1. What are internal controls?
2. Do all companies need them?
3. Why does a company need them?
4. Explain some common internal controls that a company might have in place. What are they designed to protect?
5. What are the reporting requirements regarding internal controls in the Sarbanes-Oxley Act?
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1. What are internal controls?
Internal controls are procedures put in place by management. Some formal definitions includes:
(a) Spencer Picket, Author of "Internal Control: A Manager's Journey" defines internal controls as follows:
Internal controls are mechanisms to ensure objectives are achieved. Good controls encourage efficiency, compliance with laws and regulations, sound information, and seek to eliminate fraud and abuse.
Internal control is "everything that helps one achieve one's goals - or better still, to deal with the risks that stop one from achieving one's goals."
Internal controls are mechanisms that are there to help us manage risks to success.
Internal controls is about getting things done (performance) but also about ensuring that they are done properly (integrity) and that this can be demonstrated and reviewed (transparency and accountability).
(b) The CICA (Canadian Institute of Chartered Accountants) "Criteria of Control (CoCo)" document says that:
Internal control is all the elements of an organization that, taken together, support people in the achievement of the organization's objectives. The elements include resources, systems, processes, culture, structure and tasks.
(c) The US-based Committee of Sponsoring Organizations (COSO) of the Treadway Commission, who has done leading edge research on the topic of internal control, says that:
Internal control is a process, affected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
* Effectiveness and efficiency of operations
Includes objectives related to organizational goals addressing performance, customer service, efficient use of resources, profitability, and meeting social obligations. This includes the safeguarding of the organization's resources from inappropriate use or loss and ensuing that liabilities are identified and managed.
* Reliability and internal and external reporting
Includes objectives related to such matters as maintenance of proper accounting records, the reliability of information used within the organization and of information published for third parties.
* Compliance with applicable laws and regulations and internal policies
Includes objectives related to ensuring that the organization's affairs are conducted in accordance with legal and regulatory obligations and internal policies. ...
This solution discusses internal controls in terms of definition and need. It also explains the reporting requirements regarding internal controls in the Sarbanes-Oxley Act.