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Audit of Cash and Other Liquid Assets

In: Business and Management

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Solutions for Chapter 12

Audit of Cash and Other Liquid Assets

Review Questions:

12-1. It is important that cash and liquid asset testing be coordinated because the assets can be quickly moved and thus substituted for each other. For example, an organization could quickly move assets between cash and certificates of deposit.

12-2. General Cash Account. This is the account used to transact most of the organization's cash transactions. It is usually a high volume, but low balance account. Because of its high volume and its liquidity it is susceptible to greater risk than most asset accounts of the same size.

Imprest Payroll Account. This is an account that is maintained strictly for the payment of payroll. The organization makes a deposit equal to the monthly or weekly payroll at the time the payroll checks or electronic transfers are issued. The account is used to minimize accounting costs and to isolate payroll risks to one account.

12-3. We disagree with the auditor's assessment of inherent risk of cash transactions as low. Granted, the accounting for cash and marketable securities is not overly complex. However, the liquidity of the accounts, coupled with their susceptibility to fraud or misappropriation, makes the inherent risk of the accounts at least moderate - if not high. Most organizations recognize the high inherent risk associated with the accounts and have implemented detailed control procedures to reduce control risk to a minimal level.

12-4. Cash, when well managed, is not a large balance account at year-end. However, it is susceptible to fraud because (1) it is a high volume account during the year, and (2) it is liquid and thus easily susceptible to defalcation or other fraudulent schemes if a sufficient control structure is not instituted. The types of fraud that may occur with cash and the types of audit procedures that may…...

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