Question

Cash is received by a bookkeeper, and the bookkeeper makes the deposit and records the cash transaction in the accounting records.  Is this an example of strong or weak internal controls? Please explain.

Answer 1

Cash is received by a bookkeeper, and the bookkeeper makes the deposit and records the cash transaction in the accounting records. This is an example of weak internal controls because the one who is receiving the cash is himself recording its entry in the books of accounts. No other person is involved in this process of receiving the cash and recording it in the accounting records. One person should not be allowed to process an entire transaction from start to end, so as to establish strong internal control system

One can easily do fraud in this type of situation. For example, if bookkeeper receives the cash but he does not record the same in the books of accounts. Bookkeeper may pocket this cash for himself and nobody will ever know that cash is received. Second way of making fraud is that bookkeeper may under report the cash received. For example, if bookkeeper receives $ 120 as cash but he reports only $100 in the accounting records by this bookkeeper can easily pocket $20 for himself. There can be an additional control that the bookkeeper should issue receipts against the cash collected. This cash receipt book can be later on tallied up with books of accounts. But it may happen that bookkeeper may not issue receipts for some cash receipts and bookkeeper will not record it in books of accounts too.

If there are two or more persons involved in receiving the cash and recording it in the books of accounts then chances of fraud are less. Fraud can not take place until and unless all the people involved in the transaction are willing to commit the fraud. This is a sign of strong internal control. Probability of fraud can be eliminated to a great extent.