Chapter 2 Internal Controls PDF

Internal Control and COSO Framework ===================================  Describe the three primary objectives of effective internal control -------------------------------------------------------------------  Management and Auditor Responsibilities fo...

Internal Control and COSO Framework ===================================  Describe the three primary objectives of effective internal control -------------------------------------------------------------------  Management and Auditor Responsibilities for Internal Control ------------------------------------------------------------ - Management, not the auditor, must establish and maintain the entity's internal - ### Two key concepts underlie management's design and implementation of - Reasonable assurance - Inherent limitations Management*'*s Section 404 Reporting Responsibilities ----------------------------------------------------- ### Management of all public companies is to issue an internal control report - A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting - An assessment of the effectiveness of the internal control structure and procedures for financial reporting as of the end of the company's fiscal year.  Auditor Responsibilities for Understanding Internal Control ----------------------------------------------------------- ### Auditors are required to: - Obtain an understanding of internal control relevant to the audit on every audit engagement. - Report on the effectiveness of internal control over financial ### Auditors are primarily concerned about: - Controls over the reliability of financial reporting. - Controls over classes of transactions. Example Section 404 Management Report on Internal Control over Financial Reporting ----------------------------------------------------------------------------------  - Describe the three broad objectives management has when designing effective internal control. - Identify the specific Section 404(a) reporting requirements for management. - Describe which of the three categories of broad objectives for internal controls are considered by the auditor in an audit of both the financial statements and internal control over financial reporting. - What two aspects of internal control must the auditor assess when performing procedures to obtain an understanding of internal control? COSO Model ========== to be financial 9  COSO Components of Internal Control ----------------------------------- - ### Control environment - Consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the entity. - ### Risk assessment - Involves a process for identifying and analyzing risks that may prevent the organization from achieving its objectives. - ### Control activities - Policies and procedures that help ensure that necessary actions are taken to COSO Components of Internal Control ----------------------------------- - ### Information and communication - To initiate, record, process, and report the entity's transactions and to - ### Monitoring - Deal with ongoing or periodic assessment of the quality of internal control by management to determine that controls are operating as intended and that they are modified as appropriate for changes in conditions. College of Banking and Financial Studies -- -- -- -- -- -- -- -- -- -- -- -- -- -- Eli powerIng Yo‹ir Fut« e /x Ac  - What are the five components of internal control in the COSO internal - What is the relationship among these five components? - How do the COSO principles help an organization assess whether internal controls are designed and operating effectively?  - What major factors permitted the embezzlement to take place?