Petty Cash, Petty Risk?

Most organizations hold a petty cash fund, which can be very convenient for the business, in terms of purchasing products and services without going through the cheque approval and writing process.

Unfortunately the convenience of having petty cash available on the premises could lead to an increase in risk for the business and even over-looked by management and internal auditors because of the size of the fund.

What is Petty Cash?

Petty Cash is a small amount of cash held at the business for small expenses that may occur during the operational period of the business. The size of the petty cash fund ranges with the size of the business and the amount and size of transactions the fund is used for. Typically petty cash funds range from about $200 to as much as $2000 or more.

Petty cash should be operated via an imprest system, whereby the amount of the fund is decided on and then reconciled and reimbursed either on a monthly basis or more frequently to bring the fund back up to the agreed amount.

Therefore if the petty cash fund is $500 and at the end of the month $125 is left in the fund, a cheque will be prepared for $375 to replenish the fund back to $500 and the process continues.

Risks of Holding Petty Cash

Even though the petty cash fund is relatively small, the risks are still inherent and internal audit do need to still monitor this asset and the process. The risks range from operational risk to fraud risk.

Some of those risks include:

• Theft or Misappropriation: The access to the fund could lead to employees borrowing monies for their personal use and attempting to cover it up before the fund is replenished.
• Custodian or employee error: Because of the ‘immaterial’ size of the fund, employees may not be as stringent in their management of the monies, the petty cash vouchers and the supporting documents. This could lead to errors that may go un-noticed for a period of time.
• Use for Unauthorized Expenses: Because of the ease of access to petty cash funds, there may be some use of the petty cash monies for expenditure that should go through the cheque disbursement process. There should be a maximum amount that petty cash funds should be used for. Anything over that amount, should go through the cheque process.

Reducing and Avoiding Petty Cash Risks

The risks that arise in the petty cash process can easily be controlled, but those controls have to be monitored and tested on a regular basis.

To mitigate these risks, procedures must be documented and staff, especially the custodian must be trained on the processes for the fund.

Procedures should be as below:

1. The Petty cash fund must be established through the writing of a cheque from the organisation’s operating bank account.
2. The Petty cash fund should be held be a one custodian, who is responsible for issuing the monies and managing the fund.
3. The custodian should hold the petty cash monies in a locked cash box in a secure location. The custodian must have the keys to the cash box on their person at all times.
4. Petty cash vouchers must be pre-numbered and used in sequential order.
5. The vouchers should be designed so as to include the name of the vendor, the date, the amount, the memo as well as spaces for the signatures of the custodian and the recipient of the cash.
6. The vouchers must be signed/approved by the custodian as well as signed by the person receiving the funds.
7. The 3^rd party supporting documents must be attached to the respective vouchers and the vouchers must be subsequently stamped “Paid” to indicate that they have been used.
8. The vouchers should be recorded in a Petty Cash Journal, whether a manual journal or a simple Excel spreadsheet. The Journal should mirror the information on the vouchers for ease of reconciliation.
9. The Fund should be reconciled on a monthly basis or earlier, if necessary. The vouchers and the unused monies should always total the amount of the Fund.

Even though petty cash is considered financially immaterial in terms of size and risk, internal auditors need to monitor the controls and regularly spot-check the fund to ensure that the organization’s cash is handled correctly.

Petty cash could be considered petty risk but because the lack of petty cash controls could lead to more serious risk issues for the organization, it is vital that the petty cash fund is monitored on a continually basis.