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ACCA Strategic Professional · Strategic Business Leader · Internal control and management reporting

Brightwater Logistics is a fast-growing company with a very limited number of finance staff, so full segregation of duties is impossible. The audit committee wants to compensate for this weakness while remaining cost-effective. Which response is most appropriate?

The best response is to introduce compensating controls, such as director review of exception reports, independent bank reconciliations and rotation of duties. These reduce the risk of undetected fraud or error cost-effectively when segregation is impractical. Relying on the external audit, dropping detective controls or ignoring the risk would leave management's responsibility unmet.

  1. ARely solely on the external auditor's year-end work to detect any irregularities
  2. BIntroduce compensating controls such as owner or director review of exception reports, bank reconciliations prepared by someone independent of cash handling, and rotation of dutiesCorrect
  3. CRemove all detective controls to reduce the cost of the control system
  4. DAccept the risk without action because small companies cannot operate controls

Explanation

Where segregation is not feasible, compensating controls such as independent review of reconciliations, supervision of exceptions and rotation of duties reduce the risk at reasonable cost. Relying on the external audit does not provide management's own control, removing detective controls increases risk, and doing nothing ignores the committee's responsibility.

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