Consider how an organization must manage cash, receivables, and inventory.
Which of the three variables is the most important to manage?
Is one more susceptible to fraud and errors than the others? Explain your answer. How would a misstatement in each affect the organization?
Cash is the most important to manage, because it is what keeps the company going. According to Kieso, Weygandt, and Warfield (2007), cash is the asset most susceptible to improper diversion and use (p. 315). Recording errors could be costly to businesses. This is where internal control over cash is needed. With better tracking and reporting companies can see how much cash they have coming in and going out of the business. But today with credit cards and debit cards it becomes trickier on how to properly record cash. Misstatement with cash would be when an overdraft happens. It is expected to happen from time to time. But banks expect businesses not to let this practice become a habit. Misstatement with receivables is there is there is never a sure thing a company will be able to collect all the money owed them so when reporting on receivables businesses will estimate on what will be collected. Two factors or issues cause this (1) the availability of discounts (trade and cash discounts), and (2) the length of time between the sale and the payment due dates (the interest element) (Kieso, Weygandt, and Warfield, 2007, p. 339). Some accounts may only collect part of what is due and it is not sure when the rest will be received so estimates have to be made for the records. Misstatement with inventory can happen if a product is not record for the end of the year report. Or an estimate of an item is more than what is really there. These can cause companies to think they have more or less then what is really there. Reference:
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate accounting (12th ed.). Hoboken, NJ: John Wiley & Sons.
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