Essay 1 - Risk of Holding Cash

This study unit contains 1 essay, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-5 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Super Shop is a small local convenience store. All transactions are in cash, and
collections may be up to $3,000 per day. Paul, the owner, recently hired two employees
to operate the store. However, Paul is concerned about monitoring the employees when
he is absent. Accordingly, he asks Baldwin, a CPA who assists him with tax issues, to
assess the risks and design controls.

One control is a daily deposit process requiring one employee to count all cash and the
other to deposit 80% of the cash in the bank at 4 p.m. every weekday. During
weekends, one employee counts cash but stores it in a safe. On Monday, the other
employee deposits (1) the weekend receipts and (2) Monday’s receipts. A second
control is a form that both employees must sign after recording the cash amounts for
which they are responsible. A third control is theft insurance.

A. Explain the five key steps in the risk management process.

A. Use Paul’s case to describe and explain inherent risk and residual risk.
A. List five factors that should be considered in selecting and implementing
risk responses.

A. Determine the type(s) of risk response(s) reflected in Baldwin’s controls.

A. Assume that Paul changes to an electronic payment method, such as

credit cards, for all transactions. What risk response(s) is (are) reflected
in the new policy?