Final answer:
The statement is false; internal controls aim to reduce the risk of errors and fraud but cannot guarantee complete prevention or detection due to inherent limitations, such as human error and overriding by management.
Step-by-step explanation:
The statement that internal controls prevent and detect all errors and fraud is false. Internal controls are procedures and policies implemented by a company to provide reasonable assurance of the reliability of financial reporting, compliance with laws and regulations, and the effectiveness and efficiency of operations. However, no system of internal controls can be completely foolproof due to the limitations inherent in any control system.
Factors that can limit the effectiveness of internal controls include the possibility of human error, collusion among employees, management override of controls, and the cost-benefit analysis that might prevent the implementation of exhaustive controls in every area. Therefore, while internal controls are designed to reduce the risk of error and fraud, they cannot guarantee that all instances will be prevented or detected.