Auditing Chapter 10

Auditing Chapter 10 - Chapter 10: Section 404 Audits of...

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Chapter 10: Section 404 Audits of Internal Control and Control Risk Internal Control Objectives Internal Control: policies and procedures designed to provide management with reasonable assurance that the company achieves its objectives and goals 3 primary objectives: 1. Reliability of Financial Reporting: internal controls fulfill financial reporting responsibilities of GAAP compliance and other reporting req’ts 2. Efficiency and effectiveness of operations: accurate financial and nonfinancial information improves efficiency and effectiveness and decision making 3. compliance with laws and regulations: req’d by section 404, other laws and regulations that must be followed A system of internal controls accomplishes all three objectives, auditors focus is on 1 and 3 Management and Auditor Responsibilities for Internal Control Responsibilities differ between mgmt and auditors Management’s responsibilities for establishing internal control Mgmt establishes and maintains IC w/ 2 key concepts 1. Reasonable assurance: company should develop controls that provide reasonable, but not absolute, assurance that FS are fairly stated / cost-benefit consideration taken into account 2. Inherent limitations: internal controls can never be completely effective because they depend on the competency and dependability of the people using them Beware of collusion: act of 2+ employees who conspire to steal assets or misstate records Management’s Section 404 Reporting Responsibilities SOX 404 requires all public companies to issue an internal control report w/ A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting An assessment of the effectiveness of the IC structure and procedures for FR as of the end of the company’s fiscal year Management also identifies the framework used for IC effectiveness evaluation Committee of Sponsoring Organizations of the Treadway Commision (COSO) Internal Control-Integrated Framework: IC framework used by most companies Management evaluates 2 key components: 1. design of IC over FR: focus is on controls that address risks related to all relevant assertions for all significant accounts and disclosures in the FS 2. Operating effectiveness of those controls: test the effectiveness to determine whether operating as designed and whether the person performing the control has adequate authority and qualifications Test results form the basis for assertion, must disclose any material weaknesses If 1+ material weaknesses are present -> mgmt concludes IC not effective Auditor Responsibilities for Understanding Internal Control 2 nd statement of GAAS fieldwork: obtain an understanding… [of] internal control to assess the risk of material misstatement of the FS whether due to error or fraud and to design the nature, timing, and extent of further audit procedures
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Primarily concerned about controls over: Reliability of Financial Reporting:
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This note was uploaded on 11/06/2011 for the course BUSN 469 taught by Professor J during the Fall '11 term at Portland State.

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Auditing Chapter 10 - Chapter 10: Section 404 Audits of...

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