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I logged on one of the server (Windows Server 2008 R2) and created a new folder called Test. I shared this folder using 'Advanced Sharing' which automatically gives 'Read' control to Everyone on this folder.

I also created a file called aa.txt inside this new folder. If I look at the Security tab for file aa.txt, it shows these users -

SYSTEM (Full control)
Niki (this is My account and is having Full control) 
Administrators (Full control)
Users (Read & Execute permission)

Because I can see full permission for myself, I was assuming that I should be able to modify this file from my local machine (as I have shared the parent folder)

From my local machine, yes I can access the file aa.txt. However, getting Access Denied error when trying to modify it. To make it work, I had to give myself 'Change+Read' permission using Advanced Sharing in Sharing tab.

Shouldn't it allow me to modify earlier as I was having full control on the file?

Thank you!

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    "Cascading" ... interesting choice of terminology. Might also see it referred to as propagation or inheritance. – Ryan Ries Aug 12 '15 at 13:13
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Network access to the file is granted based on the combination of the Share and the NTFS permissions, the end result being that the more restrictive permissions are applied. You've set the Share permissions to Read, which is the permission you have when accessing the file over the network.

Most people set the Share permission to Full and control access using the NTFS permissions,

https://technet.microsoft.com/en-us/library/Cc754178.aspx

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