INHERENT LIMITATIONS OF INTERNAL CONTROL

Internal control can provide only reasonable, but not absolute, assurance that the objectives stated above are achieved. This is because there are some inherent limitations of internal control, such as :

1.  management’s consideration that a control be cost-effective;
2.  the fact that most controls do not tend to be directed at transactions of unusual nature;
3.  the potential for human error;
4.  the possibility of circumvention of controls through collusion with parties outside the entity or with employees of entity;
5. the possibility that a person responsible for exercising control could abuse that authority, for example, a member of management overriding a control;
6. the possibility that procedures may become inadequate due to changes in conditions and compliance with procedures may deteriorate;
7.  manipulations by management with respect to transactions or estimates and judgements required in the preparation of financial statements.