The Management Of Internal Auditing

To execute this plan, it sets requirements for Executive Officers, guidelines for tipsters and procedures for all employees. Specifically, section 404 of SOX works towards fraud prevention by enforcing procedures. This section holds company management and their external audits accountable for regulating the internal controls, and ensuring any material weaknesses or deficiencies are disclosed. The requirements for proper disclosure includes reporting any material change that could change the mind of investor. The company should provide reasonable assurance that details accurately and fairly reflect actual transactions in the business, they comply with GAAP and they are finding unauthorized transactions in a timely manner. Keeping in mind, the primary purpose of the implementation and continual regulation of the internal controls is to prevent fraud. Without the presence of effective and reliable internal controls, companies are susceptible to fraudulent activities. The punishment for failing to provide of the required disclosures includes $5 million fine and up to 20 years in prison. In addition to the increase in severity of punishment, businesses have also felt the raising costs associated with section 404

In the last decade, the world of business has been subjected to significant changes. Globalization has given a new meaning to the way in which business is now conducted; i.e. business in a world devoid of geographical boundaries or time zones. Global expansion has also given rise to many emerging firms and laid the foundations for fierce competition amongst existing industries. Internal auditing is no exception. In order not to face complacency or obsolescence, the internal auditing industry has to be proactive and adapt to changing market trends.

Corporate fraud was the cornerstone for the strict implementation of the Sarbanes-Oxley Act of 2002 (SOX). SOX implements many compliance regulations, but one of its regulations, specifically Section 404, relates to an organization’s internal control procedures with the purpose of protecting organizational assets and investors’ interest. Consequently, organizations, big or small, private or public, are prone to fraud. SOX’s compliance of internal control procedures is developed through the Committee of Sponsoring Organizations of the Treadway Commission (COSO) known as the COSO framework that consists of the following procedures: control environment, risk assessment, control activities, information and communication and monitoring. Each variable address a layer that builds upon each other by

Internal Controls are to be an integral part of any organization's financial and business policies and procedures. Internal controls consists of all the measures taken by the organization for the purpose of; (1) protecting its resources against waste, fraud, and inefficiency; (2) ensuring accuracy and reliability in accounting and operating data; (3) securing compliance with the policies of the organization; and (4) evaluating the level of performance in all organizational units of the organization. Internal controls are simply good business practices (Strauss, 2003). And, since internal controls can have many more meanings in the world of accounting, the more we understand what were dealing with, the better we can analyze internal

This means that the main goals of the act in enhancing auditor independence in preventing fraud in future are faced with pressures regarding its efficiency. Case 3 Effective fraud control depends on prevention of the following three weaknesses in the internal control system. First is the static nature of internal controls. This means that internal controls might not be fluid in terms of evolution with the changes experienced in technology, business and the fraud environment. Second is the immunity of the internal control systems. For instance, if a company’s internal control system has weak control policies for its procedures and processes, then the company becomes a target for both internal and external criminal activities. Thirdly, are unclear definitions of the roles and responsibilities of ownership. By this it means that if the internal control system is not well defined to the employees, then there will be an assumption that the role of the internal controls is to only perform audits hence they would not be interested in preventing fraudulent

The SOX act was put in place to force companies to obtain audits of the internal operation. The internal investigations were put in place to reduce the amount of in house fraud that businesses receive from their employees. Based on SOX audits, “Markets have been able to use the information to assess companies more effectively, managers have improved internal processes, and the internal control testing has become more cost-effective over time, per Srinivasan (Hanna, 2014)”. Companies that use the internal audits to properly manage their companies, will see a decline in fraud within their

The Sarbanes-Oxley Act (SOX) of 2002, aims to combat fraud, improve the reliability of financial reporting and restores investor confidence. Section 404 of Sarbanes-Oxley emphasize the management’s responsibility in maintaining a sound internal-control structure of financial reporting and assessing its own effectiveness. While the auditors’ responsibility is to attest to the soundness of management’s assessment and to report on the state of the overall financial control system. Although it has been a question by most executives, however, some approached the new law with gratitude. As SOX went into effect, more executives had realized the need for internal reforms; they were startled by the weaknesses and gaps of their internal control that compliance reviews and assessments had exposed.

