Internal Control Over Financial Reporting - Essay Example

Ford Motor Company and Toyota Motor CORPORATION: INTERNAL CONTROL OVER FINANCIAL REPORTING PAge 265 Questions 1a, 1b, 1c, 1d, 1e ford 10-k and Toyota 20-f 1a. Both Ford and Toyota management comment on “disclosure controls.” What are disclosure controls? Why are they important? According to the Securities and Exchange Commission, disclosure procedures and controls includes those procedures and controls put in place to ensure that the information required to be availed in financial reports is processed, recorded, summarized and reported within the required timeframe as stipulated in the SEC rules (Rittenberg, Johnston, Gramling & Schweiger 279). These procedures and control policy have an organized framework that enables an issuer to disclose the information required in the Exchange Act reports. The accumulated report is presented to the management of the issuer who include financial and principal executive officers within an appropriate time limit that enables implementation old decisions on the required disclosures. Despite their differences, internal controls and disclosure controls overlap over financial reporting. 1b. Both Ford and Toyota management comment on the fact that internal control over financial reporting has “inherent limitations”. What are those inherent limitations? Inherent limitations are those unintentional errors or intentional misstatements that may reflect in financial reports despite proper design and monitoring process (Rittenberg, Johnston, Gramling & Schweiger 254). Comments on these limitations on financial report and statements aim at highlighting the impossibility of a 100% assurance control system, and that the information in the statements is material-error free. 1c. Ford notes one material change in internal control. What is it? What area of the audit would be affected by this change? The Europe segment of Ford Company has unveiled a new payroll system. The affected audit party is Price Water Coopers, which will strive to ensure that the payroll system has effective control measures and is accurate. 1d. How does management gain comfort that internal control does not contain any material weaknesses? Assurance that internal control does not contain any material weaknesses is very essential to a management team. As such, most companies have taken various approaches to prevent such instances, and include: Regular review of the processes carried out by the internal control Implementing COSO guidelines in the monitoring process of the internal control Analysis of self assessment test from all the departments Sub-certification of all departmental managers in the company 1e. From a conceptual point of view, assume two companies are the same size, participate in the same industry, and have the same reported net income. However, one has a material weakness in internal control over financial reporting and the other does not have any material weaknesses? Should the stock price of the two be different? If yes, what is the rationale for the difference in the stock price? Material weaknesses in internal control of a company imply that it has limited capabilities of preparing a correct financial statement. This is a great risk to the investors, as the information communicated to them may be unreliable. This will force the investors to utilize higher discount rates in their efforts to estimate the expected value of their stock. Ultimately, this will lower the value of their stock in the company. Nevertheless, this is a speculation, as there does not any clear-cut evidence on the expected results. Ford Motor Company And Toyota Motor Corporation: Performing An Integrated Audit PAge 309 Questions 1a, 1b, 1c, 1d ford 10-k and Toyota 20-f 1a. Read the reports of the independent registered public accounting firm for Ford and Toyota. Notice that the reports clearly articulate differential responsibilities on the part of management versus the audit firm. Why is it important that the audit firm articulate these responsibilities in this way? The responsibilities of the audit firm are limited to the work they perform, which is simply relaying the opinions of the internal control on the financial position of the company. Any problems encountered in the financial report are blamed on the management since it is their responsibility to find and correct the weak internal controls. The audit firm also distances itself with risks of being sued for the failure of the management in establishing and maintaining an effective internal control system. 1b. In Ford’s report from the independent registered public accounting firm, how does PwC describe the way that it conducts the audit of internal controls? PwC claims that its’ audit on internal controls include obtaining and analyzing the processes carried out by internal control in financial reporting. The firm then assesses the risks of material weakness in the processes, and evaluates the operational effectiveness of the internal control system concerning the assessed risks. 1c. Ford received an unqualified opinion on its internal controls, as did Toyota. How would you feel about the disclosures and reported financial results if this were not the case? Unqualified opinions on internal controls of a company reflect the accuracy of the information contained in a financial statement. In the event that a company does not receive this unqualified opinion on its internal controls, the financial statements users have to be concerned on the statement and possibility of intentional misstatement. This also may mean that the company does not have an effective system of internal controls, as it did not detect the problem in the system. As a user of the financial statement, I would question the results in the statement especially if there were omissions in the interim results. In the case of annual financial report, I would expect the auditor to account for material weakness and adjust the statement to come up with substantive and sufficient evidence on the disclosures and account balances. 1d. If you were a shareholder of Ford or Toyota and the company received an adverse report on internal controls, what would you do? In addition, An adverse opinion implies that the company has at least one material weakness in the internal control system (Rittenberg, Johnston, Gramling & Schweiger 275). Adverse opinions are often accompanied by the nature of the weakness in the internal controls. As a shareholder, I would evaluate the nature of the problem. If the weakness is a persuasive control problem that may affect the validity of the statements in general, or whether it is a limited internal control problem limited to one type of account or results in a geographical dispensation. Depending on the nature of the problem, I will consider my risk tolerance capabilities in deciding the next step. Nevertheless, an adverse report will raise concern on the internal controls system. How does the adverse report affect the reliability of future reports, e.g. interim financial reports? If the material weakness is not addressed, future financial statements will reflect this weakness. The result will be reliability problems with any financial statement henceforth, as the future statements rely on the past statements. Emphasis should be on the results not subject to annual audit. How does the report affect the current financial statements? Current financial reports are not necessarily affected by adverse reports as independent accounting firms do auditing of the statements. What does the report imply about management’s stewardship function and its commitment to risk management? The report illustrates the management of the company as not meeting its stewardship functions as required. The management is responsible for safeguarding the assets put under their trust and investing the assets to obtain a considerable rate of return. Its failure to design and maintain an effective internal controls system hinders achievement of its risk commitment and stewardship management. Should the quality of a company’s internal controls over financial reporting affect a company’s stock price? Explain. The price of the company’s stock should be affected by its quality of internal control system. A company associated with a poor internal control system poses a risk to the investor due to the unreliability of information. Such a risk would require a considerable return on investment, which imposes low prices of the stock. Work cited Rittenberg, Larry E., Johnston, Karla, Gramling, Audrey, A., & Schweiger, Bradley. Auditing: A business Approach. Mason, OH: South-Western Cengage Learning, 2009.159-300.Print. Read More