Which of the following statements about internal control is correct?

• A. Internal control is solely the responsibility of the internal audit department.
• B. The five components of internal control are control environment, risk assessment, control activities, information and communication, and monitoring.
• C. Internal control consists only of procedures for safeguarding cash.
• D. Internal control eliminates all risk of fraud and error in an organization.

Answer: (B)

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. Clarify the five components of internal control: These are control environment, risk assessment, control activities, information and communication, and monitoring. Each component plays a critical role in establishing a robust internal control system.
3. Evaluate the incorrect statement: Internal control is not solely the responsibility of the internal audit department. It is a shared responsibility across all levels of management and employees within the organization.
4. Assess the claim about safeguarding cash: Internal control is not limited to safeguarding cash. It encompasses a wide range of procedures to protect assets, ensure accurate financial reporting, and promote operational efficiency.
5. Address the misconception about fraud and error: Internal control reduces the risk of fraud and error but does not eliminate it entirely. No system can guarantee complete elimination of risks.