The Importance of Internal Control to Management and Auditors Has

question 35

Multiple Choice

The importance of internal control to management and auditors has been recognised for many years. Which of the following is likely to be cited as a major factor contributing to this importance?

• A) The operations of the business entity have become so unwieldy that management must rely on the chief financial officer to effectively control operations.
• B) Checks and reviews protect against employee collusion and reduce the chance of employee fraud.
• C) Internal control procedures must be utilised to maintain accurate accounting records.
• D) It is impractical for auditors to audit most companies within economic fee limitations without relying on the client's system of internal controls.

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Definitions:

High-Low Method

A method employed in cost accounting that calculates estimated variable and fixed costs using the highest and lowest activity levels.

Fixed Cost

A cost that does not change with an increase or decrease in the amount of goods or services produced or sold by a business.

Degree of Operating Leverage

A measure that quantifies how much sales revenue can affect operating income due to the presence of fixed costs in a company's cost structure.

Pretax Profit

The profit earned by a company before any tax is deducted, showing the company's earnings directly from its operations.