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Chapter 7

Chapter #7.docx

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Sheldon Weatherstone

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Chapter 7: Control and AIS Internal Control • System to provide reasonable assurance that objectives are met such as: o Safeguard assets. o Maintain records in sufficient detail to report company assets accurately and fairly. o Provide accurate and reliable information. o Prepare financial reports in accordance with established criteria. o Promote and improve operational efficiency. o Encourage adherence to prescribed managerial policies. o Comply with applicable laws and regulations. • Functions o Preventive  Deter problems o Detective  Discover problems o Corrective  Correct problems • Categories o General  Overall IC system and processes o Application  Transactions are processed correctly Sarbanes Oxley (2002) • Designed to prevent financial statement fraud, make financial reports more transparent, protect investors, strengthen internal controls, and punish executives who perpetrate fraud o Public Company Accounting Oversight Board (PCAOB)  Oversight of auditing profession o New Auditing Rules  Partners must rotate periodically  Prohibited from performing certain non-audit services • New Roles for Audit Committee o Be part of board of directors and be independent o One member must be a financial expert o Oversees external auditors • New Rules for Management o Financial statements and disclosures are fairly presented, were reviewed by management, and are not misleading. o The auditors were told about all material internal control weak- nesses and fraud. • New Internal Control Requirements o Management is responsible for establishing and maintaining an adequate internal control system. SOX Management Rules • Base evaluation of internal control on a recognized framework. • Disclose all material internal control weaknesses. • Conclude a company does not have effective financial reporting internal controls of material weaknesses. Internal Control Frameworks • Control Objectives for Information and Related Technology (COBIT) o Business objectives o IT resources o IT processes • Committee of Sponsoring Organizations (COSO) o Internal control—integrated framework o Control environment o Control activities o Risk assessment o Information and communication o Monitoring Internal Control • Enterprise Risk Management Model o Risk-based vs. control-based o COSO elements + o Setting objectives o Event identification o Risk assessment  Can be controlled but also • Accepted • Diversified • Shared • Transferred Control Environment • Management’s philosophy, operating style, and risk appetite • The board of directors • Commitment to integrity, ethical values, and competence • Organizational structure • Methods of assigning authority and responsib
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