30.Limitations of Internal Controls
Internal controls can provide reasonable assurance to management and the board of directors regarding the achievement of an entity’s objectives.
Reasons for limitations
(a) Management Override
Management can overrule prescribed policies or procedures for illegitimate purposes such as personal gain.
Override practices include making deliberate misrepresentations to auditors and others such as by issuing false documents to support the recording of fictitious sales transactions.
(b) Mistake in judgement
Management may exercise poor judgement in making business decisions or in performing routine duties because of inadequate information or time constraints.
(c ) Collusion
Individuals acting together such as employees or management may be able to perpetrate and conceal an irregularity so as to prevent its detection by the internal control system.
(d) Breakdowns
Breakdowns in established controls may occur because personnel misunderstand instructions or make errors due to carelessness or distractions.
Changes in personnel or in systems or procedures may also contribute to breakdowns