Chapter 7

Introduction to Internal Control Assessment and Reporting

Lynford Graham, CPA, PhD, CFE

Bentley University

7.1 Introduction

(a) Effectiveness of Sarbanes-Oxley Requirements to Date

7.2 Definition of Internal Control

7.3 Management's Required Reports on Internal Control

(a) Annual Reporting Requirements

(i) Effective Dates

(b) Quarterly Reporting Requirements

(i) Disclosure Controls and Procedures

7.4 Management Certifications

7.5 Independent Auditor's Responsibilities

7.6 Audit Standards

(a) Relationship with Management's Assessment

(b) Documentation

(c) Scope of Test Work

(d) Use of Work of Internal Auditors and Others

(i) Independent Auditor's Use of the Company's Internal Control Work

(ii) Using the Work of Others

(e) Determination of Material Weaknesses

(f) Working with the Independent Auditors

7.7 Top-Down, Risk-Based Approach for Evaluating Internal Control

(a) Principles of a Top-Down, Risk-Based Approach

7.8 Coordinating with the Independent Auditors

7.9 A New Era

7.1 Introduction

The Sarbanes-Oxley Act of 20021 made significant changes to many aspects of the financial reporting process. One of those changes is a requirement that management evaluate the effectiveness of its internal control over financial reporting and provides a report on this evaluation. Additionally, the company's independent auditors are required to report on the effectiveness of internal control in conjunction with their traditional audit of the company's financial statements.

The motivation ...

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