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CS Professional · Internal and Forensic Audit · Internal Controls

Ganga Retail Ltd has well-designed controls on paper, including daily cash reconciliation. An internal auditor finds that for six months the reconciliations were signed but never actually prepared, and a cashier misappropriated funds. Which conclusion best reflects the inherent nature of internal control?

Controls give only reasonable, not absolute, assurance, and even well-designed controls can fail when not actually performed or when they are overridden. The reconciliation was adequately designed but did not operate effectively, which is why the Act requires controls to be both adequate and operating effectively.

  1. AThe control was inadequately designed, so it can never work
  2. BControls provide only reasonable, not absolute, assurance, and management override or non-performance can defeat even well-designed controlsCorrect
  3. CThe statutory auditor is solely responsible for this failure
  4. DInternal controls are unnecessary where staff are trusted

Explanation

A control may be adequately designed yet not operate effectively. Here the design was fine, but non-performance and signing without preparation defeated it. Controls give reasonable assurance only, and the Act speaks of controls being both adequate and operating effectively. Option A wrongly blames design.

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