     The second standard requires public accounting firms to audit internal controls in conjunction with an audit of financial statements. The second standard requires public accounting firms to attest that the internal controls documented and set forth by the company audited are sufficient to ensure the integrity of the financial statements (Griggs). This second standard is a real breakthrough in ensuring the financial statements of a company are sound. It is impossible for a public accounting firm to audit every detail of large multi-national company. Strong internal controls reduce the risk of material misstatements to a company’s financials caused by negligence or fraud. Maintaining internal controls is no longer enough. Companies must now analyze and document their internal processes (Calabro). When a public accounting firm issues an unqualified opinion on the internal controls of a company, which will be required starting November 15, they are stating that the internal checks set forth adequately protect the assets of a company from negligence or fraud.

The SOX Act has always been described as “an endless list of compliance requirements” with no productive benefit (Hunter, 2007). Most of the costly compliance requirements are included in section 404 of SOX Act. “It’s turned out to be a gorilla,” said Charles Elson , “Its costs are phenomenal” (Quoted by Philadelphia Business Journal). Despite the unapparent recovery of investors’ confidence, complaints about the greatly increased costs have been heard everywhere. Obviously, the complaints came from the affected companies. To comply with the requirements of section 404 of SOX which is related to internal control, audit firms need to spend much more on the testing of a company’s internal control, the cost of which would certainly be passed on to their clients. In addition to increasing audit fees paid to auditors, more costs have been

SOX established the Public Company Accounting Oversight Board (PCAOB) to regulate the audit industry to oversee accounting professionals who provided independent audit reports for publicly traded companies (SEC). Key responsibilities include: registering public accounting firms and establishing audit, quality control, ethics, independence, and other standards relating to public company audits (SEC). Conducting inspections, investigations, and disciplinary proceedings of registered accounting firms, as well as enforcing compliance with Sarbanes-Oxley as a whole (SEC) also falls under PCAOB’s responsibility. SEC penalties have increased considerably in the recent years in addition to increased levels of enforcement activities.

a. The auditors should review the client's planning of the physical inventory and make suggestions for improvement.

The purpose of this research is to provide a summary outline on internal auditing by uncovering motives behind corporate fraud, executives greed for power, money and influence. These issues will include a transitory story of the Archer Daniels Midland Company (ADM) scandal which results in fraudulent corporate practices using the fixed pricing scheme. If internal auditing practices were implemented at ADM may have saved investors and customers millions of dollars. This topic shifts to company responsibilities for employing internal auditing practices and managers’ duties to uphold integrity over a decade Sarbanes-Oxley Act of 2002 has been prescribed. This paper ties in the connection between internal auditing and management by flowing into managerial accounting processes.

Most of these laws are used within an organization as well to help aid in the accurate reporting of the financial reports and help them organize internal and audit controls within the organization to prevent potential fraud and misappropriation of funds. Sarbanes-Oxley Act 2002 mandates that all preparers, auditors, analysts, and users operate and know the importance of governance and internal controls. (Huefner, 2011) The Treadway Commission’s (COSO) The Committee of Sponsoring Organizations lists the objectives of internal controls and its importance. (Huefner, 2011) Internal Controls have to be monitored often. These are controls that change overtime based on the needs and the functionality of the organization. Random audits are one way to identify problems that may arise with internal controls. If this is not done often, it suggests that there could be a weakness in internal controls. Weakness in controls leads to fraud to occur within a company. If there is no monitoring of the internal controls than there is a risk of fraudulent behavior among employees and potential misappropriation of funds when reporting financial reports to the federal government. There is no validity to financial reports created and the auditor or professional accountant completing the financial reports

During the audit of the financial statements we will be assessing the internal controls in use as mandated by the Sarbanes-Oxley Act of 2002. The act was designed to enhance corporate responsibility as it relates to financial reporting issues. Section 404 covers the internal controls that have been setup by the company. Internal controls are designed to protect the assets of a business from misuse or loss. Internal controls also help the business to streamline processes so that goals can be achieved at the best rate of return from the use of available assets. The remainder of this letter contains an overview of section 404 and other regulations relating to the audit of internal controls and a synopsis of internal control risks that have been identified within Apollo Shoes Inc. We will also describe the relationship between internal controls and the audit process as well as outlining our responsibilities in detecting and reporting fraud.

Organizations produce financial statements that give data about their money related position and execution. This data is utilized by an extensive variety of partners (e.g., financial specialists) in settling on financial choices. Regularly, those that possess an organization, the shareholders, are not those that oversee it. In this way, the proprietors of these organizations (and different partners, for example, banks, suppliers, and clients) take solace from the autonomous affirmation that the monetary explanations genuinely present, in every single material regard, the organization 's money related position and execution.