Internal Controls - General
1.Which of the following most likely would not be considered an inherent limitation of the
potential effectiveness of an entity’s internal control?
a.Incompatible duties
b.Management override
c.Mistakes in judgment
d.Collusion among employees
2.When considering internal control, an auditor should be aware of the concept of
reasonable assurance, which recognizes that
a.Internal control policies and procedures may be ineffective due to mistakes in
judgment and personal carelessness
b.Adequate safeguards over access to assets and records should permit an entity
to maintain proper accountability
c.Establishing and maintaining internal control is an important responsibility of
management
d. The cost of an entity’s internal control should not exceed the benefits expected to
be derived
3.Management’s attitude toward aggressive financial reporting and its emphasis on
meeting projected profit goals most likely would significantly influence an entity’s control
environment when
a.External policies established by parties outside the entity affect its accounting
practices
b.Management is dominated by one individual who is also a shareholder
c.Internal auditors have direct access to the board of directors and the entity’s
management
d.The audit committee is active in overseeing the entity’s financial reporting
policies.
4.Which of the following auditor concerns most likely could be so serious that the auditor
concludes that a financial statement audit cannot be conducted?
a.The entity has no formal written code of conduct
b.The integrity of the entity’s management is suspect
c.Procedures requiring segregation of duties are subject to management override
d.Management fails to modify prescribed controls for changes in condition.
5.Which of the following is a management control method that most likely could improve
management’s ability to supervise company activities effectively?
a.Monitoring compliance with internal control requirements imposed by regulatory
bodies.
b.Limiting direct access to assets by physical segregation and protective devices
c.Establishing budgets and forecasts to identify variances from expectations
d.Supporting employees with the resources necessary to discharge their
responsibilities.
6.Which of the following is not a component of an entity’s internal control?
a.Control risk
b.Control activities
c.The information and communication
What are the Limitations of Internal Controls?
A system of controls does not provide absolute assurance that the control objectives of an organization will be met. Instead, there are several inherent limitations in any system that reduce the level of assurance. These inherent limitations are as follows.
Collusion
Two or more people who are intended by a system of control to keep watch over each other could instead collude to circumvent the system. Since this essentially eliminates a control, the probability of losses being incurred is greatly increased.
Human Error
A person involved in a control system could simply make a mistake, perhaps forgetting to use a control step. Or, the person does not understand how a control system is to be used, or does not understand the instructions associated with the system. This may be caused by the assignment of the wrong person to a task.
Management Override
Someone on the management team who has the authority to do so could override any aspect of a control system for his personal advantage.
Missing Segregation of Duties
A control system might have been designed with an insufficient segregation of duties, so that one person can interfere with its proper operation.
Consequently, it must be accepted that no system of internal controls is perfect. There is always a way in which it can fail or be circumvented.