Section 5 Internal Control over Financial Reporting

In: Business and Management

Submitted By chopper
Words 23599
Pages 95
internal control Qver Financial Reporting
CASES INCLUDED iN THIS SECTiON

1. Simply Steam, Co. 155 Evaluation of Internal Control Environment

2. Easy Clean, Co. 155 Evaluation of Internal Control Environment

3. Red Bluff Inn & Café 165 Establishing Effective Internal Control in a Small Business
4. St. James Clothiers 169 Evaluation of Manual and IT-Based Sales Accounting System Risks
5. Collins Harp Enterprises 177 Recommending IT Systems Development Controls

6. Sarbox Scooter, Inc. 185 Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting
7. Société Générale 195 How a Low-Risk Trading Area Caused a $7.2 Billion Loss case5.!-2 Easy Clean/Simply Steam, Co.
Evaluation of Internal Control Environment
Mark S. Beasley • Frank A. Buckless • Steven M. Glover • Douglas F. Prawitt

INSTRUCTIONAL OBJECTIVES
1] To reinforce aspects relevant to the internal control environment.
2] To illustrate the degree of judgment involved in making internal control environment evaluations.
3] To provide students experience in making subjective evaluative judgments.
4] To provide a forum to discuss inquiry techniques as well as inquiry as a form of audit evidence.
5] To provide students direct experience with, and discovery of, issues surrounding the control environment, making inquiries, and the framing (e.g., positive or negative) of information provided by management.
6] To illustrate the potentially inappropriate effects of information “framing."

KEY FACTS ■ The instructor has the option of using two versions (i.e., negative and positive) of the case. Simply Steam provides the negative tone or frame while then next case, Easy Clean, provides the positive frame. The cases are identical except for the tone of the interview and some name changes. ■ Easy Clean/Simply…...

Similar Documents

Internal Controls

...INTERNAL CONTROLS RUTASHA BRABHAM 1XACC/280 AUGUST 7, 2011 Internal controls are beneficial to a company’s structure and organizational design. Internal controls consists of all the measures taken by the organization for the purpose of; (1) protecting its resources against waste, fraud, and inefficiency; (2) ensuring accuracy and reliability in accounting and operating data; (3) securing compliance with the policies of the organization; and (4) evaluating the level of performance in all organizational units of the organization (internal controls are simply good business practices (Internal Audits, n.d.). There are five components of internal controls. Control environment, risk assessment, control activities, information and communication, and monitoring are the five components of internal controls. The control environment is connected to the outline of the company. The control environment involves the integrity, ethical values, the company’s philosophy, and the competence of the entity’s people (US Regents, 2011). The control environment provides the structure for a company’s policies and values for their day to day activities.  Control environment factors include integrity and ethical values, the commitment to competence, leadership philosophy and operating style, the way management assigns authority and responsibility, and organizes and develops its people, and policies and procedures (US Regents, 2011). Risk assessment is a step in a risk management......

Words: 882 - Pages: 4

Impact of Internal Control System over Customer Service in

...Impact of Internal control system over customer service in financial aspects Definition of Internal Control? Internal control or an internal control system is the integration of the activities, plans, attitudes, policies, and efforts of the people of an organization working together to provide reasonable assurance that the organization will achieve its objectives and mission. Four Purposes of Internal Control 1. To promote orderly, economical, efficient and effective operations and to produce quality products and services consistent with the organization's mission; 2. To safeguard resources against loss due to waste, abuse, mismanagement, errors and fraud; 3. To ensure adherence to laws, regulations, contracts and management directives; and 4. To develop and maintain reliable financial and management data, and to accurately present that data in timely report FOUR COMPONENTS OF INTERNAL CONTROL 1. CONTROL ENVIRONMENT Control environment is the attitude toward internal control and control consciousness established and maintained by the management and the employees of an organization. It is a product of management's philosophy, style and supportive attitude, as well as the competence, ethical values, integrity, and morale of the organization's people. The organization structure and accountability relationships are key factors in the control environment. 2. COMMUNICATION AND INTERNAL CONTROL Management should ensure that...

Words: 858 - Pages: 4

Internal Controls

...Internal Controls XACC/280 April 8, 2013 There are rules that have to be followed when documenting financial information in accounting. Internal controls are methods used by a company to make sure their finances and accounting information meet the accurate level of integrity. Internal controls operate well when they are used in multiple levels of the company and also in different departments. A lot of companies have standard practices when it comes to financial integrity. Internal controls are also used to protect a company from incorrect data, fraud, and preventing anyone from abusing the finances. All financial records are being recorded and tracked to ensure accuracy. The Sarbanes-Oxley Act of 2002 was put in place because of the intentional inaccuracy of a company’s accounting practices and to make sure that high management and board of directors make sure they adhere to the procedures of internal controls. This act forces management to make sure that such controls are put in to place and maintained at all times. There are eleven titles within the Sarbanes-Oxley Act, but there are six that are very important when it comes to being compliant: * Section 302: Disclosure controls – this section mandates a set of internal procedures designed to ensure accurate financial disclosure. This basically states that the officers in the company are responsible for maintaining internal controls and have to present a report explaining their financial sheets. ...

