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Chapter10LearningChecks - CHAPTER 10 UNDERSTANDING INTERNAL...

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C HAPTER 10 U NDERSTANDING I NTERNAL C ONTROL Learning Check 10-1. a. The Foreign Corrupt Practices Act of 1977 is administered by the Securities and Exchange Commission. The Act pertains to management and directors of companies subject to the reporting requirements of the Securities Exchange Act of 1934. b. The antibribery and accounting standards provisions of the Act require the maintenance of a satisfactory system of internal control. 10-2. a. The National Commission on Fraudulent Financial Reporting reemphasized the importance of internal control and recommended the following: Of overriding importance in preventing fraudulent financial reporting is the "tone set by top management" that influences the corporate environment within which financial reporting occurs. All public companies should maintain internal controls that will provide reasonable assurance that fraudulent financial reporting will be prevented or subject to early detection. The organizations sponsoring the Commission (including the Auditing Standards Board [ASB]) should cooperate in developing additional guidance on internal control systems. b. COSO is an acronym for Committee of Sponsoring Organizations, a body comprised of representatives from the AICPA, the American Accounting Association, The Institute of Internal Auditors, the Institute of Management Accountants, and the Financial Executives Institute. The two principal purposes of its efforts were to: Establish a common definition of internal control serving the needs of different parties. Provide a standard against which business and other entities can assess their control systems and determine how to improve them. COSO undertook these efforts as a response to the Treadway Commission's recommendation that the organizations represented on COSO should cooperate in developing additional guidance on internal control system. 10-3. a. The COSO report defines internal control as a process, effected by an entity's board of directors, management, and other personnel, designed to provide
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reasonable assurance regarding the achievement of objectives in the following categories: Reliability of financial reporting. Compliance with applicable laws and regulations. Effectiveness and efficiency of operations. b. The COSO report identifies five interrelated components of internal control which are: 1. The control environment. 2. Risk assessment. 3. Control activities. 4. Information and communication. 5. Monitoring. c. Of primary relevance in a financial statement audit are an entity's controls that pertain to the reliability of financial information, particularly those that are intended to provide reasonable assurance that financial statements prepared by management for external users are fairly presented in conformity with generally accepted accounting principles. Other objectives and related controls may also be relevant if they pertain to data the auditor uses in applying audit procedures such
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