CMA Intermediate · Business Laws and Ethics · Internal Financial Control for Financial Reporting
Which of the following is a preventive internal financial control rather than a detective control?
Segregation of duties between approving purchases and recording payments is a preventive control because it stops errors and fraud before they arise. Reconciliations, variance reviews and stock counts are detective controls, since they identify problems only after the transactions have taken place.
- AMonthly bank reconciliation performed by an accountant who does not handle cash
- BSegregation of duties between the person who approves purchase orders and the person who records paymentsCorrect
- CReview of variance reports comparing actual expenses with the budget
- DPhysical stock verification carried out at the year end
Explanation
Preventive controls stop errors or fraud before they occur. Segregating the approval and recording duties prevents misappropriation from happening at all. Bank reconciliation, variance review and stock verification only find problems after they have occurred, so they are detective controls.
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