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    Limitations of Internal Control System

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    Scenario: You are an accountant at a local CPA firm that is auditing the accounting records of XYZ 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 2 limitations.
    - Provide at least 3 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.

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    Solution Preview

    Identify the limitations of the internal control system. Provide at least 2 limitations.

    The problem with internal controls is that most can be "beaten" or overcome. For example, systems that are designed to prevent employee fraud can be defeated if two employees are in cahoots, for lack of a better term. Unfortunately, creating stricter internal control systems are much more time-consuming and expensive; ultimately taking away from other important duties. Another common limitation of internal control is the complexity of some. The saying is that "it can strangle the business with red tape." When controls are stringent and multifaceted, many minor things are surfaced thus causing more problems for the business. Management must be able to determine which risks and controls are worth the costs and benefits. If a fraudulent event takes place that only costs the business $50, is it worth the time and payroll for someone to investigate and even the possibility of the authorities and government becoming involved? Management needs to weigh the pros and cons. ...

    Solution Summary

    The solution explains how internal control systems can be overcome by fraudulent employees with examples and explains symptoms to look for in identifying such limitations being manipulated as well as the consequences of this type of behaviour. 666 words with one scholarly reference included.