Question

-Why cash is considered as high inherent risk?
-What is the different between disposal and impairment of non current (fixed) asset?
-Mention some test of control regarding inventory and payment cycle!
-Provide example of each management fraud and employee fraud regarding cash account!

Answer 1

Answer:-

- Cash is considered as high inherent risk :- Because of two inherent risk factors are:-

• The susceptibility to theft :-  Cash is always considered to be inherently risky because it’s prone to theft and misappropriation
• Employee competence :-Management inexperience and incompetence plays a big part in the inherently risky nature of cash. Part of your job when assessing the risk of cash misappropriation is to get to know the type of job your client’s managers are doing.

- Different between disposal and impairment of non current (fixed) is:-

• Disposal of non-current fixed assets :-When a non-current asset is sold, there is likely to be a profit or loss on disposal. This is the difference between the net sale price of the asset and its net book value at the time of disposal.

A profit on disposal is shown in the statement of profit or loss as sundry income, a loss as an expense in the statement of profit or loss.

• Impairment of non current fixed asset :-Long-term assets, such as intangibles and fixed assets, are particularly at risk of impairment because the carrying value has a longer span of time to become impaired. Assets are tested for impairment on a periodic basis to ensure the company's total asset value is not overstated on the balance sheet.

- Some test of control regarding inventory and payment cycle are :-

• Test of control regarding inventory are :-
  • ​​​​​​​​​​​​​​​​​​​​​Observe physical security of inventories and environment in which they are held.
  • Test procedures for recording of inventory movements in and out of inventory.
  • Test authorization for adjustments to inventory records.
  • Test authorization for write-off or scrapping of inventories.
• ​​​​​​​Test of control regarding payment cycle are :-
  • ​​​​​​​Proper authorization of purchases.
  • Separation of asset custody from other functions.
  • Timely recording and independent checking of purchase and payment transactions.

- Example of each management fraud and employee fraud regarding cash account are :-

• Example of employee fraud regarding cash account are:-
  • ​​​​​​​Theft of cash

  • Unauthorized billing, money transfers and overpayments

  • Kickbacks, bribery and overbilling

• Example of managment fraud regarding cash account are:-
  • ​​​​​​​Cash Larceny - Cash larceny concerns an individual blatantly stealing cash after it has already been entered into records. A common example would be a theft that occurs while a business’s cash deposit is en route to the bank
  • Cash Register Disbursement -Cash register disbursement schemes usually take one of two forms, and sometimes occur as a form of skimming like - False returns
  • Unrecorded sales: Not entering a sale into a register and pocketing the cash instead.
  • Skimming - Skimming, in its most basic form, consists of taking company funds before they are recorded. Unlike cash larceny, which occurs after the funds have been documented, skimming happens prior to asset notation, making this type of fraud harder to detect.