The opening statement of ISA 315 paragraph 64 notes that "internal control no matter how well designed and operated, can provide an entity with only reasonable...

      

The opening statement of ISA 315 paragraph 64 notes that "internal control no matter how well
designed and operated, can provide an entity with only reasonable assurance about achieving the
entity's financial reporting objectives. The likelihood of achievement is affected by limitations
inherent to internal control".
With reference to above-statement, briefly explain the limitations inherent in an internal control
system.

  

Answers


Kavungya
• Management has to ensure that the benefits expected from an internal. control system
outweigh the costs. As a result certain important controls might not be put in place due
to the costs involved. c.1,. a small entity might not have the resources to employ
sufficient staff to ensure proper segregation of duties.
• Most internal controls tend to be directed towards routine transactions rather than nonroutine
transactions. This leaves gaps that can be exploited.
• Human error due to carelessness, distraction, mistakes of judgement and
misunderstanding instructions could undermine the internal control system.
• Controls could be circumvented through collusion by a member of management or an
employee with persons outside or inside the entity.
• Abuse of responsibility e.g. a member of management overriding an internal control
• The possibility that procedures maybe inadequate due to changes in conditions.
Kavungya answered the question on May 14, 2019 at 13:12


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