Chpater 10 - Chapter 10 Section 404 Audits of Internal...

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1 Chapter 10 Section 404 Audits of Internal Control and Control Risk Review Questions 10-1 Management typically has three broad objectives in designing an effective internal control system. 1. Reliability of Financial Reporting Management is responsible for preparing financial statements for investors, creditors, and other users. Management has both a legal and professional responsibility to be sure that the information is fairly presented in accordance with reporting requirements such as GAAP. The objective of effective internal control over financial reporting is to fulfill these financial reporting responsibilities. 2. Efficiency and Effectiveness of Operations Controls within an organization are meant to encourage efficient and effective use of its resources to optimize the company’s goals. An important objective of these controls is accurate financial and non- financial information about the entity’s operations for decision making. 3. Compliance with Laws and Regulations Section 404 of the Sarbanes-Oxley Act requires all public companies to issue a report about the operating effectiveness of internal control over financial reporting. In addition to the legal provisions of Section 404, public, nonpublic, and not-for-profit organizations are required to follow many laws and regulations. Some relate to accounting only indirectly, such as environmental protection and civil rights laws. Others are closely related to accounting, such as income tax regulations and fraud. 10-2 1. Management designs systems of internal control to accomplish three categories of objectives: financial reporting , operations , and compliance with laws and regulations . 2. The auditor’s focus in both the audit of financial statements and the audit of internal controls is on those controls related to the reliability of financial reporting plus those controls related to operations and to compliance with laws and regulations objectives that could materially affect financial reporting. 10-3 Section 404 requires management of all public companies to issue an internal control report that includes the following: 1. A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting and 2. 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. 10-4 Management’s assessment of internal control over financial reporting consists of the following two key components: 1. Management must evaluate the design of internal control over financial reporting. When evaluating the design of internal control over financial reporting, management evaluates whether the controls are designed to prevent or detect material misstatements in the financial statements. 2.
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Chpater 10 - Chapter 10 Section 404 Audits of Internal...

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