Limitations Of Internal Control. Why Do Limitations On Internal Control Exist?

Understanding the Limitations of Internal Controls – Learning to Mitigate Your Gamble

You only received the draft SOC 1 or SOC 2 report from your auditor and as you're scrolling through the opinion, y'all observe a reference to "Inherent Limitations." Inherent Limitations? Is your SOC written report suggesting your controls are inadequate?

Your accountant is not telling the world you accept weak controls; withal, every auditor stance volition reference the inherent limitations of internal controls, generally stated like this:

"Considering of their nature, controls may not ever operate effectively to provide reasonable assurance that the service organisation's service commitments and system requirements are achieved based on the applicable trust services criteria. Also, the projection to the future of any conclusions virtually the suitability of the design and operating effectiveness of controls is subject to the hazard that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate." For additional guidance, refer to this helpful resource from the AICPA.

What are Internal Controls?

If you're reading this, chances are you lot already know what an internal control is. As nosotros've previously discussed on another weblog post, "internal controls (which include manual, IT-dependent transmission, IT general, and application controls) are essential process steps that allow for one to determine or confirm whether certain requirements are beingness washed per a certain expectation, police force, or policy. Additionally, internal controls allow auditors to perform tests to gain balls that a process is designed and operating properly." Any compliance framework (SOX, SOC1, SOC2, PCI, HITRUST, etc.) requires the auditee to establish a set of internal controls that an auditor can exam to demonstrate compliance with the framework.

Why do internal controls have inherent limitations?

Why Do Internal Controls Accept Inherent Limitations?

Internal controls are inherently limited for many reasons. I, controls are assessed over a period of fourth dimension, but are not necessarily indicative of a future period of time. Two, auditors are unable to obtain absolute assurance with respect to your internal controls considering of factors such as the need for judgment, the utilise of sampling, etc. Much of the bear witness made available to the accountant is persuasive rather than conclusive in nature. Finally, there is a risk of material omissions or errors made past the accountant or auditee.

What are the Inherent Limitations of Internal Control?

The almost common inherent limitations of internal control tin can be summarized into 5 categories:

Collusion – the risk that ii or more employees could act together to undermine the functioning of an internal command. An example of this is a scenario where two engineers work together to facilitate the blessing and release of an erroneous or malicious system change. The system alter will appear to have followed the SDLC procedure, but the malicious intent may not be discovered until after the fact.
Management Override – the risk that certain individuals have the authority to authorize an exception to an internal control. For example, the Master Information Security Officer may have the authorisation to approve elevated access permissions for individuals, but if washed inappropriately, it could undermine your access management controls.
System Error – the risk that automated, system controls break downwardly without detect. More than and more companies rely on automatic organization controls to maintain the security, availability, and integrity of their systems. Notwithstanding, if the configuration to enforce encryption is overridden in a organisation upgrade, you may lose a key data protection control if no ane is alerted of the modify.
Human being Fault – the risk that your employees are improperly trained, have bereft experience, or are prone to making mistakes. Your internal controls are but as strong as the humans that operate them, and so if your system administrator does non empathize the importance of disabling access for terminated employees within 24 hours, your access removal control volition be rendered ineffective.
Wrong Judgment – the risk that y'all have misidentified controls to fairly mitigate the take a chance to your business or operating environment. Identifying acceptable internal controls is more an art than a science, and you may realize the industry-leading vulnerability scanner is not suitable for your technology after you identify vulnerabilities that it missed.

How do I mitigate against limitations of internal controls?

How Practice I Mitigate Against the Limitations of Internal Controls?

This is terrible news, right? What was the betoken of investing and so much fourth dimension and coin into your SOC i or SOC two report if it's inherently limited? Don't despair. You can mitigate the risks of these inherent limitations by designing your internal command environment to include a variety of control types. Your internal controls should include a combination of manual controls and automated controls. You lot should establish both preventative controls and detective controls. To mitigate the risks we described to a higher place, consider the post-obit:

Bunco – in addition to a well established SDLC process that requires adequate change testing, approvals, and access controls, implement automated alerting of changes released to production to a broad audience.
Management Override – the adventure that certain individuals have the authority to authorize an exception to an internal command. For example, the Chief Information Security Officer may have the potency to approve elevated admission permissions for individuals, just if done inappropriately, it could undermine your access direction controls..
System Error – implement automated monitoring and alerting on key configurations/controls.
Human Fault – constitute functioning review protocols that include an evaluation of your employees' internal control responsibilities.
Incorrect Judgment – bear periodic risk assessments to re-evaluate your electric current internal controls confronting emerging threats, changes to your operating surroundings, evolving technologies, etc.

Summary

In summary, internal controls may have inherent limitations, just y'all tin can mitigate this risk. Absolute assurance over an internal control surround may non be doable, just a good auditor can guide y'all through the process of developing an internal command environment that will requite y'all the best run a risk for success. For more than information, reference the following resource or reach out to Linford & Co. to talk over further.

What Are Internal Controls? The 4 Primary Types of Controls
Establishing an Effective Internal Control Surround
Control Objectives & Activities: What Are They & What's Appropriate?

Maggie spent nearly 10 years in KPMG's Information technology Advisory and Attestation practice before joining a financial technology company as the Take chances and Compliance Director. She has overseen numerous SOC 1 / SOC 2 audits and other It Compliance audits and has vast feel implementing risk management and IT compliance solutions. She is Certified in Risk and Information Systems Control (CRISC) and obtained a Bachelor of Science in Business Administration, Finance, from the University of Colorado at Boulder.