Limitations of internal control system in preparing an audit
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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.
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Solution Summary
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.
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Solution:
The aim of the internal control system is ensuring compliance with accounting policies and procedures, protecting the organization's assets, and preparing reliable and timely financial reports.
Limitations of the Internal Control System
Limitations of Internal Control
Internal control is designed to provide reasonable assurance that assets are properly safeguarded and that the accounting records are reliable. The concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit. The human element is a factor in every system of internal control. A good system can become ineffective as a result of employee fatigue, carelessness, or indifference. Occasionally two or more employees may work together in order to get around prescribed controls (collusion). Collusion can significantly impair the effectiveness of a system of internal control because it eliminates the protection anticipated from segregation of duties.
The size of the business may impose limitations on internal control. A small company may find it difficult to apply the principles of segregation of duties and independent internal verification. An important and inexpensive measure any business can take to reduce employee theft and fraud is to conduct thorough background checks. Two tips include: Check to see whether job applicants actually graduated from the schools they list. Never use the telephone numbers for previous employers given on ...
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