Which of the following is a principle of internal control as defined by the five components of internal controls?

• A. Maximizing net income
• B. Increasing sales revenue
• C. Segregation of duties
• D. Reducing tax liability

Answer: (C)

Verified step by step guidance

1. Understand the concept of internal control: Internal control refers to the processes and procedures implemented by an organization to ensure the reliability of financial reporting, compliance with laws and regulations, and the effectiveness and efficiency of operations.
2. Learn about the five components of internal control: These include Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring Activities. Each component plays a critical role in maintaining effective internal controls.
3. Focus on the principle of 'Segregation of Duties': Segregation of duties is a key control activity that involves dividing responsibilities among different individuals to reduce the risk of errors or fraud. For example, the person responsible for recording transactions should not be the same person responsible for authorizing or reconciling them.
4. Evaluate the options provided in the question: 'Maximizing net income,' 'Increasing sales revenue,' and 'Reducing tax liability' are not principles of internal control. These are business objectives or financial goals, not control activities.
5. Conclude that 'Segregation of Duties' is the correct answer: It is a recognized principle of internal control that aligns with the five components and helps ensure the integrity of financial processes.