You are an accountant at a local CPA firm that is auditing the accounting records of ABC Company. You have been asked to educate the accounting department about the limitations of the internal control system in preparation for an upcoming audit. During your audit, you have identified that because of a weak internal control system, an adjusting entry for prepaid insurance was not recorded for the first 3 months of the year at $500 per month.
- Identify the limitations of the internal control system. Provide at least 3 limitations.
- Provide at least 2 examples of internal control procedures, and explain how these procedures can be implemented.
- Identify symptoms of a lack of internal control.
- Explain the impact of the missing journal entry on the financial statements of the company.
Q: Identify the limitations of the internal control system. Provide at least 3 limitations.
Internal control systems are procedures or rules that are intended to prevent or find unauthorized transactions and ensure that all transactions are recorded properly in the books and records of the firm (none left out and no extra ones get in). But controls are not fool proof. Here are some limits: (1) Workers might not follow the procedures, either because they were not properly trained, because they forget, or because they are trying to do something wrong. (2) Managers have the authority to ask workers to skip procedures or to omit a step in the process without anyone questioning them. After all, management makes the rules so they can decide when the rule can be broken. This is called "management override." (3) Controls, if followed, usually do a great job of preventing errors or unauthorized transactions in routine and expected transactions. However, unusual or one-time events ...
Your tutorial is 560 words and two references giving you three limitations, two examples of controls and how they work, and the corrected journal entry.