F8 SCENARIO QUESTION DISCUSSIONS – Q3 (b), December 2007. Topic: Internal Control Weaknesses

This is a discussion relating to Q3 (b), December 2007. I am working from the UK paper but both the UK and INT papers are similar. For a link to the international paper, go here:

https://www.accaglobal.com/pubs/students/acca/exams/f8/past_papers/int/f8int_2007_dec_q.pdf

I am looking at both parts (a) and (b) of this question as they both relate to the scenario. Here, we will discuss part (b).

This part refers to Matalas’s PETTY CASH system. We are looking for weaknesses in their internal control system and ways of resolving each weakness.

The approach to this question is pretty straightforward. A tabular answer, with separate columns, one for WEAKNESS and one for RESOLUTION, is the way to go. Remember, one mark for each weakness, one mark for each resolution.

Now let’s get down to business. Below I have listed the petty cash system in detail – all key points are highlighted in bold.

1. The average petty cash balance at each branch is $5,000. (1)
2. Average monthly expenditure is $1,538 (1), with amounts ranging from $1 to $500. (2)
3. Petty cash is kept in a lockable box on a bookcase in the accounts office. (3)
4. Vouchers for expenditure are signed by the person incurring that expenditure (4) to confirm they have received re-imbursement from petty cash.
5. Vouchers are recorded in the petty cash book by the accounts clerk; (5) each voucher records the date, reason for the expenditure, amount of expenditure and person incurring that expenditure.
6. Petty cash is counted every month by the accounts clerk, who is in charge of the cash.(5) The petty cash balance is then reimbursed using the ‘imprest’ system and the journal entry produced to record expenditure in the general ledger.
7. The cheque to reimburse petty cash is signed by the accountant at the branch at the same time as the journal entry to the general ledger is reviewed.

Weaknesses and resolutions.

(1) Petty cash is too large = 3 months expenditure, roughly! Makes it more likely that the cash will be stolen, or errors will not be identified. Resolve this by reducing the cash amount to about £2,000, which is around one month’s expenditure.

(2) Petty cash is being used for some rather large amounts of expenditure, costing up to £500. Resolve this by setting a limit of £50 as a petty cash withdrawal limit.

(3) The petty cash box location is not secure enough. Keep it in a safe or a locked drawer instead.

(4) Only one signature for the petty cash vouchers indicates a lack of authorisation control for such expenditure. Resolve this by ensuring all vouchers are signed by an independent official.

(5) Only the accounts clerk counts the petty cash. There is no independent check! Resolve this by ensuring the petty cash count is reviewed by the accountant, to make sure the clerk is not stealing the petty cash.

ALSO NOTE:

A 6th weakness. Petty cash vouchers are not pre-numbered. This makes checking completeness difficult. Resolve this by pre-numbering the vouchers and recording said numbers in the petty cash book.

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Hope this helps!