CA RR, the internal auditor of ABC Ltd., a medium-sized trading company, was reviewing the company's internal control system as part of his audit procedures. He noticed following instances where errors and lapses occurre

Internal control systems can provide only reasonable assurance as it is affected by certain inherent limitations which include the following: Human judgement in decision making: Human judgement in decision-making may not be appropriate and therefore, breakdowns in internal control can occur because of human error. Lack of understanding the purpose: The operation of a control may not be effective, such as where information produced for the purposes of internal control (e.g. an exception report) is not effectively used because the individual responsible for reviewing the information does not understand its purpose or fails to take appropriate action. Collusion among people: Controls can be circumvented by the collusion of two or more people or inappropriate management override of internal control. E.g. management may enter into side agreements with customers that alter the terms and conditions of the entity's standard sales contracts, which may result in improper revenue recognition. Also, edit checks in a software program that are designed to identify and report transactions that exceed specified credit limits may be overridden or disabled. Judgement by Management: In designing and implementing controls, management may make judgements on the nature and extent of the controls it chooses to implement, and the nature and extent of the risks it chooses to assume.