Internal Control Audit and Compliance

Preface xi Acknowledgments xv Chapter 1: What We All Share 1 Need for Control Criteria 1 Overview of the COSO Internal Control Integrated Framework 2 Holistic, Integrated View 3 Revised COSO Internal Controls Framework 6 What We Must Do 8 Basic Scoping and Strategies for Maintenance 11 Where We Depart 12 Triangle of Efficiency 13 Controls versus Processes 14 The Debate Continues 18 Organization of This Book 18 Appendix 1A: COSO 17 Principles 20 Chapter 2: Setting the Scope of Your Documentation Project: Identifying the Core 21 Start with Business Objectives 21 After the Initial Year 24 Mapping the Entity to the Financial Statements: Ins and Outs 25 Consider Risks, Not Just Quantitative Measures 27 Inherent and Control Risk 28 Overstatement and Understatement 28 Does "In Scope" Imply Extensive Testing? 37 A Consolation 39 Be Careful Out There! 40 Appendix 2A: Summary of Scoping Inquiries 42 Chapter 3: The Risk Assessment Component 45 Risk Assessment Principles in COSO 46 Cost Control 46 Basics 47 Likelihood, Magnitude, Velocity, and Persistence 48 Separate Assessments of Inherent and Control Risks 50 Role of Assertions 51 Assertions 52 Principles 6 and 7: Specify Suitable Objectives; Identify and Analyze Risk 56 Identifying Risks 59 External Sources of Risk Information 60 Internal and External Reporting Risks 61 Compliance Risks 61 Disclosed Material Weaknesses in Risk Assessment 62 Principle 8: Assess Fraud Risk 62 Auditor Responsibility to Detect Fraud 65 Antifraud Controls for Management to Consider 66 Ties to Other Principles and Components 66 Principle 9: Identify and Assess Significant Change 66 Gathering Information to Support the Risk Assessment and Consider Change 68 Appendix 3A: SAS No. 99 Exhibit: Management Antifraud Programs and Controls 72 Attachment 1: AICPA "CPA's Handbook of Fraud and Commercial Crime Prevention" Code of Conduct 87 Attachment 2: Financial Executives International Code of Ethics Statement 91 Appendix 3B: Understanding Fraud Risk Assessment 93 Chapter 4: Control Environment 99 Principle 1: Commitment to Integrity and Ethical Values 100 Principle 2: Board of Directors (Governance) Demonstrates Independence from Management and Exercises Oversight of the Development and Performance of Internal Control 104 Principle 3: Management Establishes, with Board Oversight, Structures, Reporting Lines, and Appropriate Authorities and Responsibilities in the Pursuit of Objectives 109 Principle 4: Commitment to Attract, Develop, and Retain Competent Individuals in Alignment with Objectives 110 Principle 5: The Organization Holds Individuals Accountable for Their Internal Control Responsibilities in the Pursuit of Objectives 113 Appendix 4A: Understanding and Awareness of Control Responsibilities 117 Chapter 5: Control Activities 120 Principle 10: Selects and Develops Control Activities to Mitigate Risk and Achieve Objectives 120 Principle 11: Selects and Develops General Controls over Technology 132 Principle 12: Deploys through Policies and Procedures 141 Summing Up 143 Appendix 5A: Linking Common Control Activities and Assertions 146 Appendix 5B: Linkage of Principles to Controls, Policies, and Procedures 158 Chapter 6: Information and Communication 165 Principle 13: Generates Relevant Information 166 Principle 14: Communicates Internally 168 Principle 15: Communicates Externally 170 Chapter 7: Monitoring 173 Principle 16: Select, Develop, and Perform Ongoing and/or Separate Evaluations 174 Principle 17: Evaluate and Communicate Deficiencies as Appropriate 176 Chapter 8: Evidence and Testing 179 Sufficient Evidence 179 Gathering Information 187 Testing and Sampling 194 Nonsampling Situations 202 Confusion of Sample Size Guidance in Practice Today 203 Information Technology General Controls 204 Testing Security and Access 205 Appendix 8A: Sample Size Tutorial 211 Chapter 9: Developing Questionnaires and Conducting Interviews 217 Surveys of Employees 219 Conducting Interviews 224 Management Inquiries: Sample Questions 234 Appendix 9A: Sample Practice Aids 239 Chapter 10: Assessing the Severity of Identified Controls Deficiencies 248 It's Inevitable 248 Alignment of Public and Private Company Standards for Assessing Deficiency Severity 251 Control Deficiencies and Definitions 252 Key Factors When Assessing the Severity of a Deficiency 263 Conditions Indicating Control Deficiencies 270 Examples of Evaluating the Severity of Deficiencies 277 Overall Assessment 281 Appendix 10A: A Framework for Evaluating Control Exceptions and Deficiencies 283 Appendix 10B: Assessing the Potential Magnitude of a Control Deficiency 299 Chapter 11: Reporting Requirements 302 Nonpublic Entity Reporting 302 Public Company Annual and Quarterly Reporting Requirements 304 Reporting on Management's Responsibilities for Internal Control 309 Required Company and Auditor Communications 312 Reporting the Remediation of Weaknesses 314 Coordinating with the Independent Auditors and Legal Counsel 315 Appendix 11A: Illustrative AICPA Report on Internal Controls 316 Chapter 12: Project Management and Tools Assessment Design 318 Project Management 318 Structuring the Project Team 319 Tools Assessment Design 325 Features of a Good Tools Solution 326 Value of a Pilot Project 331 Coordinating with the Independent Auditors 334 Chapter 13: Illustrative Forms and Templates 337 Historical Perspective 338 2013 Framework Examples 340 Appendix 13A: Information-Gathering Form--Principle Focused 348 Appendix 13B: Information Gathering Form--Revenue 350 Appendix 13C: Walk-through Documentation Form 353 Appendix 13D: Information Technology General Controls Assessment Form 355 Appendix 13E: Documentation of Financial Reporting Software and Spreadsheets 364 Appendix 13F: Sampling Form for Tests of Controls 368 Appendix 13G: Summary of Internal Control Deficiencies 371 Appendix 13H: Control Environment Component Evaluation Summary 372 Chapter 14: Summing Up 373 About the Author 375 Index 377