Objectives of examining cash transactions, cash funds and cash balances in banks is to establish

the validity and propriety of the cash transactions and to properly state the cash and hand for
purposes of financial statement presentation. Cash is no more valuable than any other asset of
equal current market price. The examination of cash and cash transaction is important because
cash is a favorite item for theft: the majority of all business transactions involves a cash count or
terminates in it. Error in any account can result in errors in cash accounts, and errors in cash
accounts indicate probable errors in other account principally account payable debit sand account
receivable credits (Arthur W. Homes: 1966).

2.3. Internal control over cash receipts

Cash receipts are the main part of the revenue generating cycle and with a high possibility of
misappropriation. The accuracy of the recorded receipt as well as the omissions of some receipts
before recording must be the area where the auditor has to concentrate and give a high priority.
(Arthur W. Homes: 1966)

Cash receipts may result from a variety of source: cash sales, collections on account from
customers; the receipt of interest, rents and dividends, investments by owners bank loans; and
proceeds from the sales of noncurrent assets. (John W. Cook year : 1980)

2.3.1. Cash Sales

Control over cash sales is strongest when two or more employees (usually) sales clerk and a
cashiers participate in cash transaction with a customer Restaurants and cafeterias often use a
centrally located cashier. In many retail establishments, the nature of the business is such that
one employee must make over the counter sales, deliver the merchandise, receive cash, and
record the transaction in this situation dishonesty may be discouraged by proper use of cash
registers electronic point of sales system. (O. Ray Whittington and Kurt pany; 2001 P. 386)

2.3.2. Electronic Points of Sale

Many retail stores use various types of electronic cash registers, including online computer
terminals. The sales person need only scan the code for the register to record the sales at the
products price which is stored in computer. Thus, the risk of a sales person recording sales
person recording sales at erroneous price is substantially reduced. Besides providing strong
control over cash sales, electronic registers often may be programmed to perform numerous of
the control function (O. Ray Whittington and kurt pany 2001,p.386).

2.3.3. Collection from credit Customers

In many manufacturing and whole sales companies, cash receipts include many checks received
through the mail. This situation poses little threat of defalcation unless one employee is
permitted to receive and deposit these checks and also to record the credits to the customer’s
accounts. (O. Ray Whittington and kurt pany 2001, p. 286)

The control system must allow the incoming mail to be opened in the mail to be opened in the
mail room where the employee prepares a control listing of the incoming cash receipts which
shows the amount received and identify the customers by name and account number. One copy
of the control listing will be forwarded to the controller another copy to the cashier and the
remittance advices and control list will be given to the employee who is responsible for the
customers accounts. (O. Ray Whittington, and Kurt Pany 2001, p. 289)

2.4. Cash Disbursements

Cash may be disbursed for a variety of reasons such as to pay expenses and liabilities, or to
purchase assets. Generally, internal control over cash disbursements in more effective when
payments are made by check, rather than by cash, excepts for incidental amounts that are paid
out of petty cash. Payment by check generally occurs only after specified control procedures
have been followed in addition, the “paid’ check provides proof of payment. (Weygant, Kaiso
and Kimmel 1999 ,p. 290)

Cash disbursements are the out flow of money from the organization for the services or goods
received in verifying the cash disbursement records, all items are not selected. Some individual
items will be selected for sampling and using the sampling techniques the records will be tested.
The items will include check register, vender’s invoices, contracts and agreements. (Kaiso,
Weggant and Kimmel 1999, p. 290)
2.4.1. Control of a voucher system
Most medium and large companies use a voucher system as a part of their internal control over
cash disbursements. A voucher system is an extensive network of approvals by authorized
individuals acting independently to ensure that all disbursements by check are proper.

The system begins with the authorization to incur the cost or expense and ends with the issuance
of a check for the liability incurred. A voucher is an authorization form prepared for each
expenditure in a voucher system. Vouchers are required for all types of cash disbursements
except those petty cash. The voucher is prepare din the account payable department. (Kaiso,
Waygent, Kimmel; 1999,p.290)

2.4.2. Electronic Funds Transfer System

Electronic funds transfer is a disbursement system that uses wire, telephone, telegraph, or
computer to transfer cash from one location to another. Use of electronic funds transfer is quit
common. For example the authors receive no formal payroll checks from their universities.
Which simply send magnetic tapes to the appropriate banks for deposit. Regular payments such
as these for house, car or utilities are frequently made by electronic funds transfer. (Kaiso,
Weggant and Kimmel: 1999 p. 290)

Financial institutions have developed electronic fund transfer system that process funds related
from sections for customers as an alternative to paying by checks increasingly, electronic data
interchange systems, which always the interchange of data from one company’s computer to
another’s are electronically transferring funds between companies bank account. (Kaiso,
Waygent and kimmel; 1999, p. 292)

2.5. Internal control of petty cash funds

Internal control over payments from an imprest petty cash fund is achieved at the time the fund is
replenished to its fixed balance rather than at the time small amounts of cash are handed out.
When the custodian of a petty cash fund requests replenishment of the fund, the documents
supporting each disbursement should be reviewed for completeness and authenticity, and defaced
or perorated to prevent rouse. Audit tests of petty cash emphasize transactions rather than the
year – end balance. (O. Ray Whittington and Kurt Pany 2001 ,p. 392)