Question

What is meant by the concept of reasonable assurance in terms of internal control? What are the inherent limitations of internal control?

A) Reasonable assurance means absolute certainty, and the limitations include human error and technology failures.

B) Reasonable assurance provides a high level of confidence but not absolute assurance, and limitations include cost considerations and management override.

C) Reasonable assurance is a term used only in financial reporting, and limitations include external audit constraints and regulatory oversight.

D) Reasonable assurance is a guarantee that fraud will not occur, and limitations include the lack of employee training.

Answer 1

Reasonable assurance in internal control provides a high level of confidence but not absolute assurance.

The limitations of internal control include cost considerations, management override, human error, and technology failures.

Step-by-step explanation:

The concept of reasonable assurance in terms of internal control refers to providing a high level of confidence but not absolute assurance.

It is a goal of internal control systems to provide reasonable assurance that the organization's objectives are being achieved and that the financial statements are reliable.

The inherent limitations of internal control include factors such as cost considerations, management override, human error, and technology failures.

These limitations mean that even with effective internal controls in place, there is still a possibility that errors or fraud may occur.

For example, a company may implement controls to prevent unauthorized access to financial systems, but there is always a risk that an employee with access may misuse it.

Similarly, technological failures can impact the effectiveness of controls, leading to errors or fraud.