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Identify and briefly explain any four inherent limitations of an internal control system

Identify and briefly explain any four inherent limitations of an internal control system

Answers

Wilfred
- Most internal controls tend to be directed at routine transactions rather than non-routine transactions.
- The possibility of circumvention at internal controls through the collusion of a member of management or an employee with parties outside the entity.
- There‘s also possibility of a person responsible for exercising an internal control could abuse that responsibility e.g. management.
- There is the possibility that procedures that constitute an internal control system may become inadequate due to changes in conditions, and compliance with procedures may also deteriorate.
- Lack of management support for the control systems due to their requirement that the cost of an internal control does not exceed the expected benefits to be derived.
- There is potential for human error due to carelessness, distraction, mistake of judgement and the misunderstanding of instructions

a. Cost-benefit analysis. Management has to ensure that the benefits expected from
an internal control system outweigh the cost of installing and maintaining the internal
control system. As a result certain important controls may not be put in place due to the
costs involved e.g. a small company may not have the resources to employ efficient
staff to ensure segregation of duties.
b. L imited coverage. Most internal controls tend to be directed towards routine transactions
rather than non routine transactions leaving room for fraud and error as the non routine
transactions will not be subjected to the appropriate controls e.g. if stock is damaged by
fire and needs to be replaced immediately, there will be no controls available for such
an emergency.
c. H uman error. Human beings are prone to carelessness, distraction, mistakes of
judgment and misunderstanding instructions. This undermines the effectiveness of
the internal control system because the most important component of internal control
system is people.
d. A buse of responsibility. Senior managers could override controls thereby creating
negative perception of the internal control system to the lower level employees.
e. Corruption. A member of management or employee could circumvent controls through
collusion with persons within or without the company e.g. where an internal control on
purchasing requires a quotation to be submitted, an employee can leak the prices in the
quotations to his preferred supplier in exchange for a kick back.
f. The possibility that procedures may become inadequate due to changes in conditions
of the burden e.g. expansion of business without corresponding increase in number of
staff may require some staff member to perform more tasks than previously. This dilutes
the extent of segregation of duties.
Wilfykil answered the question on February 22, 2019 at 10:11

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