Page 73 - CA Inter Audit PARAM

CA Ravi Taori
Answer Manual elements vs automated elements in entity’s internal control: Manual elements in internal control
may be more suitable in the following circumstances:
• Where judgment and discretion are required.
• Large, unusual or non-recurring transactions.
• Circumstances where errors are difficult to define, anticipate or predict.
• In changing circumstances that require a control response outside the scope of an existing automated
control.
• In monitoring the effectiveness of automated controls.

QNO Limitations of Internal Control Old Course -- (P16M /M16M/N16M/N17R/M18M/N18M/N18R/M19R/
ICS.29 Bhaskar CNO- SA315-P2.360 M18E/M19M/M23R)
Briefly discuss the limitations of Internal Control.
OR
Internal control can provide only reasonable but not absolute assurance that its objective relating to
prevention and detection of errors/frauds, safeguarding of assets etc., are achieved. In view of above,
briefly state some of the inherent limitations of Internal Control System.
OR
Internal Control System can provide only reasonable but not absolute assurance that its objective relating
to prevention and detection of errors/frauds, safeguarding of assets etc., are achieved. Briefly explain the
inherent limitations that the system suffers.
Answer ➢ Internal control can provide only reasonable assurance:
Internal control, no matter how effective, can provide an entity with only reasonable assurance about

achieving the entity’s financial reporting objectives. The likelihood of their achievement is affected by
inherent limitations of internal control.
Top Management
➢ Judgements by Management:
Further, in designing and implementing controls, management may make judgments on the nature
and extent of the controls it chooses to implement, and the nature and extent of the risks it chooses
to assume.
Middle Management
➢ Lack of understanding the purpose:
Equally, the operation of a control may not be effective, such as where information produced for the
purposes of internal control (for example, an exception report) is not effectively used because the
individual responsible for reviewing the information does not understand its purpose or fails to take
appropriate action.

➢ Collusion among People:
Additionally, controls can be circumvented by the collusion of two or more people or inappropriate
management override of internal control. For example, management may enter into side agreements
with customers that alter the terms and conditions of the entity’s standard sales contracts, which may
result in improper revenue recognition. Also, edit checks in a software program that are designed to
identify and report transactions that exceed specified credit limits may be overridden or disabled.
Lower Management
➢ Human judgment in decision-making:
Realities that human judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human error.
Limitations in case of Small Entities:
Smaller entities often have fewer employees due to which segregation of duties is not
practicable. However, in a small owner-managed entity, the owner-manager may be able to
exercise more effective oversight than in a larger entity. This oversight may compensate for
the generally more limited opportunities for segregation of duties.
On the other hand, the owner-manager may be more able to override controls because the
system of internal control is less structured. This is taken into account by the auditor when
identifying the risks of material misstatement due to fraud.
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