ACCA Strategic Professional · Strategic Business Leader · Audit and compliance
Hollis Retail's board reviews internal control annually. Its review covered only the accuracy of the published financial statements and the operation of the accounting system. A later investigation revealed a major loss caused by a breach of data protection law and a failure in the supply chain. Which criticism of the board's review is most valid?
The review was too narrow. A sound review of internal control covers operational, compliance and risk management controls as well as financial controls. By looking only at financial reporting, the board missed the data protection and supply chain weaknesses that caused the loss.
- AThe review should have been delegated entirely to the external auditor
- BThe review should have been limited to controls that can be tested by sampling
- CThe review should have excluded financial controls, which are the responsibility of management
- DThe review was too narrow, because internal control should cover operational, compliance and risk management controls as well as financial controlsCorrect
Explanation
Governance guidance treats internal control as a broad system covering financial, operational and compliance controls, and the management of risk, not just financial reporting. Hollis's board limited its review, so it missed the compliance and operational weaknesses. Delegating to the external auditor does not remove board responsibility.
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