Which internal control supports reducing fraud risk in cash handling?

Which internal control supports reducing fraud risk in cash handling?

• A. Increases efficiency when tasks are combined.
• B. It is not necessary in cash handling.
• C. Reduces risk of fraud by dividing responsibilities between individuals.
• D. Only relevant to accounts payable.

Answer: (C)

Dividing responsibilities among different people is the key internal control that reduces fraud risk in cash handling. When one person handles cash, records the transaction, and reconciles the bank statement, there’s a single point of opportunity to misappropriate funds and hide the activity. By separating these duties—such as having one person handle receipts, another record them, and a third perform the bank reconciliation—the organization creates checks and balances. This makes it much harder to execute fraud because any irregularity can be detected by the other roles, and collusion would be required to conceal improper acts. For example, if the person who receives cash is not the same person who records it or reconciles the bank balance, discrepancies are more likely to be spotted promptly, and unauthorized transactions are less likely to go unnoticed. Internal controls in cash handling are essential and apply across all cash-related processes, including receipts, disbursements, petty cash, and reconciliations, not just accounts payable. In contrast, combining duties increases fraud risk, and claiming that internal controls aren’t necessary for cash handling is incorrect since cash is a high-risk area. And the idea that this control only matters for accounts payable is false—the same segregation of duties principles apply throughout all cash activities.

Dividing responsibilities among different people is the key internal control that reduces fraud risk in cash handling. When one person handles cash, records the transaction, and reconciles the bank statement, there’s a single point of opportunity to misappropriate funds and hide the activity. By separating these duties—such as having one person handle receipts, another record them, and a third perform the bank reconciliation—the organization creates checks and balances. This makes it much harder to execute fraud because any irregularity can be detected by the other roles, and collusion would be required to conceal improper acts.

For example, if the person who receives cash is not the same person who records it or reconciles the bank balance, discrepancies are more likely to be spotted promptly, and unauthorized transactions are less likely to go unnoticed. Internal controls in cash handling are essential and apply across all cash-related processes, including receipts, disbursements, petty cash, and reconciliations, not just accounts payable.

In contrast, combining duties increases fraud risk, and claiming that internal controls aren’t necessary for cash handling is incorrect since cash is a high-risk area. And the idea that this control only matters for accounts payable is false—the same segregation of duties principles apply throughout all cash activities.