Certification in Supplier Diversity Practice Exam

Internal controls are established by which entities in an organization?

1. Only the finance department

2. Management and the Board of Directors

3. External auditors

4. All employees equally

The correct answer is: Management and the Board of Directors

Internal controls are mechanisms and procedures put in place to safeguard assets, enhance the accuracy of accounting records, and promote operational efficiency, ultimately ensuring compliance with laws and regulations. The establishment of these controls is primarily the responsibility of management and the Board of Directors. Management plays a critical role in developing and implementing internal controls as they are directly involved in the operational processes and have the oversight necessary to analyze and bolster controls to mitigate risks. They design the specific controls tailored to the organization's operations, making decisions about risk tolerance levels and resource allocation. The Board of Directors, meanwhile, provides oversight and governance. They are responsible for putting policies in place that promote a culture of accountability and ethical behavior, ensuring management effectively implements controls that align with the organization's strategic objectives. This collaborative dynamic creates an environment where internal controls can function effectively, as it combines strategic direction with operational execution. While finance departments and all employees do contribute to the effectiveness of internal controls, the primary responsibility lies with management and the Board of Directors, who work in concert to set the framework and standards for internal control systems throughout the organization.