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Principles of Control Activities quiz #1

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  • What is the principle of establishment of responsibility in internal control activities, and why is it important?
    The establishment of responsibility principle assigns a specific task to a single individual, making them accountable for its completion. This clarity helps identify who is responsible if errors or fraud occur, ensuring accountability and improving internal control effectiveness.
  • How does the separation of duties principle help prevent fraud within a company?
    Separation of duties divides key tasks among different employees, so no single person controls all aspects of a transaction. This reduces the risk of fraud, as it requires collusion between employees to commit and conceal errors or theft.
  • Why are pre-numbered documents used as a control activity, and what risk do they help mitigate?
    Pre-numbered documents ensure that all transactions are recorded and accounted for, making it easier to detect missing or unauthorized documents. This helps prevent and identify errors or fraud, such as unrecorded or falsified transactions.
  • What are physical controls in the context of internal controls, and can you give examples?
    Physical controls are measures that safeguard assets by restricting physical access. Examples include locks on doors, safes for cash, and password-protected systems, all designed to prevent unauthorized access or theft.
  • What is independent internal verification, and how does it strengthen internal controls?
    Independent internal verification involves periodic or surprise checks of employees' work by someone not involved in the original process. This helps detect errors or fraud and ensures ongoing accuracy in company records.
  • How do human resource controls, such as bonding, mandatory vacations, and background checks, contribute to effective internal controls?
    Human resource controls reduce the risk of fraud by insuring employees who handle cash (bonding), requiring employees to take vacations (which can reveal fraud during their absence), and conducting background checks to hire trustworthy personnel.
  • What is the establishment of responsibility principle in internal controls, and why is it important?
    It assigns a specific task to one individual, making them accountable for its completion. This ensures clear responsibility and helps identify who is at fault if errors or fraud occur.
  • How does the separation of duties principle help prevent fraud within a company?
    It divides key tasks among different employees so no single person controls all aspects of a transaction. This reduces the risk of fraud, as collusion would be required to commit and conceal errors or theft.
  • Why are pre-numbered documents used as a control activity, and what risk do they help mitigate?
    Pre-numbered documents ensure all transactions are recorded and accounted for, making it easier to detect missing or unauthorized documents. This helps prevent and identify errors or fraud, such as unrecorded or falsified transactions.
  • What are physical controls in the context of internal controls, and can you give examples?
    Physical controls are measures that safeguard assets by restricting physical access. Examples include locks on doors, safes for cash, and password-protected systems to prevent unauthorized access or theft.