Future Business Leaders of America (FBLA) Accounting Practice Test

What do external controls refer to?

1. Controls maintained within the business

2. Verification methods provided outside the business

3. Internal audit procedures

4. Policies for employee salary verification

The correct answer is: Verification methods provided outside the business

External controls refer to verification methods provided outside the business, which are essential for maintaining the integrity of financial reporting and ensuring compliance with regulations. These controls can include audits performed by external accounting firms, regulatory oversight by government entities, and other assessments that are not influenced by the internal operations of the organization. The purpose of external controls is to ensure an objective evaluation of the business's financial health and operational effectiveness, helping to identify any discrepancies or areas of risk that may not be apparent through internal processes alone. These controls enhance the credibility of financial statements and increase stakeholders' trust, as they are typically seen as more impartial than controls developed internally. Internal mechanisms, like internal audit procedures or policies related to employee salary verification, focus on processes and checks that an organization implements within itself. While these are vitally important for day-to-day operations and fraud prevention, they do not encompass the broader, independent review that external controls provide. Thus, the correct identification of external controls emphasizes their role in providing a layer of assurance and accountability from outside the business.