Assessing Risk

Assessing Risk From

An Auditor’s Perspective

INTRODUCTION

BACKGROUND

During the early to mid 1980’s, we saw large businesses failing, including Drysdale Government Securities, Washington Public Power Supply System, Baldwin-United Corporation, and E.S.M. Government Securities. Congressional Hearings were conducted to determine whether these failures could have been avoided, by among other things, better audit practices.

To address Congressional concerns, the National Commission on Fraudulent Financial Reporting was established in June of 1985. This Commission is usually referred to as the Treadway Commission, which was named after its chairman, former Securities and Exchange Commissioner James C. Treadway, Jr. The Treadway Commission’s mission was “to identify causal factors that can lead to fraudulent financial reporting and steps to reduce its incidences.” 1

The Treadway Commission became known as the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In 1992, COSO developed an internal control framework which focused on three areas (1) accuracy of financial reporting, (2) compliance with laws and regulations, and (3) effective and efficient operations.

The original COSO Framework contains five components needed to ensure sound business objectives. The control components are:

* Control Environment

* Risk Assessment

* Control Activities

* Information and Communication

* Monitoring

In 2004, COSO updated its framework to focus on identifying and managing risk across the enterprise and developed the Enterprise Risk Management (ERM) COSO Framework, which added three more components to the above controls. The three added components are:

* Objective Setting

* Event Identification

* Risk Response 2

Over the past several years, we have seen more deliberate steps being taken to bring some of the practices used in the private sector into the dealings of our Government. We have...