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Here are essay-based multiple-choice questions (MCQs) focused on the *limitations of internal control systems*. Each case addresses a core deficiency or constraint commonly tested on CIA and related audit exams
### Internal Control System and Its Limitations
***
#### Question 1:
**Case:**
A multinational corporation has designed robust internal control procedures to safeguard assets. However, during an audit, several errors are detected in the payroll due to incorrect interpretation of overtime rules by staff.
**Which inherent limitation of internal controls does this scenario illustrate the most?**
A. Management override
B. Human error and judgment flaws
C. Employee collusion
D. Cost-benefit constraint
**Answer:**
***
#### Question 2:
**Case:**
The CEO of Company Y bypasses the purchase approval process twice in the last quarter to expedite business-critical orders, overruling junior staff objections.
**This is an example of which limitation of internal control systems?**
A. Employee collusion
B. Technological limitations
C. Management override
D. Lack of segregation of duties
**Answer:**
***
#### Question 3:
**Case:**
Two employees in the finance department conspire to authorize and record fictitious payments, effectively circumventing automated controls.
**Which internal control limitation is most evident here?**
A. Outdated technology
B. Management override
C. Employee collusion
D. Excessive controls
**Answer:**
***
#### Question 4:
**Case:**
A small retail company hesitates to invest in expensive automated inventory systems, relying instead on periodic manual counts, increasing the risk of errors and theft.
**What limitation of internal controls is illustrated?**
A. Lack of accurate data
B. Cost-benefit constraint
C. Control activities overlap
D. Inconsistent controls
**Answer:**
***
#### Question 5:
**Case:**
Company Z uses an old accounting software that does not flag duplicate payments or provide real-time fraud alerts.
**Which limitation is most relevant in this scenario?**
A. Human judgment flaws
B. Employee collusion
C. Technological limitations
D. Management override
**Answer:**
***
### Key Takeaways
- Internal controls, while necessary, can never guarantee absolute assurance due to human error, management override, collusion, cost-benefit constraints, and technology gaps
- Auditors must assess and address these limitations through periodic reviews and by recommending compensating controls wherever practical
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*Answers*
Here are essay-based multiple-choice questions (MCQs) with answers and explanations focused on the *limitations of internal control systems*. Each case addresses a core deficiency or constraint commonly tested on CIA and related audit exams
### Internal Control System and Its Limitations
***
#### Question 1:
**Case:**
A multinational corporation has designed robust internal control procedures to safeguard assets. However, during an audit, several errors are detected in the payroll due to incorrect interpretation of overtime rules by staff.
**Which inherent limitation of internal controls does this scenario illustrate the most?**
A. Management override
B. Human error and judgment flaws
C. Employee collusion
D. Cost-benefit constraint
**Answer:**
B. Human error and judgment flaws
**Explanation:**
Despite well-designed controls, human error—such as misinterpretation or oversight—remains a fundamental limitation. Employees may unknowingly make mistakes, affecting the reliability of internal controls
***
#### Question 2:
**Case:**
The CEO of Company Y bypasses the purchase approval process twice in the last quarter to expedite business-critical orders, overruling junior staff objections.
**This is an example of which limitation of internal control systems?**
A. Employee collusion
B. Technological limitations
C. Management override
D. Lack of segregation of duties
**Answer:**
C. Management override
**Explanation:**
Management override occurs when individuals in positions of authority bypass or overrule established controls, exposing the organization to risk even when controls exist on paper
***
#### Question 3:
**Case:**
Two employees in the finance department conspire to authorize and record fictitious payments, effectively circumventing automated controls.
**Which internal control limitation is most evident here?**
A. Outdated technology
B. Management override
C. Employee collusion
D. Excessive controls
**Answer:**
C. Employee collusion
**Explanation:**
Collusion between employees can defeat otherwise effective controls, as joint action can allow one individual to cover the tracks of the other, making fraud harder to detect
***
#### Question 4:
**Case:**
A small retail company hesitates to invest in expensive automated inventory systems, relying instead on periodic manual counts, increasing the risk of errors and theft.
**What limitation of internal controls is illustrated?**
A. Lack of accurate data
B. Cost-benefit constraint
C. Control activities overlap
D. Inconsistent controls
**Answer:**
B. Cost-benefit constraint
**Explanation:**
Cost considerations may prevent organizations from implementing the strongest possible controls, especially if the expense outweighs perceived benefits. This trade-off may increase risk exposure
***
#### Question 5:
**Case:**
Company Z uses an old accounting software that does not flag duplicate payments or provide real-time fraud alerts.
**Which limitation is most relevant in this scenario?**
A. Human judgment flaws
B. Employee collusion
C. Technological limitations
D. Management override
**Answer:**
C. Technological limitations
**Explanation:**
Outdated systems can hinder the effectiveness of internal controls, fail to provide timely alerts, and remain vulnerable to sophisticated
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