Intro to Internal Controls

What are the five components of internal controls?

internal controls, risk environment/assessment, internal control activities, info and communication, and monitoring

Describe what is done in each component of internal controls.

(1) internal controls

• senior management setting tone for what is necessary for effective IC

(2) risk environment/assessment

• a continuous process looking at risk assessment

• what needs to be prioritized for IC to succeed?

(3) internal controls activities

• 2 types of controls

  • administrative: makes sure things are efficient

  • accounting: protect assets and ensure financials reliable 

(4) info and communication 

• what is important and relevant to IC standards?

(5) monitoring 

• ongoing process that management is in charge of 

What are other parties that are involved with internal controls?

audit committee

• created by BoD to oversee financial reporting + IC system

internal audit function

• examine and eval adequacy of effectiveness of IC

independent auditors

• chosen by BoD to look at adequacy of a client’s IC process

Describe the incentives a person might have to keep their internal controls in check (4)

Sarbanes-Oxley Act of 2002

• senior management (CEO, CFO) responsible fr what happens and making sure reporting is accurate and representative, sign off on it

• public companies must disclose financials in timely manner

SEC

• keeps records in good detail and accuracy on company’s actions/decisions

Foreign Corrupt Practices Act

• penalizes companies if there is not adequate IC and accurate book/records

Federal Sentencing Guidelines

• penalizes if something illegal occurs