Words: 917 - Pages: 4

Internal Control

...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......

Words: 2385 - Pages: 10

Accounting and Financial Reporting for Business

...America. Auditing and accounting principles in the United States of America are considered strong and sophisticated. Transparency and disclosure are really emphasized in American companies, and because of this the downfall of Andersen and Enron still raises questions. This has since become a case of reference in review of issues concerning financial reporting and auditing. It has also been used to explain about regulations on auditing and accounting inside and outside America. This case has brought about huge implications on corporate governance to other countries. Enron Corporation declared its bankruptcy in the year 2001. Afterwards, Anderson’s downfall occurred in 2002. It has been a big question, outside America, on what brought about this failure. The General Accepted Accounts Principles, in the US, are very well developed. These principles require clear disclosures of financial statements that are audited. They also require an established federal agency and a commission to monitor financial reporting. Cases have been written, from the failures of Enron and Andersen, for the exploration of accounting, auditing and financial reporting issues in the US. The head of auditing of Enron Corporation was fired during the company’s downfall for destroying important documents, upon realizing that the company’s accounting methods were being investigated by the commission of Securities and Exchange. The destruction of the accounting documents compromised with accounting......

Words: 1202 - Pages: 5

Internal Control

...Internal Controls LJB Company Name Submitted to ACCT504 Accounting & Finance: Managerial Use & Analysis School: Submitted: Executive Summary This report provides an analysis and evaluation of the internal controls at the LJB Company and what is required before going public. We will touch base on IT Governance, Sarbanes-Oxley and COBIT, highlight items that LJB is doing right as well as those items LJB is doing wrong and a few improvements along the way. Company Overview LJB Company is a distributor of equipment for the surrounding areas. LJB is said to be a relatively lean organization which means that the company looks for ways to eliminate any unnecessary resources to operate at expected levels. LJB is looking to go public in the future. Internal Controls / IT Governance / Sarbanes-Oxley What are internal controls? The internal controls for any business consist of policies and procedures designed to provide management with reasonable assurance that the company achieves its objectives and goals. For any organization, public, private or governmental, there are benefits to using internal controls. * To ensure the confidence of the organizations’ constituencies (boards, employees, patients, donors, and students). * To assure there are checks and balances wherever there’s opportunity for mistakes or miscommunications. * To mitigate information technology risk protecting confidential records. * To help monitor assets of......

Words: 2475 - Pages: 10

Code Section 6038d – Reporting Foreign Financial Assets

...Who Must File Information To Be Reported Section 6038D Penalty Repatriation of Funds      Code Section 6038D added to the Internal Revenue Code as part of the Foreign Account Tax Compliance Act (FATCA) in 2010. Code Section 6038D requires certain individuals to annually report to the IRS information about their interest in specified foreign financial interest (“SFFAs”). Filing obligation is dependent of the aggregate value for the year of SFFAs and the applicable threshold. Reporting is required for assets held in taxable years beginning after March 18, 2010 on Form 8938. Form 8938 is attached to the taxpayer’s annual income tax return and is due on the same date (including extensions). Code section 6038D(a): “Any individual who, during any taxable year, holds any interest in a specified foreign financial asset … if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).”  Specified Individual:  Dual Residents: ◦ U.S. citizens; ◦ Individuals who are U.S. residents for any portion of the relevant year; ◦ Nonresident aliens who are married to a U.S. citizen or U.S. resident and who elect under Code Section 6013(g) or Code Section 6013(h) to be treated as U.S. residents for certain federal tax purposes; ◦ Nonresident aliens who are bona fide residents of Puerto Rico; and ◦ Nonresident aliens who are bona fide residents of a so-called “Section 931 Possession,” which, at this......

Words: 1157 - Pages: 5

Section 404 of the Sarbanes-Oxley Act: Curse or Blessing for Financial Reporting?

