Skip to main content
Pearson+ LogoPearson+ Logo

Limitations of Internal Controls quiz #1 Flashcards

Limitations of Internal Controls quiz #1
Control buttons has been changed to "navigation" mode.
1/10
  • What are some common limitations of internal controls within a company?
    Common limitations include human error, employee carelessness or indifference, collusion among employees, executive override by high-level staff, and challenges faced by small businesses due to limited staff.
  • How can collusion among employees undermine the effectiveness of internal controls?
    Collusion allows employees to work together to bypass separated duties, making it possible to commit fraud even when internal controls are in place.
  • Why might small businesses struggle to implement effective internal controls?
    Small businesses often have limited staff, making it difficult to separate duties, and must weigh the cost of additional controls against the benefits, especially if they trust their employees.
  • What level of assurance do internal controls provide regarding the safeguarding of assets and reliability of financial information?
    Internal controls provide reasonable assurance, not absolute certainty, that assets are safeguarded and financial information is reliable.
  • What is one reason internal controls might fail even if procedures are in place?
    Internal controls might fail due to human error, carelessness, or indifference from employees toward following procedures.
  • How does collusion among employees affect the effectiveness of internal controls?
    Collusion allows employees to work together to bypass separated duties, making it possible to commit fraud even when controls are in place.
  • What is executive override and how can it undermine internal controls?
    Executive override occurs when high-level employees, like a CFO, authorize their own transactions without oversight, potentially leading to misuse of company funds.
  • Why do small businesses often struggle to implement effective internal controls?
    Small businesses may have limited staff, making it difficult to separate duties, and must weigh the cost of additional controls against their benefits.
  • What level of assurance do internal controls provide regarding fraud prevention and financial reliability?
    Internal controls provide reasonable assurance, not absolute certainty, that assets are safeguarded and financial information is reliable.
  • Why is it important for employees to follow even seemingly minor internal control procedures?
    Minor procedures, like signing documents, are important because neglecting them can lead to failures in the internal control system and increase the risk of fraud.