...to make business decisions if financial information failed to reflect business operation and the company’s financial status. Broadly, the market would hurt due to the negative impact on the market efficiency. As a result, COSO, the Committee of Sponsoring Organizations of the Treadway Commission, was formed in 1985. It has published several comprehensive frameworks to help organizations to improve business operation and governance and to avoid fraud. The aim of this report was to study the development of COSO, including its history and main frameworks and guidance regarding internal control, enterprise risk management and fraud deterrence. The report interpreted the three areas under COSO framework with their key compositions and most recent updates. After the detailed interpretation, conclusion and recommendations were given. Keywords: Fraudulent Financial Reporting, COSO, Internal Control, ERM, Fraud Introduction and Background Financial information is a significant and unique composition of the world of business. Analysis on financial information can always help users to make business decisions. However, driven by short-term profit and specific business purposes, companies would take the risk of releasing fraudulent financial reporting. Fraudulent information would fail to lead to good business decisions. Back to 1970s, due to the occurrence of questionable corporate political campaign practices like the Watergate...
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...Checklist for Evaluating Internal Controls Lisa Cook ACC 544 October 31, 2011 Bret Mann Checklist for Evaluating Internal Controls Internal Control is to assist companies with reviewing and assessing its accountability within the organization. Internal controls are best practices for an organization that sets the tone and its main purpose is reducing business risk by controlling loss because of the misuse of the company’s assets. Fraud is sure to be detected through internal controls as well as help with the accuracy of its financial reporting. This analysis will provide a comprehensive checklist for evaluating internal controls and show how to apply the checklist to outline phases of the control evaluation. Evaluating Internal Controls Checklists The Committee of Sponsoring Organization (COSO) defines controls as the “process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following three categories: * Reliability of financial reporting. * Effectiveness and efficiency of operations. * Compliance with applicable laws and regulations. Internal control is designed to achieve objectives in various categories” (Louwers, et al, 2007, p. 149). The purpose for an internal control checklist is to analyze the efficiency of the organization’s controls in place, document the controls, and make recommendations and necessary improvements. Management...
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...organizational governance, business ethics, internal control, enterprise risk management, fraud, and financial reporting. COSO has established a common internal control model against which companies and organizations may assess their control systems. The COSO framework defines internal control as a process, effected by an entity's board of directors, management and other personnel, designed to provide "reasonable assurance" regarding the achievement of objectives in the following categories: * Effectiveness and efficiency of operations * Reliability of financial reporting * Compliance with applicable laws and regulations. * Safeguarding of Assets (MHA) The COSO framework involves several key concepts: * Internal control is a process. * Internal control is affected by people. * Internal control can be expected to provide only reasonable assurance, not absolute assurance, to an entity's management and board. * Internal control is geared to the achievement of objectives in one or more separate but overlapping categories. COSO internal control framework consists of five interrelated components derived from the way management runs a business. These components provide an effective framework for describing and analyzing the internal control system implemented in an organization as required by financial regulations (Securities Exchange Act of 1934). The five components are control environment, risk assessment, control objectives, information and communication...
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...MEMO To: Andrey Simonov From: Vivian Jeansonne Subject: Internal Controls and the Auditing of Internal Controls Date: March 19, 2013 _________________________________________________ The Internal Control—Integrated Framework, published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), defines internal control as “a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations” (Douglas). Internal controls are a very important aspect of a business which involves people at every level of an organization working together to achieve the same objectives. The three categories stated above address the different needs of a company and allow a specific focus in order for these needs to be met. The most important internal control to implement is over financial reporting. This involves preparing the financial statements so that they are presented fairly and accurately based on generally accepted accounting principles and any other financial reporting framework used by management (Landes & Ratcliffe). Fair presentation is when the accounting principles chosen by management have general acceptance and are appropriate in the circumstances. Financial statements must also reflect underlying transactions...
