Explain how internal controls affect the liquidity of a company.

Expert Solution

As we know that internal controls is very useful tool in proper financial reporting system of company. Although it is also true that audit is very vital tool to identify accounting faults & mismanagement but only audit can not save everything that is why internal controls become very necessary for fair accounting reporting system.

When we talk about the liquidity then internal controls helps in managing liquidity of a company. Internal controls continue throughout the year that is why internal will be very useful in keeping cash & cash equivalents safe. In practice we see that there are several ways of mismanagement of cash & cash equivalents, employees of a company can be seen making fraud with the cash & cash equivalents for their personal uses that is why such fraud of cash & cash equivalents may negatively affect liquidity of a company.

In case of internal controls, we see that a company can make proper management of cash & cash equivalents with the help of various internal controls tools that is why it is true that internal controls helps in managing liquidity of a company.

A company can make cross checking of cash & cash equivalents, can properly divide responsibility of work amongst employees so that cash can not be misused by the employees and other stakeholders inside the company. Hence it is true that internal conntrols affect liquidity of a company.

ekkarill92 answered 1 year ago

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