control over financial reporting (Phase II of the audit
opinion formulation process). An important part of
an organizations corporate governance is its system of internal control. All organizations need effective internal control over financial reporting so that they can produce reliable financial statements. For example, internal control is needed to provide reasonable assurance that all sales are recorded, all cash receipts are collected and properly deposited in the organizations bank accounts, and all assets and liabilities are properly valued. Management has the responsibility to design, implement, and maintain effective internal control over financial reporting. Management of public companies will also evaluate and publicly report on the effectiveness of the companys internal control. The external auditor needs to understand a clients internal control over financial
reporting and how management has fulfilled its internal
control responsibilities. This chapter helps you identify aspects of a clients internal controls that you need to understand in order to plan and conduct an audit. Through studying this chapter, you will be able to achieve these learning objectives: 1. Articulate the importance of internal control over financial reporting for organizations and their external auditors. 2. Define internal control as presented in COSOs updated Internal ControlIntegrated Framework and identify the components of internal control. 3. Describe the control environment component of internal control, list its principles, and provide examples of each principle. 4. Describe the risk assessment component of internal control, list its principles, and provide examples of each principle.
5. Describe the control activities component of
internal control, list its principles, and provide examples of each principleSource: Karla M. Johnstone University of WisconsinMadison Audrey A. Gramling Bellarmine University Larry E. Rittenberg