Petty Cash

Petty Cash

10 Oct 2015

From an audit perspective, the petty cash fund is not so petty. That’s because fraud tends to happen more often in the cash disbursement cycle than in the cash receipt cycle. And since petty cash funds are typically low dollar amounts and not material in nature, auditors do not spend much time reviewing this area. If school district management does not ensure there are strong internal controls over the petty cash fund that include Board approved policies and procedures, separation of duties, acceptable uses for disbursement, and proper and timely reconciliation, an employee may take advantage of the lack of controls leading to theft of cash and/or improper or inappropriate expenditures made using petty cash.

School districts often establish low-dollar petty cash funds (typically $100) for various district administrators to use for the purchase of materials, supplies, or services under conditions requiring immediate payment or for emergency purposes. Generally, the Board appoints a treasurer or custodian responsible for the petty cash fund at the beginning of the school year, and indicates the dollar amount of each of the petty cash funds. Payments made from petty cash should not circumvent the district’s purchasing policy and procedures. The Board is responsible for establishing effective cash disbursement policies and procedures to ensure that disbursements are properly documented, audited and approved. In addition, adequate controls over the petty cash system are required to prevent unnecessary and improper payments.

The effectiveness of the internal controls over the petty cash fund is usually a good indicator for how well the internal controls function in other areas of the organization. Poor controls over petty cash create doubt in the auditor’s mind about other sensitive areas that may also be lacking internal control and are thus more susceptible to theft or fraud. Here are four key points to consider to protect your petty cash and ensure your district is reducing the risks associated with petty cash.

POLICY:

The first place to start is by having a Board approved policy for petty cash funds that includes specific procedures that are to be followed. The purpose of the policy should be to inform employees of the specific procedures that are to be followed for the disbursement of petty cash, as well as the permitted uses of the fund. Dollar amount thresholds, examples of permitted purchases, support documents and approvals required, and replenishment procedures should be included.

SEGREGATION OF DUTIES:

Responsibility for the petty cash fund should be assigned to only one employee. As the petty cash custodian, this employee should handle all petty cash transactions and should secure the fund in a locked location separate from other cash. While a back-up custodian is often assigned, restricting access to the petty cash fund is the best way to prevent unauthorized use or theft of petty cash. Reconciliation of the fund should be performed by someone who does not have the ability to disburse funds. Replenishments should require the approval of a supervisor who is independent of the cash disbursement process. In a small operation, where complete segregation of duties is not possible, active supervision and oversight become even more important components of an effective internal control system.

DISBURSEMENT PROCEDURES:

To ensure the funds are properly managed, payments need to be controlled. Purchases made with petty cash funds or that are being reimbursed through petty cash should follow the district’s purchasing policy and procedures , which includes not paying sales tax on purchases and purchasing items that are considered school related. Petty cash should not be used to pay invoices for goods or services that would be subject to quotes or bids as per General Municipal Law, pay for employee wages, or be used for advances or loans to anyone. Disbursements should be supported by original itemized receipts. Checks should not be made to “cash”. Replenishment of the fund should include all supporting documents as to the nature of the expenditure. To further strengthen the disbursement process, the petty cash replenishment request should be reviewed by the claims auditor, and should include all the support of the expenditures to detect if improper petty cash expenditures have occurred, and to ensure the expenditures are consistent with law.

RECONCILIATION:

The custodian should be maintaining a record of all transactions along with receipts that support the expenditures. The cash-on-hand plus all receipts expended out of the current funds (‘unreimbursed receipts”) should always total the authorized fund amount. The custodian of the petty cash fund should reconcile the petty cash on-hand and unreimbursed receipts to the petty cash amount authorized by the Board. Petty cash funds must be closed out by June 30 of each school year and reestablished by Board in the following school year. Independent surprise reviews are a good way to keep all parties honest and help to ensure that the petty cash fund levels are intact. The reviewer must be independent from the custodian and arrive without prior knowledge of the custodian.

While the petty cash fund seems immaterial because the dollar value is so low, the account is important because it provides crucial insight on how a school district manages their internal controls. If a district cannot keep track of an account known to be vulnerable to theft that is small in amount, it suggests that other more complex accounts are at risk.


This article was also featured in our newsletter Lesson Plan Vol. 13