AUDIT AND ACCOUNTS

Audit and Accounts

Audit and Accounts

Limitations of the Internal Control System

The internal control system should be designed to detect and prevent fraud, errors and omissions, and material misstatements, but it can only provide reasonable assurance that the financial statements are free from material misstatements.

Against major and complex the company, the greater the importance of an adequate system of internal control, then a sole proprietorship does not need a complex control system.

But when we have companies that have more than one owner, many employees, and many tasks delegated. Therefore owners need to lose control and internal control mechanism. This system must be sophisticated and complex as required in function of the complexity of the organization.

With the multi-type organization, managers give orders to their subsidiaries in different countries, but enforcement of the same can not be controlled with frequent participation. But if so its presence does not guarantee to avoid fraud.

Then the further away the owners of the operations but it is necessary is the existence of a structured system of internal control.

Internal control is not the panacea, it does not solve all the problems and weaknesses of an organization that is not representing the "total security" on the achievement of objectives. The internal control system only provides a reasonable degree of security, since the system is affected by a number of limitations inherent in it, such as making erroneous judgments in decision-making, human errors or failures, and so on. Furthermore, if we find collusion in 2 or more people, it is very likely that they can circumvent the system of internal control.

Many people believe that establishing a system of internal control and risk is just evil that prey on the company, and this is not as well, internal control is not the answer or final solution to all ills.

We distinguish 2 concepts when considering the limitations of internal control:

•Internal control functions at different levels with respect to different objectives. In the case of the operational objectives of internal control can not provide even a reasonable assurance that objectives will be achieved.

•Internal control can not provide assurance "absolute" with respect to any of the categories of objectives (Operational, Financial and Compliance).

There are certain facts or circumstances that are external to internal control, and moreover any system will do what you want to do, at most you can reasonably expect to obtain reasonable assurance. However, there are several factors that collectively support the concept of reasonable assurance, such as the cumulative effect of the controls.

The efficiency of controls will be limited by the risk of human error in decision making, and these are taken within time limits, according to information available and usually under pressure.

Within the nature of the decisions that affect the control, based on human judgments, we can describe the following:

•Dysfunctions of the system: The internal control despite being well designed can fail. Arising from errors can be misleading, or carelessness, forgetfulness, forgetfulness or fatigue. It is also likely to change the personnel system is not well trained or ...