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...Internal Control - Integrated Framework Executive Summary Senior executives have long sought ways to better control the enterprises they run. Internal controls are put in place to keep the company on course toward profitability goals and achievement of its mission, and to minimize surprises along the way. They enable management to deal with rapidly changing economic and competitive environments, shifting customer demands and priorities, and restructuring for future growth. Internal controls promote efficiency, reduce risk of asset loss, and help ensure the reliability of financial statements and compliance with laws and regulations. Because internal control serves many important purposes, there are increasing calls for better internal control systems and report cards on them. Internal control is looked upon more and more as a solution to a variety of potential problems. Internal Control Internal control means different things to different people. This causes confusion among businesspeople, legislators, regulators and others. Resulting miscommunication and different expectations cause problems within an enterprise. Problems are compounded when the term, if not clearly defined, is written into law, regulation or rule. This report deals with the needs and expectations of management and others. It defines and describes internal control to: 1. Establish a common definition serving the needs of different parties. 2. Provide a standard against which business and other entities--large...
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...Question 1 of the 2011 Examination Paper The success or failure of an entity depends on its system of controls both accounting and administrative. Identify and discuss some of the key factors of the internal control systems of an organization with which you are familiar. Internal Control is an integral process that is effected by an entity’s management and personnel and is designed to address risks and to provide reasonable assurance that in pursuit of the entity’s mission, the following general objectives are being achieved: * Executing orderly ethical, economical, efficient and effective operations - the operations have to be well organized, methodical, and consistent with the organizations’ missions; * Fulfilling accountability obligations – the organizations and the employees within them are held responsible for their decisions and actions, including their stewardship of public funds, fairness, and all aspects of performance; * Complying with applicable laws and regulations – the organizations are required to comply with the laws and regulations relating to internal control systems; and * Safeguarding resources against loss, misuse and damage – controls should be embedded in each of the activities related to managing the entity’s resources from acquisition to disposal. Resources in the Public Sector generally entail public money and their use in the public interest generally requires special care, the significance of safeguarding resources in...
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...Six Components of Good Internal Control Systems for Smaller Entities Page 1 of 2 Published on AccountingWEB (http://www.accountingweb.com) Home > Six Components of Good Internal Control Systems for Smaller Entities Six Components of Good Internal Control Systems for Smaller Entities by AccountingWeb on Mar 4 2011printer friendly 16 Some of us were taught that internal control for smaller entities was an oxymoron. My supervisors made it clear that, because segregation of incompatible duties was not usually possible for smaller entities, internal control was non-existent. In 2006, COSO changed the rules by publishing Internal Control over Financial Reporting — Guidance for Smaller Public Companies and recognizing there are different rules for larger and smaller entities. Essentially, COSO said internal controls for smaller entities are more likely to be informal and carried out by one or a few persons. COSO’s guidance, audit standards from the PCAOB and AICPA attestation standards all require a top-down approach whenever considering internal controls. One or a few management persons performing control procedures (top-down) can produce a good internal control system for a smaller entity! Control procedures consist of entity-level and activity-level controls. For smaller entities, public or non-public, the design of control procedures should focus primarily on the entity-level (top-down) since the activity-level controls may be ineffective due to a lack of segregation...
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...Checklist for Evaluating Internal Controls ACC/544: Internal Control Systems Comprehensive Checklist for Evaluating Internal Controls As defined by the COSO framework, there are five elements that are used to explain an internal control system applied in an organization. These elements include: 1. Control Environment – The control environment is the foundation for the other four components of internal control. It outlines discipline and structure for the internal control method and consists of philosophy, ethical values, operating style, risk appetite, functioning of the board, and organizational structure (Louwers, Ramsay, Sinason, & Strawser, 2007). 2. Risk Assessment - This component evaluates the way in which an organization decides to handle the number of always-evolving external and internal risks. 3. Control Activities - This component seeks to ensure that the directives of management are carried out. These are computerized and manual and serve the purpose of preventing, detecting, and correcting errors (Louwers, Ramsay, Sinason, & Strawser, 2007). 4. Information and Communication – The information and communication component provide managers with the critical information necessary for achieving objectives. This component seeks to provide information that is timely, reliable, and relevant. 5. Monitoring – Assessing the quality of the established controls is essential to motivate continuous progress of the internal control method. ...
