Most Liquidity Asset
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Cash is the most liquid asset in the balance sheet comparing to other assets. Hence, it is most susceptible to fraud as it is easily taken out or transferred between one bank account to another with the electronic transfer.
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Debt Covenant
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Most of the time, cash is tied to the debt covenants when the company borrows money from the banks or other lenders. This will put pressure on the management of the company in handling the cash in the company.
For example, debt covenants might require the company to maintain a certain percentage of cash compared to its total assets or its equity. In the case of a cash shortage, the management may try to manipulate the cash account to meet the requirement of the covenants.
This is a serious case as the company may face going concern issues if there is a breach of covenants and lenders demand all their money back at once.
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Prone to Theft
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Cash is most prone to theft either from internal staff or external people if there are no proper controls in place. Though, the main concern related to cash thief here is the internal thief as it is usually related to the triangle of fraud whenever fraud and theft happen.
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It is useful to note that inherent risk is outside the control of auditors, so they can only assess and determine if the inherent risk for cash is low, moderate or high. And if the level of inherent risk here is high, the level of risk of material misstatement for cash is likely to be high unless the control risk is very low.
Fraud Risk for Cash
In assessing the fraud risk for cash, auditors usually consider the three factors of fraud which is also known as a triangle of fraud. These include incentive, opportunity, and rationalization.
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