In their wake, the Sarbanes-Oxley Act of was enacted to protect investors from fraudulent accounting activities and improve the accuracy and reliability of corporate disclosures.
What Is the Control Environment?
The control environment, which is the foundation for the other components of internal control, provides discipline and structure by setting the tone of an organization and influencing control consciousness.
Accordingly, risk assessment may consider the possibility of executed transactions that remain unrecorded. The following internal and external events and circumstances may be relevant to the risk of preparing financial statements Components of internal controls essay are not in conformity with generally accepted accounting principles [or another comprehensive basis of accounting]: Changes in operating environment, including competitive pressures New personnel that have a different perspective on internal control Rapid growth that can result in a breakdown in controls New technology in information systems and production processes New lines, products, or activities Corporate restructuring that might result in changes in supervision and segregation of job functions Foreign operations Accounting pronouncements requiring adoption of new accounting principles Question: Control activities are the policies and procedures management has implemented in order to ensure that directives are carried out.
Control activities that may be relevant to a financial statement audit may be classified into the following categories: Performance reviews, including comparisons of actual performance with budgets, forecasts, and prior period results.
Controls relating to information processing are generally designed to verify accuracy, completeness, and authorization of transactions. Specifically, controls may be classified as general controls or application controls.
General controls might include controls over data center operations, systems software acquisition and maintenance, and access security; application controls apply to the processing of individual applications and are designed to ensure that transactions that are recorded are valid, authorized, and complete.
Physical controls, which involve adequate safeguards over the access to assets and records, include authorization for access to computer programs and files and periodic counting and comparison with amounts shown on control records.
Segregation of duties, which is designed to reduce opportunities that allow any person to be in a position to both perpetrate and conceal errors or fraud in the normal course of his or her duties, involves assigning different people the responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets.
The auditor should obtain sufficient knowledge about the information system relevant to financial reporting. The information system generally consists of the methods and records established to record, process, summarize, and report entity transactions and to maintain accountability of related assets, liabilities, and equity.
Communication involves providing an understanding of individual roles and responsibilities pertaining to internal control over financial reporting.
What is Meant by Monitoring? Accordingly, management must assess the design and operation of controls on a timely basis and take necessary corrective actions.
There is a direct relationship between objectives and components. This results from the fact that objectives are what an entity strives to achieve, while components are what an entity needs to achieve the objectives. The controls relating to operations and compliance objectives may be relevant to a financial statement audit if they pertain to data the auditor evaluates or uses.
For example, the auditor may consider the controls relevant to nonfinancial data such as production statistics used in analytical procedures. Not all of the objectives and related controls are relevant to a financial statement audit. Furthermore, an understanding of internal control relevant to each operating unit and business function may not be essential.
Although the five components are applicable to every audit, they should be considered in the context of the following: How does information technology IT affect internal control? Controls in systems that use IT consist of a combination of automated controls e.
What are the potential benefits of IT to internal control? IT provides potential benefits of effectiveness and efficiency for internal control because it enables the entity to: Consistently apply predefined rules and perform complex calculations in processing large volumes of transactions or data.
Enhance the timeliness, availability, and accuracy of information. Facilitate the additional analysis of information. Reduce the risk that controls will be circumvented.
Enhance the ability to achieve effective segregation of duties by implementing security controls in applications, databases, and operating systems. What risks does IT pose to internal control? IT poses specific risks to internal control, including: Reliance on inaccurate systems or programs Unauthorized access to data that may result in destruction of data or improper alterations to data.
Unauthorized changes to master files Unauthorized changes to systems or programs Failure to make necessary changes to systems or programs Inappropriate manual intervention Potential loss of data Note: The practitioner must obtain a sufficient understanding of internal control to enable the proper planning of the audit.
Whether controls have been placed in operations is of prime importance.
Operating effectiveness is not to be judged by the practitioner. The understanding of the internal control should:Components of Internal Controls Essay Sample. The components of internal controls include the following aspects: control activities, risk assessment, information and communication, control environment and monitoring activities.
Additionally, controls can be circumvented by two or more people colluding, and because management can override the system of internal control Internal control has been viewed by some observers as ensuring that an entity will not fail—that is, the entity will always achieve its operations, reporting, and compliance objectives.
Here are six components of a good internal control system for smaller entities: 1) Management personnel should have high integrity and ethical values and be committed to diligently performing key internal control procedures.
The Internal Audit role is to examine the adequacy and effectiveness of the University internal controls and make recommendations where control improvements are needed.
Since Internal Auditing is to remain independent and objective, the Internal Audit Office does not have the primary responsibility for establishing or maintaining internal controls. Internal System Unit Components Computer Science Essay.
Print Reference this. Disclaimer: The processor carries out the instructions in a program and controls all the work in the computer. Each of the separate components of CPU on its own is relatively simple. There are two different types of power, internal (Alternating current) and.
Changes in internal control over financial reporting or other factors that might significantly affect internal control over financial reporting might occur subsequent to the date as of which internal control over financial reporting is being audited but before the date of the auditor's report.