...Section 404 of the Sarbanes-Oxley Act: Curse or Blessing for Financial Reporting? Yuliya M. Ford University of Maryland University College   Introduction In response to public concerns regarding the accuracy and quality of reported financial information by publicly traded companies, in mid-summer of 2002 Congress passed Public Law 107-204, 116 Stat.745 which is commonly referred to as the Sarbanes Oxley Act (SOX or the Act). The law was passed in large part due to the public outcry of the numerous unethical accounting scandals and fraudulent reports from such notable companies as - Enron, WorldCom, and Global Crossing (Singer and You, 2011). The goal of SOX was to mandate corporate governance reforms in order to help to instill investor’s confidence in capital markets. In an effort to establish best practices and standards SOX created the Public Company Accounting Oversight Board (PCAOB). The PCAOB is chartered with the establishment of independent standards and overseeing the compliance of publicly traded companies with these standards (Agami, 2006). Another very important aspect that the PCAOB is charged with is reviewing the samples of audits conducted by accounting firms and ensuring that both the spirit and letter of the SOX act was established under (Parles, O’Sullivan, & Shannon, 2007). The Sarbanes-Oxley Act is divided into eleven sections referred to as titles. In terms of compliance, many have posited, including Addison-Hewitt Associates (2003), that the......

Words: 2681 - Pages: 11

Internal Control

...Guide to Internal Control Over Financial Reporting The Center for Audit Quality prepared this Guide to provide an overview for the general public of internal control over financial reporting (“ICFR”). The Guide explains what public company ICFR is and describes management’s responsibility for implementing effective ICFR. The Guide also discusses the responsibilities of the audit committee to oversee ICFR and of the independent auditor to audit the effectiveness of the company’s ICFR. A Guide to Internal Control Over Financial Reporting P reparing reliable financial information is a key responsibility of the management of every public company. The ability to effectively manage the company’s business requires access to timely and accurate information. Moreover, investors must be able to place confidence in a company’s financial reports if the company wants to raise capital in the public securities markets. Management’s ability to fulfill its financial reporting responsibilities depends in part on the design and effectiveness of the processes and safeguards it has put in place over accounting and financial reporting. Without such controls, it would be extremely difficult for most business organizations — especially those with numerous locations, operations, and processes — to prepare timely and reliable financial reports for management, investors, lenders, and other users. While no practical control system can absolutely assure that......

Words: 4333 - Pages: 18

Internal Control

...Internal Controls are a growing issue for compliance of the Sarbanes-Oxley Act of 2002 (SOX) (Kimmel,Weygandt & Keiso, 2009). Under SOX all companies publicly traded will maintain an adequate system of internal controls (Kimmel, Weygandt & Keiso, 2009). Some of the internal controls characteristics include, control environment, risk assessment, control activities, information/communication, and monitoring. According to Roadmap for an IPO, private companies pondering on going public should consider the following: 1. Internal control: Management, like the CEO and CFO, is required by section 404 of SOX to provide certifications in periodic filings (usually quarterly) regarding the evaluation of the effectiveness of the company’s internal control over financial reporting (Pricewaterhouse Coopers, LLC, 2010). Companies contemplating on going public should discuss their section 404 plan and timeline in their marketing documents (Pricewaterhouse Coopers, LLC, 2010). Sections 302 and 906 of SOX also requires that the CEO and the CFO to certify that the financial statements are accurate, comply with requirements and information are fairly presented (Pricewaterhouse Coopers, LLC, 2010). 2. Audit committee: An audit committee is required by SOX even if it’s just composed of one member (Pricewaterhouse Coopers, LLC, 2010). 3. Board of directors: SOX requires that majority of the board of directors are from outside the company and at least one member should have......

Words: 820 - Pages: 4

Chapter 6 Internal Control in a Financial Statement Audit

...CHAPTER 6 INTERNAL CONTROL IN A FINANCIAL STATEMENT AUDIT Answers to Review Questions 6-1 From management's perspective, the internal control provides a way to meet its stewardship or agency responsibilities. Management also needs a control system that generates reliable information for decision-making purposes. The importance of internal control to the auditor is rooted in the second standard of fieldwork. The controls that are relevant to the entity's ability to initiate, record, process, and report financial data consistent with management's assertions are the auditor's main concern. The auditor needs assurances about the reliability of the data generated within the entity's internal control system in terms of how it affects the fairness of the financial statements and how well the assets and records of the entity are safeguarded. 6-2 The potential benefits and risks to an entity’s internal control from information technology include (see Table 6-1): Benefits: • Consistent application of predefined business rules and performance of complex calculations in processing large volumes of transactions or data. • Enhancement of the timeliness, availability, and accuracy of information. • Facilitation of additional analysis of information. • Enhancement of the ability to monitor the performance of the entity's activities and its policies and procedures. • Reduction in the risk that controls will be circumvented. ...