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...CONTROL AND AIS (Version 1 – Brief, just for the exam) Overview of Control Concepts * Internal Control - plan of organization and the methods a business uses to safeguard assets, provide accurate and reliable information, promote and improve operational efficiency and encourage adherence to prescribed management procedures. * Management Control - broader than internal control 1. Integral part of management responsibilities. 2. Is designed to reduce errors and irregularities and achieve goals 3. Is personnel oriented and seeks to help employees attain company goals by following policies. * Administrative Controls - help ensure operational efficiency and adherence to managerial policies. * Accounting controls - safeguard assets and ensure the reliability of accounting records. * Internal control structure - policies and procedures established to provide reasonable assurance that the organization's specific objectives will be achieved. 1. Control environment 2. Accounting system 3. Control procedures * Internal control classifications 1. Preventive, detective, corrective 2. Feedback, feedforward 3. General, application 4. Input, processing and output COSO - Committee of Sponsoring Organizations * Internal control - process implemented by management, the BOD, and those under their direction to provide reasonable assurance that control objectives are achieved with regard to: ...
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...mid -1970s, the U.S. Securities and Exchange Commission (SEC) and the U.S. Congress enacted campaign finance law reforms and the 1977 Foreign Corrupt Practices Act (FCPA) which criminalized transnational bribery and required companies to implement internal control programs. In response, the Treadway Commission, a private-sector initiative, was formed in 1985 to inspect, analyze, and make recommendations on fraudulent corporate financial reporting. The Treadway Commission studied the financial information reporting system over the period from October 1985 to September 1987 and issued a report of findings and recommendations in October 1987, Report of the National Commission on Fraudulent Financial Reporting. As a result of this initial report, the Committee of Sponsoring Organizations (COSO) was formed and it retained Coopers & Lybrand, a major CPA firm, to study the issues and author a report regarding an integrated framework of internal control. In September 1992, the four volume report entitled Internal Control— Integrated Framework was released by COSO and later re-published with minor amendments in 1994. This report presented a common definition of internal control and provided a framework against which internal control systems may be assessed and improved. This report is one standard that U.S. companies use to evaluate their compliance with FCPA. COSO was formed in 1985 to sponsor the National Commission on Fraudulent Financial Reporting (the Treadway Commission)...
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...Institute of CPA (AICPA), the Institute of Internal Auditors (IIA) , the Association of Accountants and Financial Professionals in Business (IMA), and Financial Executives International (FEI). Each sponsoring organization appoints representatives to periodically work together on specific projects. The goal of COSO is to provide leadership through the development of frameworks and guidance on enterprise risk management, internal control and fraud deterrence to enhance organizational governance and decrease fraud 1. The History of COSO and the Creation of the COSO Framework Due to the public criticisms against both accounting professionals and the U.S. Securities and Exchange Commission (SEC), the Treadway Commission was formed in 1985 to inspect fraudulent financial statements, especially in the aspects of reliability and accuracy. In 1987, the Treadway Commission issued its first report on fraudulent financial reporting. COSO was created because of this report. In 1992, COSO released the report titled Internal Control-Integrated Framework, which defined the concept of internal control and established a framework on how to make internal control systems work effectively. The 1992 COSO framework contains the following five integrated components of internal control1: Control environment; Risk assessment; Control activities; Information and communication; and Monitoring. The framework was revised in 2013 and the five components mentioned above remain fundamental to the...
