Limitations of an internal control system

NotesCBE

Limitations of an internal control system

Internal controls in the accounting system are set up to assess that:

  • Transactions are properly authorised.

  • All transactions are promptly recorded at the correct amount, in the appropriate accounts and in the proper accounting period.

  • Access to assets is permitted only in accordance with proper authorisation.

  • Recorded assets are compared with the existing assets at reasonable intervals and appropriate action is taken with regard to any differences.

Inherent limitations

However, any internal control system can only provide the directors with reasonable assurance that their objectives are reached, because of inherent limitations, such as:

  • Human errors

    These include the fact that human judgement in decision-making can be faulty or simple errors and mistakes.

  • Controls being by-passed or over-ridden

    For example, The system will report transactions that exceed specified credit limits and this check may be overridden or disabled.

  • The costs of controls not outweighing their benefits

    This is a particular problem faced by smaller entities. 

    For example, smaller entities often have fewer employees which may limit the extent to which segregation of duties is practicable. 

    It would not make commercial sense to employ additional staff purely for the purposes of achieving greater segregation of duties.

  • Controls tending to be designed to cope with routine and not non-routine transactions

    Non-routine transactions are by their very nature unusual. 

    For example a company that sales furniture.

    It may have effective controls over selling transactions, but if the company acquires a car of its own, the controls around authorising and recording the acquisition may be much less effective.

These factors show why auditors cannot obtain all their evidence from tests of the systems of internal control.

NotesCBE