Professor Adams' Lecture Materials

LO6-5: Identify important internal control activities present in a properly designed system to mitigate the risk of material misstatements for each relevant assertion related to cash and to help prevent or detect employee fraud.

Auditors assess controls based on financial statement assertions, identifying risks and relevant control activities.

Because cash is highly liquid and easily misappropriated, strong controls over cash receipts and disbursements are essential.

Dual Custody – Two employees should open mail containing cash receipts.
Immediate Endorsement – Checks should be endorsed upon receipt.
Daily Deposits – All cash should be deposited intact daily, with no funds withheld.
Segregation of Duties:
Cash handling should be separate from record-keeping.
The accounting department should record cash transactions independently.
Lockbox Arrangement – Using a third-party (bank) to collect payments reduces the risk of internal theft.

Authorized Signatures – Only designated officers should sign checks.
Sequentially Numbered Checks – Prevents unauthorized checks from being issued.
Voucher System – Payments should be authorized only after proper documentation is reviewed.
Timely Bank Reconciliations – An independent employee should prepare and review bank reconciliations monthly.
Review of Electronic Payments – Strong password controls and multi-factor authentication should be enforced.

Auditors perform tests of controls to evaluate effectiveness. Common tests include:

By implementing these internal controls, organizations reduce fraud risks and ensure accurate financial reporting.

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