Role Of Accounting In Busi

CHAPTER 7: CONTROL FRAMEWORK Objectives: 1. Support why we need control 2. Provide a historical perspective on internal control Legal responsibility of management The role of business ethics 3. Define internal control: goals, plans and hierarchy.

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WHY WE NEED CONTROL General: To improve the possibility that results will be achieved Specific: Help the organization meet its objectives Protect the organization’s resources Ensure organization produces reliable financial statements Ensure organization(management) meets legal responsibilities

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Thus, control plans achieve control goals and prevent exposure

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HISTORICAL PERSPECTIVE ON ACTIVITIES RELATED TO IC Foreign Corrupt Practices Act (1977) Cohen Commission (1978) Treadway Commission (1987) Auditing: 2nd Standard of Fieldwork (GAAS), SAS No. 55, 78, and in 1997, SAS No. 82. 1996-97 COSO, COCO (management control environment) 1997 Independence Standards Board (just ended) 1999 SEC Corporate Governance (Management perspective: Role of BD, audit committees) 2002 Sarbanes Oxley 4

So, what are the roles of the players? Management’s legal responsibility is defined by the very early FCPA Auditor’s responsibility: SAS No. 55, 78, 82… (responsibility for fraud detection) COSO Five Areas:Assessing the Control Environment as the Linchpin

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Current emphasis: environment contextual factors which hinder auditor’s ability to comply with GAAS. “Tone at the top,” management control philosophy, Board composition, etc. Fraud and Control: Fraud is deliberate which makes it the #1 enemy of control (circumventing the system) SO, what is “internal control”?

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DEFINITION OF INTERNAL CONTROL Key Points 1.

Use of control plans to achieve control goals in operations systems and information system

2. Management responsibility 3. Cost vs Benefit 4.

Ethics, integrity, and control environment: Goal congruence

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Subdivide (see Table 7.1) CONTROL GOALS FOR OPERATIONS 1.

Ensure effectiveness: fufills intended objective

2.

Ensure efficiency: prevents unnecessary waste of resources

3.

Ensure security: protection of resources from misuse or destruction

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CONTROL GOALS FOR INFORMATION (1) Transaction inputs (capturing data and converting to machine-readable form, e.g. transaction files 1.

Input validity: only valid items are allowed to enter a system (authorization)

2.

Input completeness: all valid items are captured and entered into system (number of items)

3.

Input accuracy: data that is entered into the system is correct is correct (data fields)

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CONTROL GOALS FOR INFORMATION (2) Master files (file updates from transaction processing) Programming and operational errors 1.

Update completeness (e.g. Ledgers: All entered data makes it to appropriate Master Files)

2.

Update accuracy (e.g. Ledgers: All entered data is posted accurately to appropriate Master File)

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IMPORTANT: Though controlling input validity controls update validity, controls that ensure accuracy and completeness do not necessarily ensure update accuracy and completeness

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CONTROL HIERARCHY 1.

2.

The Control Environment: corporate ethics and management integrity; the culture Pervasive Controls : relate to multitude of goals and applications; Broad in scope: “Influence effectiveness of application control plans.”

2A. General Controls: a subset of pervasive; relates only to computer systems; used in SAS 3.

Application Controls: specific to application (focus on transaction processing)

EX: checking a customer number to A/R master file

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