Final answer:
Auditors must control all cash and negotiable assets during an audit to prevent misappropriation. Simultaneous control ensures audit accuracy and that a bank's cash assets are verified against liabilities, safeguarding the financial integrity and preventing bank failure due to deposit runs.
Step-by-step explanation:
When counting cash on hand, the auditor must exercise simultaneous control over all cash and other negotiable assets to prevent substitution or misappropriation.
This precaution is essential to ensure the accuracy and integrity of the audit process. Simultaneous control means that the auditor must account for all cash components as defined by M1 (cash and coins in circulation, checkable bank deposits, traveler's checks) and ensure that they align with the reported figures. In the context of a bank's balance sheet, this involves the auditor verifying the cash as an asset against other liabilities and ensuring that the bank is maintaining adequate bank capital as well as reserves.
‌Understanding the concept of asset-liability time mismatch is also crucial for auditors. This concept reflects the risk that customers could withdraw bank liabilities (like deposits) in the short term while the assets (like loans) are repaid over a longer term. Proper auditing and counting of cash on hand helps ensure that the bank has enough liquidity to prevent a bank failure due to a run on deposits.