Audit and Assurance Practice Exam

Which statement about inherent risk in cash accounts is true?

1. Auditors are indifferent to cash overstatements

2. Auditors must test controls over cash accounts

3. Cash accounts have a low level of inherent risk

4. Controls over cash accounts are unnecessary

The correct answer is: Auditors must test controls over cash accounts

The statement that auditors must test controls over cash accounts is true because cash is often considered to be one of the most susceptible areas to misappropriation and fraud within an organization. Given the high volume of transactions typically associated with cash, as well as the ease of diversion or manipulation, auditors need to ensure that there are adequate internal controls in place to safeguard these assets. Testing these controls allows auditors to assess whether the organization is effectively managing the inherent risks associated with cash transactions, thereby ensuring both the accuracy and reliability of the financial reporting related to cash. Inherent risk refers to the risk of material misstatement in an account without considering the effectiveness of internal controls. Cash accounts typically have a high level of inherent risk due to factors such as the potential for loss, theft, or unauthorized transactions. Thus, while not every situation may require an equal level of control testing, substantial attention must be given to cash accounts to mitigate these risks effectively.