1. What is the system of internal controls? 2. Explain five (5) limitations of the Internal Control...

1. What is the system of internal controls?

2. Explain five (5) limitations of the Internal Control System?

3. Your audit plan notes that you will be testing the system of internal controls for the ‘three Es’. Explain the ‘three Es’

4. Why should an auditor place reliance in internal controls

Expert Solution

Ans:

1.

Internal controls are those rules and procedures established by a company to ensure the correctness and intigrity of financial information. Internal control helps companies and organisations to setup up a control and culture among employees to detect and remove any frauds or errors at management level on regular basis.

2.

Internal controls does not provide absolute assurance that a control objective of the company will be met. There are several limitations of internal controls which needs to be looked closely at different levels:

Collusion: Two or more people who are in a system to keep watch on each other may collude to commit any fraud.
Human Error: All controls depend upon the ability of human to perform. Error from a human may occur any time. Sometimes a person don't understand how a control system to be used or doesn't understand the system.
Missing Segregation of duties: A control system may not be properly designed so segregate duties of each and every individual. Which may increase chances of interference in others work.
Management Override: Sometimes senior person of management can override controls for any personal benifits.
Costly: The implementation of internal control system is a costly process. Most of the small businesses may not afford to incur such heavy costs on internal controls.

3.

Audit plan covers the testing the system of internal controls for the ‘three Es:

The three E's of internal controls are:

Efficiency: Efficiency is concerned with the relationship between the goods and services produced and the resources used to produce them. It is about getting the best output from available resources. As an auditor we will verify the internal control over efficiency management.
Effictiveness: Effiectiveness means that is company actual results compared with company's obective is acheived or not. It is about acheiving predertmined objectives.
Economy: Economy refers to minimising the cost of resources used. Cost of people, material, equipment etc reducing without compromising the quality. Auditor will verify the impact of internal control over economic impact on company.

4.

An auditor should place reliance on internal control because it is not possible for an auditor to verify each and every transaction. Due to limited scope and time of audit, auditor have to place reliance on internal control. However efficiency and effectiveness of internal control should be checked several times to ensure their intigrity. Auditor should not place complete reliance on internal control as it will increase the risk that a material misstatement may not be detected also should not ignore internal control as it is not possible for statutory auditor to check 100%.

ekkarill92 answered 2 years ago

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