Audit and Assurance Practice Exam

What action can help mitigate fraud risk in cash management?

1. Allowing one person to handle all cash transactions

2. Implementing regular financial audits

3. Using a single bank account for all transactions

4. Reducing the number of cash transactions

The correct answer is: Implementing regular financial audits

Implementing regular financial audits is a crucial action that can significantly mitigate fraud risk in cash management. Regular audits serve as a control mechanism to ensure that all financial activities are being scrutinized and verified. This involves thorough examinations of cash receipts, disbursements, reconciliations, and overall compliance with the established financial policies. By having periodic audits conducted by independent auditors, discrepancies can be identified early on, and any irregularities can be investigated promptly. This process increases transparency within cash management operations and fosters accountability among employees. Moreover, the knowledge that audits will occur acts as a deterrent to potential fraudulent behavior, as individuals are less likely to engage in dishonest activities if they know there will be checks and balances in place. Other options, such as allowing one person to handle all cash transactions or using a single bank account for all transactions, can actually increase the risk of fraud because they reduce oversight and segregation of duties, which are important components of effective internal controls. Reducing the number of cash transactions may help to some extent but does not provide the same level of oversight and risk management as regular audits. Thus, the implementation of regular financial audits is a best practice for maintaining the integrity of cash management systems.