ABA ABA Internal Controls & Risk Management 1 — Questions and Answers
Question 1: What is the primary purpose of internal controls in a business?
- To increase gross profit margins
- To safeguard assets, ensure accurate records, and promote operational efficiency (Correct answer)
- To reduce the number of employees needed
- To comply with marketing regulations
Correct answer: To safeguard assets, ensure accurate records, and promote operational efficiency
Internal controls are policies and procedures designed to safeguard assets, ensure accuracy of financial records, and promote efficient operations.
Question 2: What is 'segregation of duties' as an internal control?
- Assigning all financial tasks to one trusted employee
- Dividing financial responsibilities among multiple employees to prevent fraud (Correct answer)
- Separating business and personal bank accounts
- Filing tax returns separately from financial statements
Correct answer: Dividing financial responsibilities among multiple employees to prevent fraud
Segregation of duties divides critical financial tasks among multiple employees so no single person has complete control over a transaction, reducing fraud risk.
Question 3: Which type of internal control is a bank reconciliation?
- Preventive control
- Detective control (Correct answer)
- Corrective control
- Directive control
Correct answer: Detective control
A bank reconciliation is a detective control because it identifies discrepancies between company records and bank records after transactions have occurred.
Question 4: What is the COSO framework used for?
- Calculating cost of sales for manufacturing companies
- Providing a framework for designing and evaluating internal controls (Correct answer)
- Setting federal tax regulations for businesses
- Determining depreciation methods for fixed assets
Correct answer: Providing a framework for designing and evaluating internal controls
The COSO (Committee of Sponsoring Organizations) framework provides a widely used model for designing, implementing, and evaluating internal controls.
Question 5: What is 'dual authorization' as an internal control?
- Using two separate accounting software systems
- Requiring two people to approve certain transactions before processing (Correct answer)
- Filing two copies of every financial document
- Having two signatures on all customer invoices
Correct answer: Requiring two people to approve certain transactions before processing
Dual authorization requires two authorized individuals to approve a transaction, which reduces the risk of unauthorized or fraudulent transactions.
Question 6: A company requires all employees to take mandatory vacations. What internal control purpose does this serve?
- Employee morale improvement only
- Ensuring another employee reviews the vacationing employee's work, which can uncover fraud (Correct answer)
- Compliance with federal labor law requirements
- Reducing health insurance costs
Correct answer: Ensuring another employee reviews the vacationing employee's work, which can uncover fraud
Mandatory vacations require another employee to perform the absent employee's duties, which can reveal fraud or irregularities that might otherwise remain hidden.
ABA ABA Internal Controls & Risk Management 1
What is the primary purpose of internal controls in a business?