Question

Verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another. True or False?

Answer 1

The statement is True as verifying cash and other liquid assets concurrently can prevent the misrepresentation of financial assets by precluding the substitution of one type of asset for another.

Step-by-step explanation:

The statement that verification of cash and other liquid assets on the same date may prevent substitution of one form of asset for another is True. This verification process is critical in financial audits and controls to ensure that a company or individual is not attempting to conceal financial issues by substituting different types of assets. Liquidity refers to the ease and speed with which an asset can be converted into cash without significant loss of value. Cash is a highly liquid asset since it can be readily used for transactions or to settle debts. Other assets, like those in savings accounts or investments, require more steps to convert into cash, making them less liquid.

By ensuring that all liquid assets are accounted for on the same date, it becomes more difficult to disguise the true financial state by shifting assets around. For example, if a firm only verifies its cash balance on a particular date without checking its bank balances or other liquid assets, it might temporarily deposit cash to show a healthy bank balance. However, checking all liquidity sources simultaneously would reveal if cash had been removed from one source to boost another misleadingly. Likewise, a firm could not easily use funds from its bank account to inflate its cash holdings if all accounts were verified at once. This concurrent verification serves as an important check against misrepresentation of financial status.

Answer 2

Verification of cash and other liquid assets on the same date can help prevent substitution of one form of asset for another. This is because by verifying all liquid assets at the same time, it makes it more difficult for someone to fraudulently substitute one asset for another. For example, if a company is verifying its cash and marketable securities on the same day, it would be more difficult for someone to substitute cash with fake securities. so, the correct answer is True.

Step-by-step explanation:

Verifying cash and other liquid assets on the same date is a preventive measure against the substitution of one form of asset for another. This process ensures that the reported cash and liquid assets accurately reflect the financial position of an entity at a specific point in time.

By conducting verification simultaneously, the risk of manipulating financial statements by substituting less liquid assets for cash is minimized. It enhances the reliability and accuracy of financial reporting, providing stakeholders with a true representation of the organization's financial health at a given date.

In summary, verifying cash and other liquid assets concurrently is an effective practice to prevent the substitution of one form of asset for another, making the statement true.