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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. Components of the control environment consist of but are not limited to value, integrity, and the philosophy of management. 2. Risk assessment - The management’s ability to minimize risk by identifying, evaluating, managing and handling risk by establishing objectives and linking all levels of the organization to that objective. 3. Control activities - Activities that are either

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