Limitations of Internal Controls
No matter how well internal controls are designed, they can only provide reasonable assurance that objectives have been achieved. Some limitations are inherent in all internal control systems.
These include:
1. Judgment
The effectiveness of controls will be limited by decisions made with the human judgment under pressure to conduct business based on the information at hand.
2. Breakdowns
Even well designed internal controls can break down. Employees sometimes misunderstand instructions or simply make mistakes.
Errors may also result from new technology and the complexity of computerized information systems.
3. Management Override
High-level personnel may be able to override prescribed policies and procedures for personal gain or advantage.
This should not be confused with management intervention, which represents management actions to depart from prescribed policies and procedures for legitimate purposes.
Control systems can be circumvented by employee collusion. Individuals acting collectively can alter financial data or other management information in a manner that cannot be identified by control systems.
The costa of an entity’s internal control structure may exceed the benefits that are expected to be ensured.
Finally, a limitation of internal controls is that they are generally designed to deal with what normally or routinely happens in a business.
However, it may be the case that an unusual transaction may occur which does not fit into the normal routines, in which case standard controls may not be relevant to the unusual transaction. Hence, mistakes may be made about that unusual transaction.