Referat tekshirdi: Oblomurodov N. Bajardi: Umarov F. Plan: Audit Cash

Trainable of Fraud

Incentive	This is the case when the staff of the company thinks they should be incentivized. This is usually related to fraud committed by the person who thinks they are being paid too low which is not enough for their hard work or they are having a personal problem. For example, the staff involving in cash transactions think their payment is too low or they are having a personal problem, so they commit fraud by stealing cash as an incentive to compensate for their work or their personal problem.
Opportunity	This is related to the week controls of cash which gives the opportunity to the person related to cash transactions to commit fraud. In this case, the persons commit fraud are usually not due to their personal problem or their thinking of being paid too low but due to the opportunity is given to them to commit fraud. For example, there is only one person receiving cash and recording it in the accounting system. Hence, that person alone may commit fraud by not record in the system or record less amount of cash received from customers. This is due to the person has the opportunity to do so.
Rationalization	This is related to fraud committed by the staff which they think it is fine to do so. This is usually due to the poor environment in the company especially those related to tone at the top. For example, the management take out the cash without properly recording or there were cases of misappropriations of cash before, but they were ignored by management due to various reasons. Hence, it leads to staff rationalize that committing fraud by stealing some cash is fine.

Risk of Material Misstatement: Control Risks for Cash

Control risk is the risk that internal controls cannot prevent, detect or correct material misstatement that could occur on financial statements. Usually, when the inherent risk for cash is high, auditors would try to assess if the internal control is strong, so that they can tick the control risk as low and reduce the risk of material misstatement for cash.

Similar to inherent risk, auditors cannot modify the control risk that the client has; they can only assess whether it is low, moderate or high and perform their work based on the level of risk they have with the client’s cash account. Also, as risk of material misstatement for cash is the combination of inherent risk and control risk, auditors cannot control or modify the level of risk of material misstatement for cash either.

The level of control risk for cash depends on how strong and effective the internal controls on cash that the client has in place. The segregation of duties and authorization are usually the most important internal controls for cash as well as many other financial line items.

For example, the control risk is usually high if there is no proper segregation of duties and authorization controls in the company. If the control risk and inherent risk for cash are high, the risk of material misstatement for cash will be undoubtedly high. Since auditors cannot modify the risk of material misstatement for cash, they can only try to lower the detection risk so that their audit risk can be acceptably low in this case.

Besides the segregation of duties and authorization controls, there are many more internal control procedures that can help reduce the control risk in the client. Below are the common control procedures for cash that can help prevent or detect error or fraud in the cash account: