What is true about internal controls?

Question

Internal controls are only necessary for large businesses.

One of the major purposes of internal control is to ensure accurate, reliable accounting records.

Internal control procedures tend to diminish the importance of operational efficiency.

A company's outside auditor is responsible for the company's internal control system.

Answer 1

Let's evaluate each statement regarding internal controls:

1. Internal controls are only necessary for large businesses.

   • False. Internal controls are essential for businesses of all sizes. While larger businesses may have more complex systems and a greater need for formal controls, smaller businesses also need internal controls to prevent fraud, ensure reliability of financial reporting, and promote operational efficiency.

2. One of the major purposes of internal control is to ensure accurate, reliable accounting records.

   • True. A primary objective of internal controls is to ensure the accuracy and reliability of financial reporting, as well as the safeguarding of assets and compliance with laws and regulations.

3. Internal control procedures tend to diminish the importance of operational efficiency.

   • False. Internal control procedures are designed not only to safeguard assets and ensure reliable financial reporting but also to promote operational efficiency. Well-designed controls can enhance efficiency by streamlining processes and reducing errors.

4. A company's outside auditor is responsible for the company's internal control system.

   • False. The responsibility for the internal control system lies with the company's management. While outside auditors evaluate the internal controls as part of their audit process and may provide recommendations, they are not responsible for designing or implementing the internal control system.

In summary, the only true statement about internal controls is that they are meant to ensure accurate and reliable accounting records.