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CHAPTER 5 INTERNAL CONTROL OVER FINANCIAL REPORTING Comment on the Quality of an Organization’s Internal Controls The quality of an organizations internal controls affects not only the reliability of its financial reporting, but also its ability to make good decisions and stay in business Internal control processes must effectively address risks that are present in the industry and in the organization Auditors gain an understanding of their clients control system in order to Better understand the client, its risks, and how it manages those risks Assess control risk and identify types of most likely misstatements Plan extent of substantive testing needed Report on effectiveness of internal controls (publicly-held companies) Define Internal Controls Internal controls is a process designed to provide reasonable assurance of achieving the following: Generating reliable financial accounting information Safeguarding assets Complying with applicable laws and regulations Operating efficiently and effectively Review the Need for Control Control is part of corporate governance whereby the owners and creditors of an organization exert control and require accountability for its resources Governance begins with stockholders, who delegate certain responsibilities to the board of directors and in turn to management That delegation must occur within a framework of control and accountability The control system exists to ensure that Responsibilities are properly identified Tasks are assigned in accordance with responsibilities and accountability Who is Interested in an Organizations Control System? Board of directors and the audit committee Management Regulators Internal and external auditors Suppliers and customers Investors and creditors Customers or others using the Web for commerce Discuss the Integrated Audit The Sarbanes-Oxley Act of 2002 requires publicly held companies to report on the effectiveness of their internal controls over financial reporting The Public Company