Defining Internal Controls-COSO Questions and Answers(A+ Solution guide)

The 3 Principles of Control Activities - ️️1) Selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels. (eg recons, supervision, variance analysis). 2) Selects and develops general control activities over technology to support the achievement of objectives. 3) Deploys control activities through policies that establish what is expected and procedures that put policies into action. COSO's 5 essential components of an effective internal control system: Information and Communication - ️️1) Obtains or generates and uses relevant, quality information to support the functioning of internal control. What goals does the auditor have on all audits regarding control risk? - ️️1) To DOCUMENT ITS UNDERSTANDING OF INTERNAL CONTROLS in order to have any chance of being able to evaluate its effectiveness. 2) To use this understanding to TEST whether of not internal controls are effectively supporting the relevant assertions What do you use the COSO Framework to do? - ️️1) Document ICS. 2) Evaluate whether or not it appears effective. 3) As a basis for designing tests of the relevant assertions associated with each significant account. COSO's 5 essential components of an effective internal control system: - ️️1) The Control Environment. 2) Risk Assessment. 3) Control Activities. 4) Information and Communication. 5) Monitoring. COSO's 5 essential components of an effective internal control system: The Control Environment - ️️1) TONE AT THE TOP- The organization demonstrates a commitment to integrity and ethical values. {Internal controls are important} 2) The board demonstrates independence from management. And exercises oversight of the development and performance of internal control.3) Management establishes, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives. 4) HIRE THE RIGHT PEOPLE. 5) ACCOUNTABILITY. COSO's 5 essential components of an effective internal control system: Risk Assessment - ️️The identification of all things that could negatively affect the company's ability to present financial information consistent with all of the management assertions and the mitigation of their impact with pre-emptive actions. The 4 Principles of Risk Assessment per COSO: - ️️1) The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives. 2) Identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed. 3) Considers the potential for fraud in assessing risks to the achievement of objectives. 4) Identifies and assesses changes that could significantly impact the system of internal control. Internal Controls Definition - ️️Are all PROCESSES designed by an organization to provide REASONABLE ASSURANCE regarding the achievement of objectives related to three general Areas: Internal Controls General Areas: - ️️1) Reliable Financial Reporting 2) Effective and efficient operations 3) Compliance with Rules and Regulations