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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

Applying internal control over cash receipts by mail. Review the internal controls over cash receipts by mail presented in the chapter. Exactly what is accomplished by the final step in the process, performed by the controller?

How do businesses control cash receipts over the counter?

Recording credit card and debit card sales

Restaurants do a large volume of business with credit and debit cards. Suppose Summer,

Sand, and Castles Resort restaurant had these transactions on January 28, 2018:

National Express credit card sales $ 10,800

ValueCard debit card sales 10,000

Requirements

1. Suppose Summer, Sand, and Castles Resortโ€™s processor charges a 2% fee anddeposits sales net of the fee. Journalize these sales transactions for the restaurant.

2. Suppose Summer, Sand, and Castles Resortโ€™s processor charges a 2% fee anddeposits sales using the gross method. Journalize these sales transactions for therestaurant.

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?

Identifying internal controls. Consider each situation separately. Identify the missing internal control procedure from these characteristics:

โ€ข Assignment of responsibilities

โ€ข Separation of duties

โ€ข Audits

โ€ข Electronic devices

โ€ข Other controls (specify)

a. While reviewing the records of Quality Pharmacy, you find that the same Team member orders merchandise and approves invoices for payment.

b. Business is slow at Amazing Amusement Park on Tuesday, Wednesday, and Thursday nights. To reduce expenses, the business decides not to use a ticket taker on those nights. The ticket seller (cashier) is told to keep the tickets as a record of the number sold.

c. The same trusted team member has served as a cashier for 12 years.

d. When business is brisk, Fast Mart deposits cash in the bank several times during the day. The manager at one store wants to reduce the time employees spend delivering cash to the bank, so he starts a new policy. Cash will build up over weekends, and the total will be deposited on Monday.

e. Grocery stores such as Convenience Market and Natural Foods purchase most merchandise from a few suppliers. At another grocery store, the manager decides to reduce paperwork. He eliminates the requirement that the receiving department prepare a receiving report listing the goods actually received from

the supplier.

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