Transferability
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Cash is the asset that can be easily transferred between branches or countries. The ease of cash transfer can make it more prone to fraud or illegal activity such as money laundering. Without proper authorization control on the cash transfers, including the transfer in electronic form, can lead to the misstatement of cash due to fraud, either by an individual or a group of staff in the company.
In the case of money laundering, the transferring of cash from one bank to another is an example of trying to create the complicated transactions and cover up the trace so that auditors find it difficult to find out the truth of such transactions. It is called layering, the second stage of money laundering.
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Liquidity
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Cash is the most liquid asset in the company’s balance sheet. As a result, cash may be the most susceptible to fraud comparing the other assets in the company.
In this case, cash can be easily transferred from one place to another comparing to other assets like machinery. This is probably the unique reason why cash is high-risk comparing to are other assets in the company.
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Debt Covenant
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In general, cash is usually tied to the debt covenants which lenders place on the company as their protection. They usually do this to ensure that they have a high chance of receiving their money back from the company.
The debt covenants here may including the requirement that the company needs to maintain a certain level of cash in comparing to the total assets or to maintain minimum levels of working capital etc. As a result, management may manipulate cash account to have a certain level of cash presented on financial statements in order to meet the debt covenants.
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Theft
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Cash is considered an asset that is most prone to theft, either from internal or external people. The high risk of cash here is that it may be manipulated and stolen by the staff with high authority.
Without proper cash controls in place, the client’s staff temptation to steal cash may be high, especially if they are facing a personal financial problem.
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