Audit and Assurance Practice Exam

Why is it important to separate duties related to cash transactions?

1. To enhance employee morale

2. To reduce the risk of fraud and errors

3. To speed up transaction processes

4. To comply with regulatory requirements

The correct answer is: To reduce the risk of fraud and errors

Separating duties related to cash transactions is crucial primarily to reduce the risk of fraud and errors. This practice, often referred to as segregation of duties, involves dividing responsibilities among different employees to ensure that no single individual has control over all aspects of any financial transaction. By implementing this separation, organizations can create a system of checks and balances, where the actions of one employee are monitored by another. For example, if one employee is responsible for recording cash transactions and another is responsible for reconciling those transactions, it becomes significantly harder for any fraudulent activity to go unnoticed. This division makes it more difficult for an individual to misappropriate funds without detection, as collusion would be required to bypass established controls. Moreover, this practice helps in minimizing errors that could occur if one person were to manage all aspects of cash handling. Human error is unavoidable, and having multiple layers of oversight can catch mistakes before they impact the financial statements. While the other options might touch on aspects relevant to organizational operations, they do not capture the primary reason for the importance of separating duties in cash transactions as effectively as the focus on fraud and error reduction. Enhancing employee morale, speeding up transaction processes, and complying with regulatory requirements may be secondary benefits, but the primary concern