Q.1 What is the primary objective of internal control in an organization?
To maximize profits
To safeguard assets and ensure reliable records
To comply with taxation laws
To improve marketing strategies
Explanation - The main goal of internal control is to safeguard assets, maintain accuracy of records, and ensure operations are effective and efficient.
Correct answer is: To safeguard assets and ensure reliable records
Q.2 Which component of internal control deals with the overall attitude and actions of management?
Risk Assessment
Information System
Control Environment
Monitoring
Explanation - The control environment reflects management's philosophy, ethical values, and overall operating style, which sets the tone of the organization.
Correct answer is: Control Environment
Q.3 Which of the following is NOT a limitation of internal control?
Human error
Collusion between employees
Management override
Perfect accuracy of transactions
Explanation - Internal control cannot guarantee perfect accuracy due to inherent limitations like human error, collusion, or management override.
Correct answer is: Perfect accuracy of transactions
Q.4 In risk assessment, what does 'inherent risk' mean?
The risk after considering internal controls
The risk of an auditor missing an error
The risk before considering internal controls
The risk of regulatory penalties
Explanation - Inherent risk is the susceptibility of an assertion to misstatement assuming no internal controls are in place.
Correct answer is: The risk before considering internal controls
Q.5 Which of the following is an example of a preventive control?
Bank reconciliation
Supervisory review of transactions
Segregation of duties
Audit trail review
Explanation - Preventive controls are designed to stop errors or fraud before they occur, and segregation of duties ensures no single person controls all aspects of a transaction.
Correct answer is: Segregation of duties
Q.6 Which component of internal control includes processes to identify and manage risks?
Risk Assessment
Control Environment
Monitoring
Control Activities
Explanation - Risk assessment involves identifying and analyzing risks relevant to achieving the entity’s objectives.
Correct answer is: Risk Assessment
Q.7 Why is segregation of duties important in internal control?
It eliminates the need for auditors
It prevents one person from controlling a transaction entirely
It reduces the cost of operations
It guarantees profit
Explanation - Segregation of duties prevents fraud and errors by ensuring no single individual handles all aspects of a transaction.
Correct answer is: It prevents one person from controlling a transaction entirely
Q.8 Which of the following is a detective control?
Password protection
Bank reconciliation
Segregation of duties
Pre-approval of purchases
Explanation - Detective controls identify errors or irregularities after they have occurred, and bank reconciliation is an example.
Correct answer is: Bank reconciliation
Q.9 What is the purpose of monitoring in internal control?
To identify risks
To assess management style
To evaluate the effectiveness of controls over time
To segregate duties
Explanation - Monitoring ensures that internal control continues to operate effectively by assessing and correcting deficiencies.
Correct answer is: To evaluate the effectiveness of controls over time
Q.10 Which type of risk arises due to failure of internal controls?
Inherent risk
Control risk
Detection risk
Business risk
Explanation - Control risk is the risk that a misstatement will not be prevented or detected on a timely basis by the organization’s internal control.
Correct answer is: Control risk
Q.11 Which element of internal control ensures that only authorized individuals approve transactions?
Authorization procedures
Risk assessment
Monitoring
Information systems
Explanation - Authorization procedures ensure only designated individuals can approve transactions, reducing fraud risk.
Correct answer is: Authorization procedures
Q.12 In the COSO framework, which is NOT one of the five components of internal control?
Control Activities
Information and Communication
Financial Planning
Monitoring
Explanation - The five COSO components are control environment, risk assessment, control activities, information and communication, and monitoring.
Correct answer is: Financial Planning
Q.13 Which of the following best describes 'risk assessment'?
Recording of financial transactions
Identifying and analyzing potential risks
Preparing management reports
Approving financial statements
Explanation - Risk assessment involves identifying and analyzing risks that may affect achievement of objectives.
Correct answer is: Identifying and analyzing potential risks
Q.14 Which of these is an example of physical control?
Bank reconciliation
Locked storage for inventory
Segregation of duties
Authorization procedures
Explanation - Physical controls protect assets directly, such as locks, safes, or restricted access to inventory.
Correct answer is: Locked storage for inventory
Q.15 Which of the following risks can auditors NOT eliminate?
Detection risk
Control risk
Inherent risk
Business risk
Explanation - Inherent risk is due to the nature of the business or transactions and cannot be eliminated by auditors.
Correct answer is: Inherent risk
Q.16 What is the relationship between internal control and audit risk?
Stronger internal controls reduce control risk
Stronger internal controls increase detection risk
Stronger internal controls eliminate inherent risk
Stronger internal controls reduce audit fees only
Explanation - Well-designed internal controls reduce control risk, lowering overall audit risk.
Correct answer is: Stronger internal controls reduce control risk
Q.17 Which control activity involves comparing actual performance with standards?
Authorization
Supervision
Performance reviews
Information processing
Explanation - Performance reviews evaluate results by comparing actual outcomes with expectations or standards.
Correct answer is: Performance reviews
Q.18 Why can collusion weaken internal control systems?
It reduces profitability
It allows multiple employees to override controls together
It increases workload
It eliminates segregation of duties automatically
Explanation - Collusion involves two or more people working together to bypass controls, defeating segregation of duties.
Correct answer is: It allows multiple employees to override controls together
Q.19 Which type of control ensures transactions are recorded promptly and accurately?
Authorization
Recording controls
Monitoring
Segregation of duties
Explanation - Recording controls help ensure transactions are promptly and accurately recorded in the accounting system.
Correct answer is: Recording controls
Q.20 What does 'reasonable assurance' mean in internal control?
Guarantee of zero fraud
Absolute prevention of errors
A high but not absolute level of assurance
Assurance only for small businesses
Explanation - Internal control provides reasonable assurance, not absolute, because no system is foolproof.
Correct answer is: A high but not absolute level of assurance
Q.21 Which control is most useful against management override?
External audit
Segregation of duties
Collusion
Authorization procedures
Explanation - External audits provide independent oversight, helping to detect or prevent management override.
Correct answer is: External audit
Q.22 Which risk is associated with the possibility that auditors fail to detect a misstatement?
Control risk
Inherent risk
Detection risk
Business risk
Explanation - Detection risk arises when auditors fail to detect material misstatements in financial statements.
Correct answer is: Detection risk
Q.23 Which of the following is an example of an information system control?
Password protection for accounting software
Supervision of employees
Performance reviews
Inventory locks
Explanation - Information system controls safeguard data and systems, such as requiring passwords for software access.
Correct answer is: Password protection for accounting software
Q.24 What is the key benefit of internal control for management?
It ensures tax exemptions
It provides assurance of meeting objectives
It eliminates all risks
It increases sales
Explanation - Internal control helps management gain reasonable assurance that objectives will be achieved.
Correct answer is: It provides assurance of meeting objectives
Q.25 Why is risk assessment a continuous process?
Because risks change with environment and operations
Because auditors demand it
Because it guarantees profits
Because it eliminates inherent risk
Explanation - Organizations must continuously reassess risks as business environments and operations change.
Correct answer is: Because risks change with environment and operations