Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What are the two main components of an internal control system?

Policy guidelines and audit trails.
Control environment and detailed control processes.
Compliance and reporting.
Risk assessment and communication protocols.

The correct answer is: Control environment and detailed control processes.

The two main components of an internal control system are primarily recognized as the control environment and control processes. The control environment sets the tone at the top of the organization, influencing the control consciousness of its people. It encompasses the overall attitude, awareness, and actions of the board of directors and management regarding internal controls, establishing the framework within which the organization operates. Control processes, on the other hand, refer to the specific policies and procedures that are put in place to ensure the organization achieves its objectives and manages risks effectively. These processes cover a wide range of activities such as approvals, authorizations, verifications, reconciliations, and operational performance assessments. By understanding these two components, it becomes evident how they interact to create an effective internal control system that not only safeguards assets but also enhances the reliability of financial reporting and ensures compliance with laws and regulations. This structure is crucial for organizations to mitigate risks and improve operational efficiency, which is essential for their success and sustainability.