Ch 3 - Risk Management and Internal Controls LO 1 Distinguish among the three functions of internal controls. 1.How do internal controls mitigate risk? a.___internal control__is a process that specifically mitigates risks to the company's financial information. b.An adequate process creates assurance that i.accounting information is reliable, complete, and valid; ii.operations are effective and efficient; and iii.the business is complying with laws and regulations. c.Proper controls can: i.Create quality information ii.Lessen the risk of financial statement misstatements iii.Prevent fraud iv.Identify financial issues v.Safeguard assets from theft and waste vi.Increase operating efficiency vii.Measure business objectives and goals viii.Ensure compliance with applicable laws and regulations ix.Provide investors with reassurance d.Different Functions of Internal Controls i.Controls, or control activities, are the mechanisms, like rules, policies, and procedures that make up the process. ii.Provide reasonable assurance, which means not absolute mitigation but enough mitigation to give the company confidence that is risk is at an acceptable level. iii.Function of a control is to do one of the following: 1.__Prevent______ 2.__Detect_____ 3.__Correct_____ . e.Preventive Controls- prevent problems from happening. i.For Example,a firewall prevents unauthorized access to an organization's computer network. ii.One of the most common preventive control is_policy and procedure documentation _. 1.By specifying how employees should execute procedures and clarifying company policies, an organization lowers its risk of error and misconduct. iii._Segregation of duties_,also called separation of duties 1.lessens the risk of error and fraud by ensuring that different employees are responsible for the separate parts of a business activity:
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