Audit and Assurance Practice Exam

What is a reasonable test of controls for cash receipts?

1. Periodic reviews of bank statements

2. Segregation of duties between cash handling and recording

3. Daily cash count by one individual

4. Reconciliation of cash with sales records

The correct answer is: Segregation of duties between cash handling and recording

Segregation of duties between cash handling and recording is essential for maintaining internal controls over cash receipts. By dividing the responsibilities between individuals who handle cash and those who record cash transactions, the risk of fraud or errors is significantly reduced. This structure helps ensure that no single individual has control over both the cash and the recording of that cash, which can deter misappropriation and promote accurate financial reporting. For effective internal control, one person should receive and deposit cash while another records the transaction in the accounting records. This separation creates a system of checks and balances, making it more difficult for discrepancies or fraudulent activities to go unnoticed. When employees share responsibilities, there is greater accountability, and errors can be more easily identified and corrected. Periodic reviews of bank statements, while important for overall cash management, do not directly test the internal controls at the point of cash receipt. Similarly, a daily cash count conducted by a single individual may not provide adequate control since it lacks independent verification. Finally, reconciling cash with sales records is vital for ensuring accuracy in financial statements, but it happens after the fact and does not serve as a preventative control at the cash handling stage. Therefore, the segregation of duties remains the most effective test of controls for cash receipts.