Ethical

Checklist for Evaluating Internal Controls

An entity’s system of internal control consists of policies and procedures designed to provide management with reasonable assurance that the company achieves its objectives and goals ( Louwers, T., Ramsay, R., Sinason, D., & Strawser, J. (2007). During the course of the past few weeks, we have all come to find out exactly what internal control is and what benefits it provides an organization. Reliability of financial reporting, compliance with laws and regulations, effectiveness and efficiency of operations are the major objectives of an internal control system. There are five interrelated components that make up the internal control system. They are the control environment, risk assessment, control procedures, information and communication systems, and last monitoring. The following paper will discuss the importance of these components of an internal control system along with how internal controls can be evaluated.

The question has to be asked. What is the purpose of evaluating internal controls? Normally, auditors have two primary reasons for conducting internal control evaluations. The first reason is Sarbanes- Oxley requirements. Section 404 of Sarbanes-Oxley Act requires management of publically traded companies to issue an internal control report. This report must contain a statement that management is responsible for establishing and maintaining an adequate internal control system and procedures for financial reporting. On top of that requirement is an assessment of the effectiveness of the internal control structure and procedures for financial reporting as of the end of the company’s fiscal year. Not only must management evaluate the design of internal control over financial reporting, but management must also test the operating effectiveness of those controls put in place. The second reason for evaluating internal control is to assess an organization’s control risk. Control risk is the...