Audit and Assurance Practice Exam

What is a potential risk when electronic transfers are involved in cash handling?

1. Errors could be compounded due to the volume of electronic transactions.

2. It allows for easier manual control of cash flow.

3. Transactions can be executed without authorization.

4. It reduces the need for bank reconciliations.

The correct answer is: Errors could be compounded due to the volume of electronic transactions.

The concern regarding cash handling in the context of electronic transfers primarily revolves around the potential for errors, particularly as the volume of transactions increases. When a business processes a high number of electronic transactions, the risk of misentries, system errors, or failures in data transmission can lead to compounded inaccuracies in financial records. This is especially true when automation is involved, as even a small mistake can escalate into significant discrepancies if not caught promptly. Furthermore, with electronic transfers, reliance on technology means that if a process fails or generates incorrect data, the effects can ripple through the accounting system, making it challenging to trace and rectify mistakes. The volume also complicates oversight because it becomes more difficult to monitor every individual transaction compared to manual processes. Therefore, understanding and mitigating this risk is critical for maintaining the integrity of cash handling in an organization.