Chapter 10
Cash Controls
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Generally, internal controls can be classified as preventive (i.e. to stop an incident before it happens),
or detective (i.e. to discover an incident after it happens). Obviously, it is better to prevent incidents
than to discover them after they occur.
Consider the following situation. Michael purchased a family restaurant, which he managed
himself. He bought supplies, paid bills, opened and closed the restaurant himself each day. He was
doing so well that he decided to buy another location in another suburb of the city. He promoted
an employee, who had worked with him for the past three years, to manage the old location while
he focused on setting up the new location.
Michael disliked anything to do with accounting. He operated a simple hands-on business and his
bookkeeper updated the books each month to ensure that sales taxes were paid and payroll was
disbursed on time. Other than these two functions, the bookkeeper relied on the accountant to
complete the financial statements at the end of each year and complete Michael’s annual tax return.
Michael’s business was performing well, so Michael and his wife decided to take a vacation. Not
long after they returned, Michael received a call from one of his suppliers to say that a payment he
had issued a few days before was returned by the bank because of insufficient funds in Michael’s
account.Michael was not only frustrated but also extremely embarrassed.He had to transfer money
from his personal savings account to cover the shortfall and immediately started looking into what
happened.
Since Michael knew very little about accounting, he contacted his accountant to investigate. An
entire year had passed since the accountant had worked with Michael’s financial statements, so the
investigation was no easy task.The following issues were discovered.
1. Cash was only being deposited every few days, rather than daily and the cash receipts did not
match the cash register.
2. Payroll was considerably higher, relative to sales, than it had been in previous years. It appears
that the manager was paying ghost employees—he was making payments to contract staff that
did not actually exist.
3. His trusted manager was stealing food supplies and selling them for cash. This increased the
food costs and decreased profits.
4. Some of the servers were “sweet-hearting” customers—meaning that friends were being served
with free meals or extras at no charge.
As a result of a lack of controls, poor bookkeeper oversight and fraudulent behaviour,Michael nearly
went bankrupt. He hired a new manager, and with the help of his accountant he implemented the
following controls to prevent this from happening again.
1. The new manager does not handle any sales and deposits the cash every day. Any discrepancies
between the cash receipts and the register are investigated by the manager immediately.