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...I need help with 5 Auditing questions. I would like someone else’s answers to compare to. I would like an original answer only please. Need this by Monday 5pm Central Time. 1. (Analytical procedures) In audit planning the audit of Construction Industry Resources, Inc., a building supply company. You have completed analytic procedures relevant to purchases and inventory. The results of these procedures are included in Figure 8.13. Figure 8.13. Selected Financial Information ($000) X1 X2 X3 X4 X5 Building supply revenues $ 90,100 $ 99,380 $ 117,468 $ 137,085 $ 160,800 Lumber brokerage revenues $ — $ — $ 45,021 $ 63,480 $ 90,141 $ 90,100 $ 99,380 $ 162,489 $ 200,564 $ 250,941 Inventory turn days Building supplies 32 34 31 33 27 Lumber brokerage 7 6 6 Gross margin Building supplies 20.1% 18.5% 18.6% 19.1% 18.0% Lumber brokerage ...
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...Internal Control Topic List 1. What is internal control? 2. Components of internal control 3. Information about controls Learning outcomes On completion of this section you should be able to: • State the reasons for organisations having effective systems of controls • Identify factors which contribute to an effective control environment • Identify the components of internal control in both manual and IT environments • Identify types of control activity • Distinguish between general controls and application controls • Identify inherent limitations of a system of internal controls • Specify the composition of an audit committee Internal Control [pic] Internal control: ‘The process designed, implemented and maintained by those charged with governance*, management, and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to:- • Effectiveness and efficiency of operations • Reliability of financial reporting, • Compliance with applicable laws and regulations. The term “controls” refers to any aspects of one or more of the components of internal control. A key audit question is: “How does management control the business?” *Usually directors - remember the difference between exec and non-exec Company Objectives • To ensure it correctly reports its financial position to shareholders • To ensure it operates effectively and...
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...September 2004 Copyright © 2004 by the Committee of Sponsoring Organizations of the Treadway Commission. All rights reserved. You are hereby authorized to download and distribute unlimited copies of this Executive Summary PDF document, for internal use by you and your firm. You may not remove any copyright or trademark notices, such as the ©, TM, or ® symbols, from the downloaded copy. For any form of commercial exploitation distribution, you must request copyright permission as follows: The current procedure for requesting AICPA permission is to first display our Website homepage on the Internet at www.aicpa.org, then click on the "privacy policies and copyright information" hyperlink at the bottom of the page. Next, click on the resulting copyright menu link to COPYRIGHT PERMISSION REQUEST FORM, fill in all relevant sections of the form online, and click on the SUBMIT button at the bottom of the page. A permission fee will be charged for th e requested reproduction privileges. Committee of Sponsoring Organizations of the Treadway Commission (COSO) Oversight COSO Chair American Accounting Association American Institute of Certified Public Accountants Financial Executives International Institute of Management Accountants The Institute of Internal Auditors Representative John J. Flaherty Larry E. Rittenberg Alan W. Anderson John P. Jessup Nicholas S. Cyprus Frank C. Minter Dennis L. Neider William G. Bishop, III David A. Richards Project Advisory Council to COSO Guidance Tony Maki...
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...internal control Internal Control BUAC 782 Brendan Conway Shalini Sharma Yi Li Jiayu Shan Xiaoran Wang Introduction As a result of the recent scandals of companies such as Enron and WorldCom, the Sarbanes-Oxley Act (SOX) was enacted to preemptively curb fraudulent financial reporting. Since its enactment, SOX has strengthened requirements of both internal controls and procedures for financial reporting. Internal control is a process where a common goal is achieved by management and personnel to ensure safe guarding assets, as well as the attainment of realistic objectives such as operation, reporting and compliance. (COSO, May, 2013) Strong internal controls assist CEOs and CFOs in meeting their new SOX requirement of personally validating their company’s financial statements for reliability and transparency (Sweeny, 2012) The following presents an overview of internal controls, a real-world example of internal controls in action, and a synopsis of monitoring, which is perhaps the most critical part of a strong internal control system. Five components of internal control The Committee of Sponsoring Organizations (COSO) provides a framework in which to analyze a firm’s internal controls. Below are the five interrelated components of this framework: 1. Control environment - The top management is responsible for setting standards, processes, structure and accountability of the organization, resulting in the establishment of the control environment...
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