Chapter 4 IDENTIFYING RISKS AND CONTROLS IN BUSINESS PROCESSES

Internal Control and Accountants’ Roles Accountants as Managers – Sarbanes-Oxley Act of 2002 and Standard No. 2 of the Public Company Accounting Oversight Board (PCAOB) requires: Management to prepare a statement describing and assessing the company’s internal control system

Internal Control and Accountants’ Roles Sarbanes-Oxley Act of 2002 and Standard No. 2 of the Public Company Accounting Oversight Board (PCAOB) requires: Annual reports of public companies to include: (1) a statement that management is responsible for internal controls over financial reporting,

Internal Control and Accountants’ Roles Sarbanes-Oxley Act of 2002 and Standard No. 2 of the Public Company Accounting Oversight Board (PCAOB) requires: Annual reports of public companies to include: (2) a statement identifying the framework used by management to evaluate internal controls,

Internal Control and Accountants’ Roles Sarbanes-Oxley Act of 2002 and Standard No. 2 of the Public Company Accounting Oversight Board (PCAOB) requires: Annual reports of public companies to include (3)an assessment of internal controls and disclosure of any material weaknesses, and

Internal Control and Accountants’ Roles Sarbanes-Oxley Act of 2002 and Standard No. 2 of the Public Company Accounting Oversight Board (PCAOB) requires: Annual reports of public companies to include: (4) a statement that a public accounting firm has issued an attestation report on management’s assessment of internal control.

Internal Control and Accountants’ Roles Accountants as Users – Must understand a company’s internal controls to apply them correctly.

Internal Control and Accountants’ Roles Accountants as Designers of internal control procedures – Must understand a company’s internal controls in working to achieve to compliance with regulations and company objectives and to minimize risks

Internal Control and Accountants’ Roles Accountants as Evaluators – must understand internal control systems to: Help develop management’s report that assesses internal controls (as internal auditors) Prepare an attestation to management’s statement about internal control (as external auditors) Conduct the audit of a company’s financial statements (as external auditors)

Framework for Studying Internal Control Components of internal control (the COCO Report) Internal control objectives Risk assessment

Framework for Studying Internal Control The COSO Report: 5 interrelated components of internal control: Control environment Risk assessment Control activities Information and communication Monitoring

Internal Control Components and Objectives Internal control: Execution objectives – 2 execution objectives for the revenue cycle: Ensure proper delivery of goods and services Ensure proper collection and handling of cash 2 execution objectives for the acquisition cycle: Ensure proper receiving of goods and services Ensure proper payment and handling of cash

Internal Control Components and Objectives Internal control: Information system objectives - Focus on recording, updating, and reporting accounting information Important for ensuring effective execution of transactions

Internal Control Components and Objectives Internal control: Asset protection objectives - Focus on safeguarding assets to minimize risk of theft or loss of assets

Internal Control Components and Objectives Internal control: Performance objectives – Focus on achieving favorable performance of an organization, person, department, product, or service Established to ensure effective operations

KEYTERMS Application controls Control activities Control environment Execution risk General controls Information system risks Input controls

KEYTERMS Internal controls Performance reviews Recording risks Risk assessment Segregation of duties Update risks Workflow controls