Redesigning Cash Controls and Fixing a Budget Deficit

Accounting for Internal Control

Skill: Create

Stimulus

Question

(a) Propose THREE internal-control improvements for cash suitable for Encik Farid's business. For each proposal, explain how it reduces the risk of misappropriation or error.

(b) Using the cash budget, identify the problem month and give numerical evidence. Then design TWO measures Encik Farid could take to overcome the problem, and state the effect of each measure on the closing balance.

Thinking steps

1. Identify the control weaknesses in the stimulus: one clerk does every cash task, takings are banked late, receipts are not numbered, and the bank reconciliation is unchecked.
2. Match each weakness to a cash-control principle: segregation of duties, daily intact banking with serial receipts, and supervisory review of the bank reconciliation.
3. For each proposal, write the REASON (effect) so the answer is a designed solution, not a mere list.
4. Read the cash budget column by column and find the negative closing balance: February shows -RM1,000.
5. Link the cause: February receipts (RM22,000) are lower than payments (RM30,000), while March has a surplus of RM8,000 that can be tapped.
6. Design measures that bring receipts forward or delay payments, then state the effect: February's closing balance turns positive again.

Model answer

(a) Three internal-control improvements for cash:

1. Segregation of duties: Puan Salmah should not receive, record, bank AND prepare the bank reconciliation alone; split these tasks among two or three staff. Reason: one person's work is cross-checked by another, so misappropriation is harder to conceal.

2. Bank all cash takings intact every day and issue pre-numbered serial receipts for every amount received; reconcile total receipts against the daily bank slip. Reason: prevents cash going missing between receipt and banking and creates an audit trail.

3. The Bank Reconciliation Statement is prepared monthly by staff who do not handle cash and is reviewed and signed by Encik Farid. Reason: differences or errors are detected early and supervisory control is established.

(b) The problem month is February because the closing balance is a deficit of -RM1,000 (receipts RM22,000 are less than payments RM30,000). Two measures:

1. Reschedule some February payments (e.g. non-urgent stock purchases) into March, which has a surplus of RM8,000. Effect: February payments fall and February's closing balance turns positive again.

2. Speed up debtor collections or offer a cash discount so part of March's receipts arrive in February; if still short, obtain a short-term bank overdraft to cover the RM1,000 gap. Effect: February receipts rise and the business avoids failing to meet obligations (dishonoured cheques).