Setting an iOS Passcode
Description:
How to configure an iPad to use a Passcode when locked on iOS 4.2 or later.
The instructions for iPhone and iPod Touch is very similar to the iPad.
How to Use:
Enabling
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From the Home Screen, find and open Settings.
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Select General if it's not already active, and then tap Passcode Lock.
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Optional: Turn Simple Passcode Off. This will bring up a keyboard to type a password rather than a 4-digit code and is theoretically more difficult to bypass if you are using a good, strong password.
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Turn Passcode On
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Enter a passcode that you will use to unlock the device.
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Optional: Tap Require Passcode to change the time before passcode is required. Longer times mean that your device is vunerable if lost or stolen shortly after you've used it.
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Turn Erase Data On to enable automatic erase in the case of 10 passcode failures. If this option is not enabled, it is HIGHLY recomended that Find My iPhone is enabled. Beware of a child or person who may try entering many passcodes to use your device without knowing the consequences.
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Tap Enable to confirm.
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Optional: Picture Frame allows a locked device to display photos similar to a screen saver. These photos may include personally identifable information. Turn this Off to prevent someone from seeing photos on the device. Alternatively, select what photos are displayed in the Photo Frame settings listed on the left-hand side of the screen.
Demonstration
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Lock your device with the Sleep Button, wait the amount of time set to require the passcode, and wake up with the Sleep or Home Buttons. Slide to Unlock the device as normal.
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The Passcode entry message appears. If the Simple Passcode option was disabled, the prompt will be different.
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An Incorrect passcode was entered! Make sure not to do this ten times in a row (unlikely if you know the code).)
Once a passcode is set, several other options and settings for the iOS will require this to be entered before changing such as audio volume limits and accepting encryption keys.

