Question

8. What are control activities?

9. Give the different types of control activities.

10. Why is it necessary to monitor controls?

11. What are the inherent limitations of internal controls?

12. Enumerate, in chronological order, the steps followed in the study and evaluation of internal controls. Explain each step briefly.

Answer 1

Answer(8): Control activities- These are the policies and procedures that help the management in achieving its goals by minimizing the risk. Company analyzes, selects and develops the control activities to minimize the risk so that goals can be achieved easily for that matter, company makes the policies and procedures and bring those policies into action.

Example: Reconciliation and Authorizations

Answer(9): Types of control activities- Are as following:

Segregation of duties- Duties and responsibilities should be divided differently and should be separated so that risk of error can be eliminated.

Authorization and approval- All the business transactions should be authorized and approved so that goals can be achieved.

Reconciliation and review- Transactions should be cross checked with the records and vouchers so that true and fair financial statements can be made and financial reporting can be more effective.

Physical security- Physical inventory, cash and assets should be secured and should be counted and checked time to time and should be cross checked with the amounts shown in the records.

Answer(10) Necessity of monitoring the control- It is very important to monitor the controls to ensure the operational efficiency. If controls are moniored properly, it prevents from fraud and increases the organizational security. Company can achieve its goals easily and time and cost will be saved if controls are monitored timely.

Answer(11): Limitations of Internal control- Are as following:

• There may be some human errors if a person assigned does not know about the proper use of internal controls. It requires training and knowledge of technology.
• Establishing internal controls increases cost to the company.
• Internal control does not provide absolute assurance, it only provides resonable assurance. It is not 100% accurate.