Which of the following is an example of inherent limitation in a clients internal control system?
In financial and managerial accounting, inherent risk is defined as the possibility of incorrect or misleading information in accounting statements resulting from something other than the failure of controls. Incidents of inherent risk are most common where accountants have to use a larger than normal amount of judgment and approximation, or where complex financial instruments are involved. It is often present when a company releases forward-looking financial statements. Show
Key Takeaways
Types of Audit RiskTo understand inherent risk, it helps to place it within the context of audit risk analysis. Audit risk is the risk of error while performing an audit, and it traditionally is broken into three distinct types.
Common Examples of Inherent RiskInherent risk is common in the financial services sector. The reasons include the complexity of regulating financial institutions (the large and ever-changing amount of rules and regulations), the large networks of related companies, and the development of derivative products and other intricate instruments which require complicated calculations to assess. Financial institutions often have longstanding and complicated relationships with multiple parties. A holding company might be involved with several different entities at once, each controlling special-purpose vehicles and other off-balance-sheet entities. Each organizational structure level might have large numbers of investor and client relationships. Related parties are notoriously less transparent than separate entities, too. Business relationships include those with auditors; both initial and repeat engagements with auditors create some inherent risk. Initial auditors might be overwhelmed by complexity or new topics. Repeat engagement may cause overconfidence or laxity due to personal relationships. Non-routine accounts or transactions can present some inherent risk. For example, accounting for fire damage or acquiring another company is uncommon enough that auditors run the risk of focusing too much or too little on the unique event. Inherent risk is particularly prevalent for accounts that require a lot of guesstimates, approximations, or value judgments by management. Fair value accounting estimates are difficult to make, and the nature of the fair value process should be disclosed in accounting statements. Auditors may have to investigate and interview the firm's decision-makers about estimation techniques to reduce error. This type of risk is magnified whether it occurs rarely or for the first time. Internal control cannot be designed to provide reasonable assurance that Answer (D) is correct. Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control? Answer (C) is correct. Internal controls are designed to provide reasonable assurance that Answer (D) is correct. Which of the following items is an example of an inherent limitation in an internal control system? Answer (D) is correct. Which of the following is a component part of the COSO’s internal control framework? Answer (B) is correct. The objective of the auditor is to
identify and assess the risks of material misstatement (RMMs). The auditor therefore identifies and assesses RMMs Answer (A) is correct. An auditor is evaluating a client’s internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect? Answer (B) is correct.
Which of the following is an inherent limitation of
internal control? Answer (A) is correct. Which of the following situations represents a limitation, rather than
a failure, of internal control?
Answer (A) is correct. An auditor uses the knowledge provided by the understanding of internal control and the assessed risks of material misstatement primarily to Answer (B) is correct. An entity should
consider the cost of a control in relationship to the risk. Which of the following controls best reflects this philosophy for a large dollar investment in heavy machine tools? Answer (C) is correct. Although substantive tests may support the accuracy of underlying information used in monitoring, these tests may provide no affirmative evidence of the effectiveness of monitoring controls because Answer (C) is correct. Manual controls would most likely be more suitable than automated controls for which of the following? Answer (A) is correct. Which of the following represents an example of an inherent limitation of internal controls? Answer (B) is correct. Which of the following best describes an inherent limitation that should be recognized by an auditor when considering the potential effectiveness of internal control? Answer (A) is correct. An auditor is concerned about management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor’s concern? Answer (D) is correct. The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with Answer (D) is correct. Which of the following factors would most likely be considered an inherent
limitation to an entity’s internal control? Answer (C) is correct. In an audit of financial statements, an auditor’s primary consideration regarding an internal control is whether the control Answer (A) is correct.
Which of the following is an inherent limitation in internal control? Answer (C) is correct. Internal control can provide only reasonable assurance of achieving an entity’s control objectives. The likelihood of achieving those objectives is affected by which limitation inherent to internal control? Answer (C) is correct. Which of the following statements is correct regarding internal control? Answer (B) is correct. Which of the following is an inherent limitation of any client's internal control?An inherent limitation of internal control is that controls can be circumvented by management override.
What are the inherent limitations of internal control system?Some of the most common limitations of internal controls include providing reasonable assurance, collusion, human error, control override, poor judgment, cost and benefit consideration, improper communication to or training of employees, and unforeseen circumstances.
Which of the following in inherent limitations of internal controls Mcq?Answer and Explanation: The correct answer is d. A strong internal audit department.
Which of the following is an inherent limitation?Answer: Explanation: INHERENT LIMITATION is whether the potential effectiveness of an entity's internal control is subject to inherent limitations, e.g., human fallibility, collusion, and management override.
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