Evaluating internal controls - Essay Example

Week 3 Individual Assignment Connie Johnson December 2, ACC 544: Christine Errico of Phoenix Checklist for evaluating internal controls: Understanding elements of control Generally Accepted Auditing Standards PCAOB Auditing Standard 2 – requires management to assess its internal control and auditor to express opinion on management assessment of internal control and the auditor’s independent evaluation of internal control. Section 404 Sarbanes Oxley Act. Composed of three audits – 1) financial statements of the company; 2) management’s evaluation of internal controls; 3) effectiveness of internal controls Evaluate control risk – probability that the internal controls will fail to prevent material statements and fraud Reliability of financial reporting Effectiveness and efficiency of financial operations Compliance with applicable laws and regulations Safeguard assets Reasonable assurances – recognizes that cost of control should not exceed the benefits that are expected from the control Protect the most liquid asset – cash Create control mechanism to protect cash Inventory protection (RFID tags) Changes in accounting principles Proper disclosure Compliance with GAAP The five components of internal control are: control environment, risk assessment, control activities, monitoring, and information and communication.

Management is responsible for the components of internal control. The COSO report guides managers to connect the different phases associated with the five components of internal control. The control environment provides discipline and structure. Internal controls are more effective when the duties are segregated instead of being performed by the same person. The manager is the employees responsible for overseeing the internal control system. He may delegate part of the function to other employees in order to facilitate the process.

The control environment is established by the managers of the company. The use of internal auditor can help companies determine if the control activities of a company are adequate and if the environment is suitable to foster proper ethical conduct by the accounting staff and other employees of the company. Risk assessment must be performed in order to minimize the risk exposure of the company. A firm that is issuing a secondary round of common stocks must ensure that the market conditions are adequate to launch the issuance of new common stocks.

If the manager does not assess the event adequately the company may not be able to raise the desired capital because the stock may sell at a price below the expectations of the company. GAAS requires managers to assess control risks. A proper assessment of control risk includes the evaluation of the internal controls. Risk assessment must be perform of the account receivables of the company to determine if there are any uncollectible accounts that have not been recognized by the company. Internal controls can be useful because they can help a company comply with the organization’s vision, goals, and mission statement.

The managers and accountants of a public corporations must comply with the mandates of the Public Company Accounting Oversight Board (PCAOB) and the American Institute of CPAs in regards to internal control protocols. Sometimes certain industries carry a high risk of employee injury. The safety of the employees must be the top priority of managers that participate in risky industries such as construction workers, firefighters, and military servants. The presence of strong leadership can serve as preventive measurement that lowers the risk exposure of employees in risky industries.

Controls mechanism must be present to protect the human resources of the company. The monitoring phase of internal control is an important component. One the most important assets that must be monitored on a recurrent basis is cash. In order to pay small expenses companies utilize a petty cash account. To protect the petty cash the firm must give an employee the responsibility of dealing with the cash. The person responsible of the petty cash account should be an accountant or a manager of the company.

The petty cash should be locked down in a safe. A camera should have a line of vision to the petty cash safe. The rest of the cash of the company should be deposited in a bank. Often companies have money in transit especially in the retail business. That money should also be placed in a safe located in the office of the general manager of the company. Bank reconciliations should be performed to audit the cash account. CPA Practice Exam CPA Practice Exam II