2017-11-30
1922
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 human judgment under pressures 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.
4. Collusion: 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.
5. Human error. A person involved in a control system could simply make a mistake, perhaps forgetting to use a control step. Or, the person does not understand how a computer system is to be used, or does not understand the instructions associated with the system.
Additional information Question 22, Question 23
There are several techniques for recording the assessment of control risk; that is, the system
• Narrative notes • Questionnaires• Flowcharts • Checklists
Explain how auditors record internal control systems including the use of, narrative notes, flowcharts, internal control questionnaires and internal control evaluation questionnaires
There are several techniques for recording the assessment of control risk; that is, the system. One or more of the following may be used depending on the complexity of the system. • Narrative notes • Questionnaires • Flowcharts • Checklists
Narrative notes
The purpose of narrative notes is to describe and explain the system, at the same time as making any comments or criticisms which will help to demonstrate an intelligent understanding of the system.
Advantages: 1) They are relatively simple to record and can facilitate understanding by all audit team members. 2) They can be used for any system due to the method's flexibility. 3) Editing in future years can be relatively easy if they are computerised.
Disadvantages: 1) Describing something in narrative notes can be a lot more time consuming than, say, representing it as a simple flowchart, particularly where the system follows a logical flow. 2) They are awkward to update if written manually. 3) It can be difficult to identify missing internal controls because notes record the detail of systems but may not identify control exceptions clearly.
Flowcharts
Flowcharts can take many forms, but in general are graphic illustrations of the physical flow of information through the accounting system. Flowlines represent the sequences of processes, and other symbols represent the inputs and outputs to a process. An example of an accounts receivable flowchart follows.
Advantages: 1) After a little experience they can be prepared quickly. 2) As the information is presented in a standard form, they are fairly easy to follow and review. 3) They generally ensure that the system is recorded in its entirety, as all document flows have to be traced from beginning to end. Any 'loose ends' will be apparent from a cursory examination. 4) They eliminate the need for extensive narrative and can be of considerable help in highlighting the salient points of control and any deficiencies in the system.
Disadvantages: 1) They are most suitable for describing standard systems. Procedures for dealing with unusual transactions will normally have to be recorded using narrative notes. 2) Major amendment is difficult without redrawing. 3)Time can sometimes be wasted by charting areas that are of no audit significance.
