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What situation should raise concern about the possibility of fraud for an internal auditor?
Cash receipts are deposited in the bank daily.
The monthly bank statement reconciliation is performed by the same employee who maintains the inventory records.
The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are maintained by the same person.
One person has sole access to the petty cash fund.
The correct answer is: Cash receipts are deposited in the bank daily.
The correct answer identifies a red flag that could indicate a potential fraud risk. When cash receipts are consistently deposited in the bank daily, it may seem like a best practice of maintaining cash flow and ensuring accountability. However, frequent deposits could also suggest that there is an effort to conceal cash transactions or manipulate cash balances. If an individual has the opportunity to process cash receipts and deposit them without oversight or independent verification, it raises questions about their ability to misappropriate these funds without detection. In contrast, the other situations present more definitive concerns. For example, having the same employee perform both the bank reconciliation and maintain inventory records creates an opportunity for that individual to manipulate records and conceal discrepancies. Likewise, when one person manages both accounts receivable and accounts payable ledgers, it could lead to the misappropriation of funds since there is no separation of duties to catch errors or fraudulent activity. Similarly, sole access to petty cash by one individual also creates significant risk because it enables that person to control cash disbursements without oversight, increasing the chances of fraudulent manipulation. Thus, the observation of daily cash deposits by a single individual could signify a broader attempt at covering fraudulent activities, making it a situation that warrants concern from an internal audit perspective.