Internal auditors noted minimal controls over the petty cash fund. Discover the most appropriate recommendation to enhance petty cash controls and mitigate risks.
Table of Contents
Question
The internal audit activity noted there were minimal controls in place over the petty cash fund. Which of the following recommendations would be the most appropriate?
A. Eliminate the petty cash fund and require all expenses to be reimbursed through an expense report.
B. Recommend that surprise cash counts be performed by another independent employee.
C. Advise management to purchase a vault along with security cameras to monitor the movement of cash.
D. Institute a monthly reconciliation process with reimbursement through a miscellaneous expense account.
Answer
The most appropriate recommendation to address the minimal controls over the petty cash fund is:
D. Institute a monthly reconciliation process with reimbursement through a miscellaneous expense account.
Explanation
Implementing a regular, systematic reconciliation process is the most effective way to enhance controls over the petty cash fund. A monthly reconciliation, where the physical cash on hand is counted and compared to petty cash records and receipts, will help detect any discrepancies, errors, or potential fraud in a timely manner.
Discrepancies can then be investigated and resolved, with the fund being replenished as needed through a designated miscellaneous expense account. This creates a clear audit trail and accountability.
The other options, while they may have some benefits, are not as comprehensive or effective:
A) Completely eliminating petty cash, while it would remove the control risks, is often not practical as petty cash is needed for small, incidental expenses.
B) Surprise cash counts by an independent employee provide a deterrent and detective control, but this alone is not sufficient as a comprehensive control process. It should be done in addition to, not instead of, regular reconciliations.
C) Purchasing a vault and security cameras secures the physical cash but does not address the need for regular record-keeping, reconciliation and review to verify accuracy and detect issues.
Therefore, choice D, instituting a robust monthly reconciliation process, is the best recommendation for improving petty cash controls and reducing risks. Supplementing this with other controls like surprise audits, physical security, and clear policies and procedures for petty cash use will create an even stronger control environment.
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