Limitations of Internal Control
Limitations of internal control will always exist no matter what industry the company is in or how strong the control procedures are in place. Hence, it is important to understand those limitations of internal control and be warned so that we can avoid them as much as possible.
In the table below are the six limitations of internal control:
| Limitations of Internal Control | |
|---|---|
| Reasonable assurance | Internal control can only provide reasonable assurance, not absolute assurance. It cannot ensure 100% that error or fraud will never occur. |
| Override control | Internal control will not work if it is overridden by management or personnel with high authority. It may be possible that management can override the controls with their authority, e.g. if the CEO tells low-level employees to do something, they usually will do so, even it will not comply with control policies. |
| Collusion | Internal control will not work either if the personnel or management collude to by-pass the control. This limitation of control is the type that overtakes the segregation of duties control procedures.
For example, segregation of duties can be extremely effective in an internal control system. However, if people who are supposed to act independently collude among themselves, the internal control of segregation of duties here will not work anymore. |
| Deliberate circumvention | Although the internal controls are implemented to prevent or detect errors, deliberate circumvention by people in the system can still occur. |
| Events outside expectation | Controls are usually designed to cope with routine activities. The controls might not work against any irregular event outside the expectation. This limitation of control usually happens for the new implementation of control procedures and requires a regular monitoring process. |
| Cost-benefit consideration | Controls that cost more than the benefit they are expected to receive are not worth having. Usually, the company may decide that certain controls are too costly to implement, considering the risk that can occur due to the lack of such controls. |
However, strong internal controls are still essential despite having those existences of internal control limitations. This is due to internal controls bring many benefits to the business operations of the company. In this case, good internal controls can help the company achieve efficient and effective business operations.
In addition to having efficient and effective business operations, internal controls also help the company to minimize the risk of error and fraud, safeguard its assets, and comply with various laws and regulations.
In short, internal controls are the policies and procedures that the company implements in order to minimize the risks that prevent it from achieving its objective.