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

Solutions

Expert Solution

Ans:

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.

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.

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.

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 1 year ago

Next > < Previous

Related Solutions

Define Internal controls and describe the five components of a good internal control system.

Controls cannot provide absolute assurance. Describe some of the major limitations of internal control and explain...

Controls cannot provide absolute assurance. Describe some of the major limitations of internal control and explain how they diminish the reliability of internal controls.

Question What are some limitations of internal controls and explain them in brief?

Defining internal control Internal controls

Question Defining internal control Internal controls are designed to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate accounting records.Requirements1. Which objective do you think is most important?2. Which objective do you think the internal controls must accomplish for the business to survive? Give your reason.

Identify the principles of internal control. Explain the use of cash and internal controls to prevent...

Identify the principles of internal control. Explain the use of cash and internal controls to prevent fraud. Explain why corporations invest in stocks and debt securities. Describe how debt and stock investments are reported in financial statements. Evaluate the effects of unusual or irregular items on financial statements.

P4-51B. (Learning Objectives 2, 4: Explain the objectives and components of internal control; evaluate internal controls)...

P4-51B. (Learning Objectives 2, 4: Explain the objectives and components of internal control; evaluate internal controls) Each of the following situations reveals an internal control weakness: Situation a. In evaluating the internal control over cash payments of Arlington Manufacturing, an auditor learns that the purchasing agent is responsible for purchasing diamonds for use in the company’s manufacturing process, approving the invoices for payment, and signing the checks. No supervisor reviews the purchasing agent’s work. Situation b. Kelly Hixson owns an...

Part 2: Describe physical controls, independent internal verification, and human resource controls. For each internal control...

Part 2: Describe physical controls, independent internal verification, and human resource controls. For each internal control principle, explain what weaknesses are being prevented for the company.

There are five components of internal control: 1) Control environment 2) Risk assessment 3) Control activities...

There are five components of internal control: 1) Control environment 2) Risk assessment 3) Control activities 4) Information and communication system 5) Monitoring processes. In your own words explain the purpose of internal controls. Then select one of the components shown above and explain the role it plays in protecting the assets of the business. Many of these activities can be observed in the workplace both inside and outside of the accounting department. Please share any work experiences you may...

Question 14 pts The five components to a system of internal controls include all of the...

Question 14 pts The five components to a system of internal controls include all of the following except: control procedure risk assessment safeguarding assets monitoring controls Flag this Question Question 24 pts An automobile company testing brakes on new vehicles is part of: control procedure risk assessment information systems monitoring controls Flag this Question Question 34 pts Which account would we debit to open a new petty cash fund? cash petty cash miscellaneous expense petty cash expense Flag this Question...

Question: What are the five components of internal control? Briefly explain each component.

Subjects