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2 4 Limitations Internal Controls

This document discusses the limitations of internal controls for government agencies. It notes that while internal controls provide reasonable assurance, they cannot guarantee that agency objectives will be met. Limitations can arise from human errors, lack of resources, or inflexible systems. The document provides examples of how internal controls can break down, such as from staff carelessness or controls failing to flag unusual transactions. It recommends actions like staff training, regular risk reviews, and internal audits to minimize these limitations. For smaller agencies with limited staff, alternative measures like spot checks or board oversight of transactions are suggested.

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997 views

2 4 Limitations Internal Controls

This document discusses the limitations of internal controls for government agencies. It notes that while internal controls provide reasonable assurance, they cannot guarantee that agency objectives will be met. Limitations can arise from human errors, lack of resources, or inflexible systems. The document provides examples of how internal controls can break down, such as from staff carelessness or controls failing to flag unusual transactions. It recommends actions like staff training, regular risk reviews, and internal audits to minimize these limitations. For smaller agencies with limited staff, alternative measures like spot checks or board oversight of transactions are suggested.

Uploaded by

Zohaib Aslam
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Financial Accountability Handbook

> > Vo l u m e 2 Governance


Information Sheet 2.4 – Limitations of Internal Controls

Introduction
An effective internal control system can only ever provide reasonable assurance that an agency’s
operating systems, financial controls, reporting and other agency processes are working
effectively. No matter how well designed and operated, internal control systems cannot provide
absolute assurance that agency objectives have been, and will continue to be, met.
Designing and implementing effective systems of internal control requires management to clearly
understand agency objectives and its operating environment. Management also needs to
recognise the inherent limitations in the design and application of systems that may impact on the
ultimate delivery of agency objectives and services.
This Information Sheet is designed to highlight the inherent limitations in systems of internal
controls and processes, and suggest actions to minimise potential internal control breakdowns.

Internal controls – potential limitations


Effective internal control systems reduce the probability of errors or omissions in agency
operations. However, there can be limitations in the effectiveness of internal controls. Limitations
to the effectiveness of internal controls may result from system omissions, human factors,
resource constraints or lack of system flexibility.
For example, causes of breakdowns in internal control systems may include:
• staff carelessness, poor judgement or lack of knowledge
• internal control processes do not reflect changed operating conditions, specific agency
activities or potential new risks
• collusion by staff for personal gain or other motives
• controls fail to capture or flag unusual transactions, and
• controls and processes are viewed as a hindrance in the delivery of agency services.
Actions to minimise internal control breakdowns might include:
• management displaying a culture of responsiveness to identified control weaknesses and
encouraging reporting of internal control weaknesses
• training in internal control processes as part of staff induction, with regular follow up training
• easy access to user-friendly documented internal procedures
• regular review of potential risks that may significantly impact agency operations
• regular review and update of internal operational, financial and other processes
• establishment of effective internal audit and risk management functions
• assessment and adoption of audit recommendations, when appropriate, and
• design and implementation of an effective fraud, corruption and official misconduct mitigation
strategy.
>> Volume 2 Governance IS 2.4 Limitations of Internal Controls

Financial Management Framework


Smaller agencies and bodies
>> OvervSmaller
iewagencies
Diagram and offices with few staff (for example, departmental regional offices) may have
limited opportunities to apply internal control processes as rigorously as would be the case in
larger offices (for example, less effective segregation of duties due to limited staff numbers).
June 2008
In these instances, it is suggested that agency management consider the adoption of innovative
measures to assist in mitigating the impact of potential limitations in agency internal control
systems.
Examples of such measures may include:
• spot checks of various transactions
• regular reporting from agency management on specific operational matters and agreed key
performance indicators, and
• for smaller statutory bodies, utilising independent board members to approve or review
transactions etc.

Further information
If you have any questions concerning the Financial Accountability Handbook, please contact the
relevant Business Branch of Treasury for your agency.
Alternatively, email the Financial Management Helpdesk with details of your query and a
response will be provided by the Financial Management Branch of Treasury:
• Email: [email protected]

Financial Accountability Handbook Date Issued: January 2010 Page 2 of 2

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