Accounting Information Systems: The Processes and Controls, 2nd Edition

RISKS AND CONTROLS IN THE CASH DISBURSEMENT PROCESSES (STUDY OBJECTIVE 4, continued)

AUTHORIZATION OF TRANSACTIONS

Only the accounts payable department should authorize the processing of a cash disbursement transaction, according to the need to satisfy a vendor obligation. The authorization occurs when the accounts payable department matches the purchase order, receiving report, and invoice, and then forwards these matched documents to the cash disbursements department. In addition, designated members of management should be given responsibility for authorizing the actual payments by their signatures on the face of the check. This means that only one or a few people should have check-signing authority. The bank will keep records of the signatures of those authorized check signers and should not pay a check unless it bears the signature of an authorized party. Finally, all bank accounts that are established in the company's name should be authorized by the board of directors.

Many companies establish special cash disbursement authorization policies and procedures applicable to large checks whereby a dual signature requirement is in place for checks over a specified dollar amount. Dual signature means that two people sign the check. This additional control requires the approval and signature of two authorized persons, thus reducing the risk of a significant fraud or error. The company's bank plays a crucial role in enforcing this policy, as it must not pay checks over the threshold ...