Which of the following best explains why management implements internal controls within an organization?

• A. To eliminate the need for external audits
• B. To guarantee profitability in all business operations
• C. To avoid compliance with legal and regulatory requirements
• D. To ensure the reliability of financial reporting and safeguard assets

Answer: (D)

Verified step by step guidance

1. Understand the concept of internal controls: Internal controls are processes and procedures implemented by management to ensure the reliability of financial reporting, safeguard assets, and ensure compliance with laws and regulations.
2. Evaluate the incorrect options: Review why the other options are not correct. For example, internal controls do not eliminate the need for external audits, guarantee profitability, or allow avoidance of legal compliance.
3. Focus on the correct purpose: Internal controls are designed to ensure accurate financial reporting, protect company assets, and promote operational efficiency.
4. Relate internal controls to financial accounting: Highlight how internal controls help prevent fraud, errors, and misstatements in financial records, which are critical for stakeholders relying on financial information.
5. Conclude with the correct explanation: Management implements internal controls to ensure the reliability of financial reporting and safeguard assets, which is essential for maintaining trust and accountability within the organization.