checklist for evaluating internal controls acc 544 amanda smith

1CHECKLIST FOR EVALUATING INTERNAL CONTROLS

Checklist for Evaluating Internal Controls

Amanda Smith

ACC/544

September 14, 2015

Gary Godfrey

CHECKLIST FOR EVALUATING INTERNAL CONTROLS 2


“Internal control is a process effected by an entity’s board of directors, management, and

other personnel, designed to provide reasonable assurance regarding the achievement of

objectives in three categories: 1) reliability of financial reporting, 2) effectiveness and efficiency

of operations, and 3) compliance with applicable laws and regulations” (Louwers, Ramsay,

Sinason, & Strawser, 2007, p.149). There are five components of internal control that should be

considered when evaluating a company’s financial reporting controls, and in addition will

provide the bases for the auditor’s assessment of control risk as it relates to financial statements.

According to Louwers, Ramsay, Sinason, & Strawser, 2007, the five components are: 1) control

environment, 2) risk assessment, 3) control procedures, 4) information and communication, and

5) monitoring. To efficiently perform an accurate review of an organization’s internal controls,

the auditor uses a comprehensive checklist. This provides a basis for planning the audit and

useful information to meet legal standards.

Control Environment

“The control environment sets the tone of the organization and is the foundation for all

components of internal control” (Louwers, Ramsay, Sinason, & Strawser, 2007, p. 151). The

control environment refers to the organization’s “Corporate culture” and is the foundation for all

components for internal control. To have a favorable control environment management must

value and demonstrate ethical behavior. An organization should also have a plan and mission

statement in place to provide guidance and assistance. Other elements include a company

organizational structure, methods of assigning authority and responsibility, and human resource

policies and practices.


Risk Assessment

“Management should take steps to identify risks, estimate their significance and

likelihood, and consider how to manage the risks” (Louwers, Ramsay, Sinason, & Strawser,

2007, p. 153). It is important to identify and manage any risks that could prevent the

organization from achieving business objectives. “Because economic, industry, regulatory, and

operating conditions will continue to change, mechanisms are needed to identify and deal with

the special risks associated with change” (COSO, n.d.). Management should seek to avoid these

risks but in the event the risks cannot be avoided, management can decide to accept the risk or

reduce the risk.

Control Procedures

“Control procedures are specific actions taken by a client’s management and employees

to help ensure that management directives are carried out” (Louwers, Ramsay, Sinason, &

Strawser, 2007, p. 154). After the risks have been identified the internal control procedures will

need to be established. Control activities include segregation of duties, performance reviews,

physical controls, and information processing. These procedures help to prevent, detect, and

correct errors that could occur in the financial statement.

Information and Communication

To accurately achieve management’s objectives, the information and communication

component is essential. Managers must have access to effective communication with external

parties, events, and activities to make informed business decisions. “Pertinent information must

be identified, captured, and communicate in a form and time frame that enable people to carry

out their responsibilities” (COSO, n.d.).


Monitoring

Internal control systems should be monitored on a regular basis. Monitoring of controls

assesses the effectiveness of the internal control performance through monitoring activities and

evaluations. The monitoring process should be performed through a combination of ongoing

and separate evaluations. These evaluations determine whether components of internal control

are functioning as designed and as intended. If controls remain unmonitored, they will

deteriorate over time, but proper monitoring can lead to organizational efficiency and reduced

costs.

Conclusion

The internal control system is implemented to evaluate policies and procedures and

enables management to achieve company goals and objectives. A successful internal control

system will also help the company stay prepared for upcoming audits, safeguard assets, and

ensure compliance. The checklist will ensure that each of the five components is properly

evaluated, and internal controls are functioning properly. The checklist is designed to help gain

a better understanding of company needs and allow management to make improvements if

needed.



Control Environment

Yes/No

Are employees familiar with the organization’s policy and procedures?Are employees familiar with the organization’s compliance requirements?Does management demonstrate integrity and ethical values?Are internal procedures updated appropriately?

Does management abide to an open door policy?

Risk Assessment

Yes/No

How many employees are responsible for cash and check handlingAre cash deposits segregated between employees?Is mail received and handled by two or more employees?How does management assess risks?

How does management develop strategies and objectives?


Control Procedures

Yes/No

Does the organization have written policies and procedures?Does the organization audit its procedures?

Is management involved in the process?

Is quality assurance enforced?

Are processes reviewed by management?

Communication and Information

Yes/No

Does the organization get information from internal and external sources?Does the department identify, capture, process, and communicate the information that others need in a form and timeframe that is useful?Does the department communicate effectively? Internally? Externally? Does the department get information to alert it to internal or external risks?


Monitoring

Yes/No

Are accounting policies defined and effectively communicated in writing?Does management periodically evaluate accuracy, timeliness, and relevance of its information and communication systems?Are internal control subject to a formal and continuous internal assessment process?Does management assess controls and report results of the assessment along with required corrective actions?Is the monitoring process performed through both ongoing evaluations and separate evaluations?


References

This is a hanging indent. To keep the hanging indent format, triple click your mouse on this line

of text and replace the information with your reference entry. You can use the Reference

and Citation Examples (Center for Writing Excellence>Tutorials and Guides>Reference

and Citation Examples) to help format your source information into a reference entry.

The reference page always begins on the top of the next page after the conclusion.

checklist for evaluating internal controls acc 544 amanda smith

Documents