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What are some limitations of internal controls?

Short Answer

Expert verified

There are four limitations of the internal controls.

Step by step solution

01

Definition of internal controls

Internal controls are the control that helps in the proper management of the company.

02

Limitations if internal controls

1. Not Provide Assurance:

The first limitation of the internal controls is that it does not provide you assurance. Internal controls only provide effective controls. Hence, internal control is not the assurance that the problem is solved.

2. Human Error:

Internal controls are directly affected by human errors. If humans make some errors, then the complete process goes in vain.

3. Collision of Employees:

As you know, internal controls include the separation of duties that can cause conflict between employees.


4. Increase cost:

The following limitation of internal control increases the cost of the company.

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Most popular questions from this chapter

Computing the cash ratio Smythe Banners reported the following figures in its financial statements:

Cash $ 26,500 Cash Equivalents 5,000 Total Current Liabilities 30,000 Compute the cash ratio for Smythe Banners.

Preparing a bank reconciliation

The Cash account of Guard Dog Security Systems reported a balance of \(2,540 at December 31, 2018. There were outstanding checks totaling \)400 and a December 31 deposit in transit of \(100. The bank statement, which came from Park Cities Bank, listed the December 31 balance of \)3,340. Included in the bank balance was a collection of \(510 on account from Brendan Ballou, a Guard Dog customer who pays the bank directly. The bank statement also shows a \)30 service charge and $20 of interest revenue that Guard Dog earned on its bank balance. Prepare Guard Dogโ€™s bank reconciliation for December 31.

Identifying internal control weakness in cash receipts

Seawind Productions makes all sales on credit. Cash receipts arrive by mail. Justin

Broadway, the mailroom clerk, opens envelopes and separates the checks from

the accompanying remittance advices. Broadway forwards the checks to another

employee, who makes the daily bank deposit but has no access to the accounting

records. Broadway sends the remittance advices, which show cash received, to

the accounting department for entry in the accounts. Broadwayโ€™s only other duty

is to grant sales allowances to customers. (A sales allowancedecreases the customerโ€™s

account receivable.) When Broadway receives a customer check for \(600 less a

\)30 allowance, he records the sales allowance and forwards the document to the

accounting department.

Requirements

1. Identify the internal control weakness in this situation.

2. Who should record sales allowances?

3. What is the amount that should be shown in the ledger for cash receipts?

Understanding internal control, components, procedures, and laws

Match the following terms with their definitions.

1. Internal control

2. Control procedures

3. Firewalls

4. Encryption

5. Environment

6. Information system

7. Separation of duties

8. Collusion

9. Documents

10. Audits

11. Operational efficiency

12. Risk assessment

13. Sarbanes-Oxley Act

a. Two or more people working together to overcome internal controls.

b. Part of internal control that ensures resources are not wasted.

c. Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.

d. Should be prenumbered to prevent theft and inefficiency.

e. Limits access to a local network.

f. Example: The person who opens the bank statement should not also be the person who is reconciling cash.

g. Identification of uncertainties that may arise due to a companyโ€™s products, services, or operations.

h. Examination of a companyโ€™s financial statements and accounting system by a trained accounting professional.

i. Without a sufficient one of these, information cannot properly be gathered and summarized.

j. The organizational plan and all the related measures that safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting data.

k. Component of internal control that helps ensure business goals are achieved.

l. Rearranges data by a mathematical process.

m. To establish an effective one, a companyโ€™s CEO and top managers must behave honorably to set a good example for employees.

What is a bank reconciliation?

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