Explain inherent limitation of internal control

Azhruddin Khan

Azhruddin Khan

Student at CA FINAL

Published Aug 21, 2016

Inherent limitations are such features of audit that restrict the scope for an auditor to obtain absolute assurance. It is because of inherent limitation of an audit the practitioner can't assure the user of f.s.t that the f.s.t are absolutely free from material misstatement. As a result of these limitations auditor is expected to provide reasonable assurance.

Due to inherent limitation of audit auditor is only able to get Persuasive evidence instead of Conclusive evidence. But what’s the difference between Persuasive and Conclusive evidence.

• Persuasive evidence is evidence that has the power to influence or persuade someone to believe in its truth. For example: Your job is to check the receivable account balance, to accomplish this you send confirmation mail to the big clients and the sum of these clients is almost 75 % of the total percentage, if all customer replies with positive responses then you have enough persuasive evidence to issue an opinion on the accuracy of overall receivable account.

• Conclusive evidence is a solid evidence after which no further proof or inquiry is required & evidence in itself is complete. Conclusive evidence would be if you sent confirmation letter to all customer and pursued all customer until they respond.

Inherent limitations of audit are discussed below:

Inherent limitations can't be completely eliminated but the effect of such limitations can be minimized to an appropriate level.  

• Always plan the audit so that audit procedures can be carried out in efficient manner.
• Place more attention to those areas where auditor expects greater risk of material misstatement either due to fraud or error.
• Application of multiple audit procedures on the same area to get sufficient appropriate audit evidence with greater assurance and satisfaction.
• Setting appropriate materiality and performance materiality levels
• Conducting audit engagement with due care and professional scepticism.
• Strictly following the professional codes of ethics and maintaining independence in conducing audit engagement.

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:

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.