Audit and Assurance Practice Exam

Which factor contributes to the inherent risk of cash being assessed as high?

1. Cash is more susceptible to errors due to its fluid nature.

2. Cash accounts are less monitored than other accounts.

3. Errors can only be identified at the end of the fiscal year.

4. Cash cannot be easily manipulated.

The correct answer is: Cash is more susceptible to errors due to its fluid nature.

The inherent risk of cash being assessed as high is influenced by its fluid nature, which makes it more susceptible to errors. Cash transactions occur frequently, and the high volume and rapid movement of cash can lead to greater chances of misstatements due to human error or oversight. For example, miscounting cash, failing to record cash transactions, or errors in reconciliation can all arise from the fast-paced nature of cash management. Additionally, cash is often involved in various types of transactions, providing opportunities for mistakes that might not occur in less dynamic areas of financial reporting. Therefore, the fluidity of cash inherently increases the risk, leading auditors to assess that risk as high when considering how to approach the audit of cash accounts. This understanding emphasizes the importance of employing strong internal controls over cash and conducting thorough audits to mitigate this inherent risk.