Enterprise Risk Management and Internal Control

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Questions and Answers

What is the primary purpose of the Annual Risk Profile in an agency?

To report on financial losses

To evaluate employee performance

To assess external and internal risks (correct)

To ensure compliance with training programs

Which of the following is NOT one of the major types of risk identified?

Market (correct)

Control

People

Inherent

What does an 'unmodified statement of assurance' indicate?

The agency is completely ineffective

The agency is effective, with no material weaknesses (correct)

The agency has unresolved material weaknesses

The agency has significant internal weaknesses

Which organization is known for setting international standards in ERM and internal controls?

Committee of Sponsoring Organizations (COSO) Signup and view all the answers

What is the key function of internal controls within an agency?

To ensure efficient resource use while achieving intended results Signup and view all the answers

What does Enterprise Risk Management (ERM) primarily focus on?

Identifying, assessing, and managing risks Signup and view all the answers

Which component is NOT part of establishing and achieving goals and objectives in ERM?

Conducting market analysis Signup and view all the answers

What is the focus of the Internal Control Over Reporting (ICOR) requirement under OMB Circular A-123?

Providing assurance testing for financial reports Signup and view all the answers

Which of the following is included in the risk profile development mandated by OMB Circular A-123?

Current Risk Response Signup and view all the answers

What is the purpose of the Federal Managers' Financial Integrity Act (FMFIA) of 1982?

To mandate annual assurance statements from agency heads Signup and view all the answers

Which two types of controls are presented in the Federal Information System Controls Audit Manual (FISCAM)?

General Controls and Business Process Controls Signup and view all the answers

What does the Green Book by the Government Accountability Office focus on?

Standards for Internal Control in the Federal Government Signup and view all the answers

What is one of the primary responsibilities of management under the risk management framework?

Maintaining compliance with relevant laws and regulations Signup and view all the answers

Study Notes

Enterprise Risk Management (ERM) and Internal Control (IC)

Key components of a strong governance framework.
ERM involves identifying, assessing, and managing risks, while IC ensures objectives are achieved through processes controlled by management and other personnel.

5 Framework Responsibilities

These responsibilities are key to setting goals and achieving them, ensuring operational efficiency, maintaining reliable reporting, complying with laws and regulations, and effectively managing risks.

Center of ERM & IC Requirements

OMB Circular A-123
- Mandates risk profile development and includes 7 core components:
  - Identifying objectives
  - Identifying risks
  - Inherent risk assessment
  - Current risk response
  - Residual risk assessment
  - Proposed risk response
  - Proposed action category
- Internal Control Over Reporting (ICOR) [previously Internal Control Over Financial Reporting (ICOFR)] provides assurance testing for financial reports.
- Federal Information System Controls Audit Manual (FISCAM) provides methodology for information system control audits. It focuses on general and business process controls.
Federal Managers' Financial Integrity Act (FMFIA) of 1982
- Also known as the Integrity Act.
- Section 2 of FMFIA requires an Annual Statement of Assurance from each executive agency head submitted to the President and Congress.
A-123 and FMFIA reinforce the Government Performance and Results Act Modernization Act (GPRAMA).
Government Accountability Office (GAO) Standards for Internal Control in the Federal Government (The Green Book)

Risk Management and Internal Control Reporting

Agencies complete an Annual Risk Profile and submit it externally in the Agency Financial Report (AFR) or the Performance and Accountability Report (PAR).

Leading ERM and Internal Controls International Standards Setters

Committee of Sponsoring Organizations of the Treadway Commission (COSO)
International Organization for Standardization (ISO)

ERM Definition

Agency-wide approach that manages the organization's external and internal risks collectively, considering the interconnectedness of risks across different areas.

Major Types of Risk

Inherent: Risks that are inherent to the organization and its operations.
People: Risks associated with human actions, such as errors, fraud, or misconduct.
Control: Risks that arise from control failures or weaknesses in the organization's internal control system.

Shared Service Providers

Although relying on third-party providers, management remains responsible for processes and user controls. Monitoring the entire process is essential.

Internal Controls provide reasonable assurance that:

Program objectives are achieved.
Resources are used efficiently.
Protection from waste, fraud, and mismanagement.
Laws and regulations are followed.
Financial reporting is accurate and reliable.

5 Components of Internal Controls

Control Environment: The overall tone and culture of the organization that influences risk management practices.
Risk Assessment: Identifying and analyzing risks to determine their likelihood and impact.
Control Activities: Policies and procedures implemented to mitigate risks.
Information and Communication: Ensuring information related to risks and controls is effectively communicated throughout the organization.
Monitoring: Continuously evaluating the effectiveness of controls and making necessary adjustments.

Internal Control Deficiencies

Control Deficiency: A deficiency in internal control where there is a reasonable possibility that a misstatement of the entity’s financial statements could occur and not be prevented or detected by internal control.
Significant Deficiency: A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Material Weakness: A deficiency, or a combination of deficiencies, in internal control, such as a significant deficiency, that results in a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected on a timely basis.

OMB Circular No. A-130, Appendix I

Outlines responsibilities regarding protecting and managing federal information resources, including security and privacy programs.

Annual Statements -- Levels of Assurance

Unmodified Statement of Assurance: Indicates effective internal controls, with no material weaknesses.
Modified Statement of Assurance: Indicates effective internal controls, with one or more material weaknesses.
Statement of No Assurance: Indicates no control assessments were performed, and material weaknesses are pervasive.

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Description

Explore the essential components of Enterprise Risk Management (ERM) and Internal Control (IC) and their significance in governance frameworks. This quiz covers key responsibilities outlined by OMB Circular A-123, their role in operational efficiency, and compliance with regulations. Test your knowledge on risk management processes and internal controls.