Multiple Choice
Which of the following is NOT a limitation of internal control policies and procedures?
6. Internal Controls and Reporting Cash
Limitations of Internal Controls
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Which of the following is NOT a limitation of internal controls?
A
Internal controls guarantee the accuracy of financial statements.
B
Management override can render controls ineffective.
C
Collusion among employees can circumvent controls.
D
Internal controls can be costly to implement and maintain.
Verified step by step guidance1
Understand the concept of internal controls: Internal controls are processes and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.
Identify the limitations of internal controls: Internal controls are not foolproof. Common limitations include management override, collusion among employees, and the cost of implementation and maintenance.
Analyze the options provided: Review each statement to determine whether it describes a limitation of internal controls. For example, management override and collusion are well-known limitations, and the cost of implementing controls is also a recognized limitation.
Evaluate the statement 'Internal controls guarantee the accuracy of financial statements': This statement is incorrect because internal controls do not guarantee accuracy; they only reduce the risk of errors or fraud. This makes it the correct answer to the question.
Conclude that the correct answer is the statement that does NOT describe a limitation of internal controls, which is 'Internal controls guarantee the accuracy of financial statements.'
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