Words: 3770 - Pages: 16

Internal Controls

...Running head: INTERNAL CONTROLS Internal Controls Jared Johnson University of Phoenix Internal Controls In order for a company to survive and be profitable there need to be a plan in place to safe guard their finances. These plans fall under an umbrella term known as the internal controls of a company. It doesn’t matter if these companies are huge corporations with thousands of employees or small one store operations with a half a dozen employees, or if they are public or private. There need to be some sort of controls in place to protect the company and it’s employees. This brings us to the two primary goals of internal controls, they are; (1)To safeguard its assets. By doing this the company can protect itself from someone who intends to defraud the company by theft, robbery, or unauthorized use. (2) Enhance the accuracy and reliability of its accounting records. We are all human and as such we all make mistakes, most are unintentional so internal controls can help catch these mistakes before they cause damage to the company or it’s reputation. Throughout the years the federal government has passed different consumer protections acts. In 1933 the Securities Act was passed, in this act it was required for investors to receive financial and other significant information while also prohibiting deceit, misrepresentations, and other fraud in the sale of securities. In 1934 the Securities and Exchange Commission was created under the Securities Exchange Act. The Trust...

Words: 1169 - Pages: 5

Internal Control

...INTERNAL CONTROL - NOTES 1 1. Definition of Internal Control Internal Control is a process designed by management of an entity to provide reasonable assurance that an entity achieves its objectives in the following categories: • • • Reliability of financial reporting Effectiveness and efficiency of operations, Compliance with applicable laws and regulations. 2. Major components 1. Control Environment – factors that set the tone of an organization and influences the consciousness of its people. There are seven factors (ICHAMBO). I – Integrity and ethical values C – Commitment to competence H – Human resource policies and practices A – Assignment of authority and responsibility M – Management’s philosophy and operating style B – Board of Trustees’ or audit committee participation O – Organizational structure 2. Risk Assessment – risks that may affect an entity’s ability to properly record, process, summarize and report financial data due to: Changes in the operating environment (e.g., increased competition) New personnel New Information systems Rapid growth New technology New lines, products, or activities Corporate restructuring Foreign operations Accounting pronouncements 3. Control Activities – various policies and procedures that help ensure that necessary actions are taken to address risks affecting the achievement of an entity’s objectives. (PIPS): P – Performance reviews (reviews of actual against budgets, forecasts) I – Information processing (checks for accuracy,...

Words: 853 - Pages: 4

Internal Controls

...Differences and Duties of Internal and External Auditors When fraud occurs in a company, executives and investors seek the advice of auditors to determine how the fraudulent activity occurred. Though the internal and external auditors are encouraged to follow the same code of ethics and professional codes of conduct, their core responsibilities are significantly different. According to our text, which references the Institute of Internal Auditors, “the scope of internal auditor responsibilities includes risk management and control systems” (MacCarthy, Mary Pat, & Timothy P. Flynn, 2004).1 In regard to those controls, the internal auditor’s role is to review internal controls and evaluate the effectiveness of those controls in an effort to assist the company in preventing fraud. By the above definition, many would say the internal auditor serves as a complement of management whom is responsible for the adherence of all Sarbanes-Oxley regulations. The external auditor’s primary role is to review the financial statements to ensure financials are properly reconciled, ensure the financial statements are free from deliberate misrepresentations and/or errors as well as review any internal controls assessed by management in regards to the Sarbanes-Oxley Act. The primary difference between the two types of auditors is, the internal auditor serves as the “enforcer” of Sarbanes-Oxley regulations and is needed to assist management with the adherence of said regulations, and the......

Words: 744 - Pages: 3

Internal Control

...Public Company Accounting Oversight Board (PCAOB), Sarbanes-Oxley’s new requirement for internal controls if your company decides to go public is on the annual report; your company must report internal controls over your financial reporting. This report should include: • Statement of responsibility by management of the company (such as the President and CFO) for establishing structure and procedures for financial reporting. • Statement identifying the framework used by management to evaluate the effectiveness of the company’s internal control over financial reporting. • Management of assessment of the effectiveness of internal controls over financial reporting. • Attestation by the company’s external auditor on management’s assessment of the company’s effectiveness of the company’s internal controls and procedures for financial reporting. 2. It is very good that your accountant has started to use pre-numbered invoices. This way, you can always know if any checks are missing. This follows the documentation procedure of the internal control process. I would recommend the buying of the indelible ink machine. According to the principles of internal control applied to cash disbursements; physical, mechanical, and electronical controls are important to safeguarding your assets and enhancing the accuracy and reliability of the accounting records. Physical, mechanical, and electronical controls for cash disbursements states that you should print check amounts by machine......

Words: 721 - Pages: 3