LIMITATIONS OF INTERNAL CONTROLS

No matter how well the internal controls are designed, they can only provide a reasonable assurance that
objectives will be achieved. Some limitations are inherent in all internal control systems. These limitations include:

Judgment – the effectiveness of controls will be limited by decisions made with human judgment under pressures to conduct business based on the information available at hand.

Breakdowns – even well designed internal controls can break down. Employees sometimes misunderstand instructions or simply make mistakes. Errors may also result from new technology and the complexity of computerized information systems.

Management Override – high level personnel may be able to override prescribed policies or procedures for personal gains or advantages. This should not be confused with management intervention, which represents
management actions to depart from prescribed policies and procedures for legitimate purposes.

Collusion – control system can be circumvented by employee collusion. Individuals acting collectively can alter financial data or other management information in a manner that cannot be identified by control systems.

A well designed process with appropriate internal controls should meet most if not all of these control objectives.