Quizz On Internal Controls - Em Lyon - Prof. Idriss Elasri

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Internal controls are always necessary regardless of the staff involved because they are designed to safeguard assets, ensure accurate financial reporting, and promote operational efficiency. Internal controls help prevent errors, fraud, and misuse of resources, regardless of the honesty or integrity of the staff. They provide checks and balances, establish clear procedures and guidelines, and help detect and correct any irregularities. Internal controls are essential for maintaining the trust of stakeholders, ensuring compliance with laws and regulations, and promoting the overall effectiveness and success of an organization.

Requiring one person to handle all payroll to minimize exposure to confidential information is not an example of internal controls because it violates the principle of segregation of duties. Internal controls are designed to ensure that no single individual has complete control over a process, as this increases the risk of fraud or errors going undetected. By having one person handle all payroll, there is a lack of checks and balances, making it easier for fraudulent activities to occur without detection.

The CEO/Managing director has the primary responsibility for internal controls in a company because they are the highest-ranking executive and have overall authority and accountability for the organization. They are responsible for setting the tone at the top, establishing a culture of ethical behavior, and ensuring that effective internal controls are in place to mitigate risks and safeguard company assets. The CEO/Managing director is also responsible for overseeing the implementation and monitoring of internal controls throughout the organization and ensuring compliance with laws, regulations, and internal policies.

The correct answer is that you would not choose the account manager for the department, administrative support staff who are payroll processors, or administrative support staff who have no payroll processing duties but who are outside of the department. These individuals may have conflicts of interest or lack the necessary knowledge and expertise to effectively review and approve fiscal transactions and payroll vouchers.

Internal controls are put in place to ensure the accuracy and reliability of financial reporting, safeguard assets, and prevent fraud. However, they are not foolproof and can fail due to various reasons. One reason is that employees can make mistakes or exercise poor judgment, leading to errors or omissions in financial records. Another reason is collusion, where two or more individuals conspire to steal or manipulate financial information. Lastly, management may override established policies or procedures, bypassing the internal controls and potentially engaging in fraudulent activities. These factors highlight the importance of continuous monitoring and evaluation of internal controls to minimize the risk of control failures.

The most important component of internal controls is the integrity, ethical values, and competence of an organization’s employees. This is because employees with high integrity and ethical values are more likely to follow policies and procedures, which are crucial for effective internal controls. Additionally, competent employees are better equipped to understand and implement internal controls, reducing the risk of errors and fraud. While segregation of duties and theft prevention are important aspects of internal controls, they rely on the trustworthiness and capabilities of the employees involved. Therefore, the integrity, ethical values, and competence of employees are the foundation for a strong internal control system.

Combining recordkeeping and custody of assets is not an example of internal controls because it violates the principle of segregation of duties. Internal controls aim to prevent fraud and errors by separating the responsibilities of recording transactions and handling assets. When recordkeeping and custody of assets are combined, there is a higher risk of misappropriation or manipulation of assets without detection. Therefore, this practice goes against the concept of internal controls.

The Business Manager should ask for an Internal Audit of the school's internal controls to ensure that the implemented controls are still effective. This is the most comprehensive and thorough approach to assess the effectiveness of controls. Asking other school Business Managers about money stolen may not provide a complete picture of the controls' effectiveness. Changing locks on the doors is a security measure but does not directly address the effectiveness of controls. Spot-checking transactions, records, and reconciliations is a good practice, but it may not capture all aspects of control effectiveness. Therefore, asking for an Internal Audit is the best option.

Segregating duties is important because it helps prevent fraud and theft within an organization. By ensuring that no single employee has complete control over a process, such as handling cash or approving transactions, the risk of "steal and conceal" is minimized. Additionally, having too many duties can overburden an employee, leading to decreased efficiency and increased errors. Company policies often require the segregation of duties, particularly in processing payroll, to maintain internal controls and safeguard assets. Failing to segregate duties may result in negative consequences, such as being written up by auditors for non-compliance.