Businesses that maintain petty cash to pay for small, on-demand necessities should implement proper petty cash audit testing procedures to ensure that employees use petty cash for appropriate reasons and properly account for the petty cash as used. Whenever possible, an individual who does not have access to the petty cash should be the person responsible for auditing petty cash.
Petty cash audits should be conducted randomly and without notice to other employees. Without random audits, employees who are “borrowing” from petty cash for personal reasons have time to put the money back in place before you audit the funds.
Balancing the petty cash in the box or drawer is the first step in auditing. The total of all petty cash plus the receipts for items petty cash was used to pay for should equal the total amount of petty cash held for use. For example, if you maintain $500 in petty cash and have $150 in receipts for petty cash expenses, you should have $350 in cash remaining in the drawer. Unaccounted for money or receipts should be noted in an audit report, and all employees with access to petty cash should be questioned about the difference.
Every receipt should clearly explain the item(s) purchased. If the item(s) purchased is not clear from the receipt itself, the item(s) should be noted in writing on the receipt along with any explanation necessary for the expense. Each item purchased should represent an appropriate use of petty cash funds and be approved by a manager or supervisor, as set forth in your company policies. Any inappropriate use of petty cash, such as for personal items, should be noted in your report. Any use of petty cash to cover normal operating expenses should be noted in your report and explained by the employees so that you can determine if changes should be made to operating procedures to cover those costs another way.
Every petty cash expense should be properly reflected on the accounting general ledger. Check the receipts for the explanation of the expense, and verify that the expense was posted to the proper general ledger expense account.
Whenever possible, you should ask to see the item(s) purchased with petty cash, especially in the case of non-consumable goods. If employees used petty cash to purchase small equipment or other non-consumable necessities, the employees should be able to show you the location of the item(s).