Internal controls may be preventive, detective, corrective, or directive. Which of the following is preventive?
Answer (A) is correct. Preventive controls are designed to prevent an error or an irregularity. Detective and corrective controls attempt to identify and correct errors or irregularities that have already occurred. Preventive controls are usually more cost beneficial than detective or corrective controls. Assigning two individuals to open mail is an attempt to prevent misstatement of cash receipts.
Segregation of duties is a fundamental concept in an effective system of internal control. Nevertheless, the internal auditor must be aware that this safeguard can be compromised through
Answer (B) is correct. By segregating duties, organizations make it more difficult for one person to perpetrate a fraud. When custody of the asset and recordkeeping for the asset are invested in different persons, a fraud generally cannot be executed by one of the two parties. However, if they collude, the internal control aspect of the segregation is nullified.