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ACCA Strategic Professional · Strategic Business Leader · Managing, monitoring and mitigating risk

Tessling Pharma's audit committee reviews its annual assessment of internal controls. The review finds that controls were well designed, but test results show several were not applied by staff during a restructuring when many experienced employees left. Which conclusion is most appropriate?

The controls are designed adequately but are not operating effectively. The board should remedy the operating failures and consider how the restructuring affected the control environment before concluding on effectiveness, because good design alone does not make an internal control system effective.

  1. AControls are designed adequately but not operating effectively, so the board should address the operating failure and consider the effect of change on control environment before reporting on effectivenessCorrect
  2. BThe control system is effective because design is the only relevant criterion
  3. CThe company should remove the controls as they are not being used
  4. DRisk appetite should be raised to match actual control practice

Explanation

An effective system needs both sound design and consistent operation. Staff turnover during change weakened operation, so the board must remediate and consider the change impact before asserting effectiveness. Removing controls or raising appetite simply accepts the exposure without a decision.

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