AA – Nov 2020 – L2 – Q1c – Internal Control Systems

Discuss the limitations of internal controls and how they affect an organization’s ability to prevent errors and fraud.

Question

Explain the limitations of internal controls.

Answer

Human error may result in incomplete or inaccurate processing, which may not be detected by control systems.
It may not be cost-effective to establish certain types of controls within an organization.
Controls may be ignored or overridden by employees or management, leading to control failures.
Collusion may make segregation of duties ineffective. Collusion occurs when two or more people work together to bypass controls, often to commit fraud.