During a quarterly audit at Aerodynamic Aviation, Adam and Tessa discover irregularities in several cash-handling records, raising suspicion about a possible dishonest employee. According to good risk-management practices, which action helps reduce or prevent losses from internal dishonesty?

Question

BlackTom AI · Accepted Answer

The question asks which practice aligns with good risk-management to reduce or prevent losses from internal dishonesty. I will evaluate each option in turn.
Option 1: 'Avoiding outside auditors to keep internal processes more “streamlined”' This is problematic because external or independent auditing provides an objective check on internal controls. Avoiding auditors reduces oversight, making it harder to detect irregularities, and thus increases the risk of undetected dishonest acts. The idea that streamline processes replace audit oversight is a misconception; internal controls require independent verification, not elimination of it.
Option 2: 'Allowing one employee to manage all deposits, reconciliations, and cash handling without oversight' This creates a single point of failure and opportunity for concealment. Segregation of duties is a fundamental internal-control principle precisely to prevent dishonest activity; concentrating cash handling and reconciliation in one person eliminates necessary checks and balances and should be avoided.
Option 3: 'Relying solely on employee self-reporting to identify financial discrepancies' Relying only on employees to self-report is unreliable and unsafe. People may fail to report or conceal issues; effective loss prevention relies on proactive detection methods, not voluntary disclosure alone. It ignores preventive controls such as independent reconciliations and monitoring.
Option 4: 'Careful screening and selection of personnel supported by an effective accounting system and varied control methods' This option reflects a comprehensive, proactive risk-management approach: it emphasizes hiring practices to reduce dishonest behavior and combines a solid accounting framework with multiple controls (e.g., separation of duties, reconciliations, access controls). This layered approach is consistent with established internal-control standards and reduces opportunities for theft or fraud.
In summary, the first three choices describe practices that weaken controls or rely on unsafe assumptions about detection, whereas the fourth option articulates a robust, multi-faceted strategy rooted in prevention and verification. The stronger, correct-sounding approach is to implement careful personnel screening along with dependable accounting procedures and multiple control mechanisms to mitigate internal dishonesty.

Similar Questions

At an FBO reviewing its internal controls, Johan explains why strong record systems matter. What internal benefit does a good record system provide?

Hiring qualified personnel is an example of a control, and procedures to resubmit rejected transactions are an example of a control.

A control activity can be either a prevention control or a monitoring control.

Part 1The control procedure of prohibiting employees from accepting gifts is designed to reduce the risk of ________. Part 1 A. theft of inventory B. kickbacks C. fraudulent cash disbursements D. stockouts E. None of the above

Which one of the following will an auditor’s ICFR audit include?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler