Effective staff training and management oversight are also central to preventing errors and dishonesty.

### **Worked Example 1.1**

A retail manager receives cash each day from sales, records the amounts, and deposits cash at the bank. Over a month, shortfalls are noticed during bank reconciliations compared with sales records.

**What internal control weaknesses are present, and what procedures could prevent this issue?**

> **Answer:**
> The same person is responsible for collecting, recording, and banking cash. Weaknesses include lack of segregation of duties, inadequate oversight, and no regular cash counts. To prevent problems, different staff members should be responsible for recording receipts and banking. Regular independent cash counts and reconciliations should be carried out, and supporting documentation should be checked by someone other than the handler.

### **Worked Example 1.2**

An accounts clerk is able to both approve and process petty cash payments. Over time, some payments are found to lack supporting invoices.

**Why is this arrangement a fraud risk, and what control should be used?**

> **Answer:**
> Allowing one person to both approve and process payments enables unauthorized or fictitious spending. The control to implement is to require that all petty cash payments be supported by receipts and approved by a different, authorized manager.

### **Exam Warning**

> Be alert for exam questions that test understanding of both the purpose and operation of controls—identify _why_ a control is required and _how_ failure can create a fraud risk.

### **Revision Tip**

> List common cash controls and match each to the risk it addresses. For the ACCA exam, be ready to give specific examples of controls for receipts, payments, and reconciliations.

## **Summary**

The treasury function manages all aspects of an organization’s cash and bank activities, with strong controls required at every step. Robust procedures ensure cash is protected, fraud is deterred, and records are reliable.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- State the core objectives of the treasury function regarding cash and banking
- Identify essential internal controls over receipt, custody, and disbursement of cash
- Explain segregation of duties and authorization in preventing cash fraud
- Recognize the importance of bank reconciliation as a detection control
- Describe typical cash fraud schemes and how to design controls to reduce risk

## **Key Terms and Concepts**

- treasury function
- segregation of duties
- authorization
- bank reconciliation

Treasury function and banking - Cash handling controls and fraud prevention