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Which of the following statements is correct regarding the need for formal internal controls in a smaller entity as compared with a larger entity?
A.There is a greater need due to the lack of segregation of duties
B.The need is the same since the owner’s close involvement compensates for the lack of segregation of duties
C.There is less need since the lower volume of transactions increases the reliability of accounting records and other information
D.There is less need because of the owner’s close involvement in the entity’s operationsCan you please explain why option A cannot be the answer
The important word in the prompt is “formal” (all entities need controls).
Consider the question “which has the greater need to formal internal controls – a small entity or a large entity”? I hope you agree the answer is the latter.
Therefore A must be wrong, it doesn’t matter what justification is given (here “due to the lack of segregation of duties”), it is simply not true that there is a greater need in a smaller entity.
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