How to Comply With Sarbanes-Oxley Section 404: Assessing the Effectiveness of Internal Control

5.4. DOCUMENTING ACTIVITY-LEVEL CONTROLS

The processing of accounting transactions is a relatively linear process, as indicated in Exhibit 5.2.

Reading from left to right, the entity enters into a transaction—for example, the purchase of raw materials. That transaction generates data, some of which are significant for accounting purposes, some of which are not. For example, the description of the items purchased, the amount paid, and when the goods were received all have significance in the recognition, measurement, presentations, and disclosure of the transaction in the financial statements. The vendor's invoice number also is included as part of the transaction data, but this information has no relevance for accounting purposes.^[]

^[] For the purpose of tracking or controlling the transaction, the entity may wish to capture the invoice number anyway, but this is optional. However, capturing the amount of the purchase is not an option.

Raw transaction data must be transformed into information that can be processed by the accounting system, that is, information that will eventually result as a debit and credit to the general ledger. Once the accounting information has been prepared, the transaction enters the accounting system to be recognized and measured for financial reporting purposes. As indicated in Exhibit 5.2, several discrete processing steps may be required before the information ultimately is posted in the general ledger and other accounting records.

This entire process, ...