The Vanishing Petty Cash and the Segregated Duties Problem
You are the newly appointed finance manager at Brightwell Facilities Ltd, a small cleaning contractor with a £2.4m turnover. The company runs a £500 impounded petty cash float, topped up monthly on a fixed imprest basis. On your first week you reconcile the tin: vouchers total £318.40, coins and notes total £141.60, and the float should be £500. The previous finance manager, Derek, left three weeks ago. You discover that Derek both raised the petty cash vouchers and signed the monthly imprest top-up cheque, and that the office administrator, Priya, cashes the top-up cheque and holds the tin. There is no independent review of the reconciliation. Staff submit receipts sporadically, and several vouchers are handwritten on plain paper with no supporting receipt. Derek's final month shows a £40 'stationery' voucher with no payee and a £65 'client hospitality' voucher signed only by Derek himself.
1. Quantify the petty cash discrepancy and explain the control weaknesses that allowed it to arise.
Read the worked answer
Reconciliation: Float £500.00 − vouchers £318.40 − cash £141.60 = £40.00 short.
Control weaknesses:
- No segregation of duties. Derek raised vouchers and authorised the top-up cheque; Priya cashed the cheque and held the tin. One person can therefore create a voucher and extract cash with no second pair of eyes.
- No independent reconciliation. Nobody other than Derek reviewed the imprest reconciliation, so a £40 shortfall went undetected.
- Weak supporting documentation. Handwritten vouchers without receipts breach the 'no receipt, no payment' principle and make the £40 'stationery' voucher unverifiable.
- Self-authorisation. The £65 hospitality voucher signed only by Derek is a conflict of interest - the authoriser is also the beneficiary.
Root cause: a single point of control failure (Derek + Priya acting without independent oversight) combined with poor documentary evidence.
2. Recommend the specific controls you would implement to prevent recurrence, and explain how you would investigate the £40 shortfall and the two suspicious vouchers.
Read the worked answer
Preventive controls:
- Segregate duties: the person who prepares vouchers must not authorise the top-up; the person who holds the tin must not be the sole reconciler.
- Independent monthly reconciliation signed off by the finance manager (you), with the reconciliation filed and reviewed quarterly by the directors.
- Imprest discipline: top-up only to the value of supported vouchers; reject any voucher without a receipt.
- Voucher standards: pre-numbered vouchers, payee, purpose, date, amount, receipt attached, and a second signature for any voucher over £25.
- Authorisation matrix: hospitality and entertainment require director approval; staff may not approve their own expenses.
Investigation of the £40 and suspicious vouchers:
- Treat the £40 as a cash loss pending investigation; do not simply write it off.
- Request the missing receipts and, failing that, treat the vouchers as unsupported and recover from the responsible party if policy allows.
- Interview Priya and Derek (Derek's departure is a red flag - consider whether the shortfall predates it).
- Review the last 12 months of reconciliations for a pattern of small shortfalls.
- Escalate to the directors and consider whether a fraud referral is warranted; document findings.
- Restate the petty cash policy and retrain staff.