coso monitoring - templates
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http://www.avivaspectrum.com/contacts COSO 2009 Monitoring Templates free overviewTRANSCRIPT
2009 COSO Guidance & Impact
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AgendaOverview of COSOPurpose of the
Monitoring GuidanceHow COSO’s 2009
Monitoring Guidance Impacts Smaller Co.
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Quick Overview of COSOCOSO was formed in 1985 Introduced a Framework for internal controls in 1992COSO is comprised by five professional associations: American Accounting Association AICPA (American Institute of Certified Public Accountants) FEI (Financial Executives International) IIA (The Institute of Internal Auditors) and IMA (Institute of Management Accountants)
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COSO Guidance - Timeline
1987
Fraud
report
1987 - 1997 Fraud report
on public companies – Issued 1999
1997 – 2007
Fraud report
on public
companies –
Coming Soon
(June 2009)
Monitoring Guidance
Issued Feb. 2009
Guidance for
Smaller Public
Companies
Issued June
2006
Monitoring
Guidance on
Derivatives
Issued 1996
ERM FrameworkIssued 2004
20101985
Framework
Introduced in 1992
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How to get COSO MaterialsFree download to executive summaries
(e.g. introduction or overview documents) of their guidance materials located at http://www.coso.org/guidance.htm
www.cpa2biz.com : site represents AICPA and COSO related products. Search terms such as Internal controls, or COSO etc.
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2009 COSO Monitoring GuidanceIntroduction
Free DownloadIntended for CFO, CEO, BOD and AC members
Vol. 1 Guidance Overview
Intended for C-Level, BOD and AC Members, and Director of Internal
Audit
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2009 COSO Monitoring GuidanceVol.II Application
Discusses How guidance ImpactsAnd Links to 1992 and 2006 COSO
Guidance materialsAudience: DIA, Internal Audit Staff
etc.
Vol. III ExamplesProvides templates to leverage Monitoring
Guidance TheoryAudience: DIA, Internal
Audit Staff etc.
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Vol. #1 - Overview• Four Sections 1.Purpose of Guidance2.Nature & Purpose of
Monitoring3.A Model for Monitoring4.Summary Considerations
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Purpose of the GuidanceTwo Primary Objectives:
1. To help improve the effectiveness & efficiency of their internal control systems
2. To provide practical guidance that illustrates how monitoring can be incorporated into an organization’s internal control process.
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Application of GuidanceDesigned to meet all three
control objectives of COSO Framework
Due to SOX compliance Guidance has a primary focus on internal controls over financial reporting
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Guidance Does Not: Change COSO framework or its 2006 guidanceDictate risks or controls that organization must
considerMandate the exact monitoring procedures that
organizations must followIncrease the monitoring effort for organizations in
areas where monitoring is already effective orMandate a certain level or formality of monitoring
documentation, including the use of certain terms
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Nature and Purpose of MonitoringCOSO Framework states that “monitoring
ensures that internal controls continues to operate effectively” by leveraging two related principles:1. Ongoing and/or separate evaluations enable
management to determine whether the other components of internal control continue to function over time.
2. Internal control deficiencies are identified and communicated in a timely manner to those parties responsible for taking corrective action and to management and the board as appropriate.
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Linking the 2 Principles to 2006 COSO guidance
Principle #19: Ongoing & Separate Evaluations
Principle #20: Reporting Deficiencies
Source: 2006 COSO guidance, vol #3
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Establishing a Model for Monitoring
Effective approach to monitoring involves:1. Establishing a
Foundation 2. Designing &
Executing Monitoring procedures
3. Assessing & Reporting
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Establishing a Foundation
A tone at the top that stressesthe importance of monitoring
Effective organizational structure that considers the roles of management and the board regarding monitoring, and places people with appropriate capabilities, objectivity, authority and resources in monitoring roles and
Baseline understanding of internal control effectiveness
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Design & ExecutePrioritize Risks: Evaluate controls in areas of
meaningful riskID Controls: select appropriate controls for
evaluation from across any or all of COSO’s 5 components
ID information that will be persuasive in supporting conclusions about control effectiveness
Implement monitoring procedures: evaluate that information through a mix of ongoing monitoring and separate evaluations
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Assessing and Reporting Results
Prioritize findingsProvide support at the
appropriate organization level for conclusions regarding the effectiveness of internal controls and
Follow up on corrective action: Facilitate prompt corrective actions and documentation as necessary
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Vol. II – Application Overview
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Vol. II – Application“Quick Tip”
Concept and it’s application in Grey area
Tips on How to Read Vol.II: Grey areas are only suggestions. Application may vary Co. by Co.
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Application of “Tone at the Top”
Management’s tone influences the way employees conduct and react to monitoring.
Examples of documenting the monitoring of “Tone at the Top” include:Communicating expectations to employees (via
employee manual, performance evaluation, sign-off on risk/control matrices, or other SOX related documents).
Taking action for control problems by documenting control failures and including remediation plan or compensating control for each gap.
Documentation of follow-up procedures for any control failures identified (via ____________ or ______________)
20Action Item: Update Performance Evaluations
Application of “Organizational Structure” Role of Management & the BOD
Senior Management evaluates the day-to-day control and monitoring activities (Evidenced in SOX or other related document sign-off)
BOD has an oversight role, in which they are responsible for Understanding risks to organizational objectives Controls that management has put in place to mitigate those risks How management monitors to help ensure that the internal system
continues to operate effectively NOTE: Evidence should be documented in the BOD/AC minutes Guidance offers four suggestions for the BOD to perform it’s
oversight responsibilities (1) Inquiries & Observation of management, (2) Internal audit function (if present) (3) Hired resources or specialists when necessary and (4) external auditors.
21Action Item: Principle #19 and #2 of COSO can leverage evidence of Monitoring Risks
Application of “Organizational Structure” (continued)
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Characteristics of Evaluators Self-review: evaluation of one’s own work
Benefit: usually affords the 1st opportunity to ID control deficiencies
Peer Review: evaluation of co-worker’s or peer’s work Benefit: the individual is close to the control and maybe in the
best position to ID and correct control deficiencies Supervisory Review: evaluation of subordinate’s work
Benefit: same as above Peer Review Impartial Review: often includes internal audit function, people from
other departments or external parties Benefit: Most objective concerning results and can place more
reliance on the effectiveness of ICFR
Source: Vol.2: Figure 5, pg13
Monitoring Changes
COSO offers a high-level overview of an internal control change continuum as follows:
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Change Continuum Evidence
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Risk/Control matrices
Narrative/Flowcharts ELC - Assessment
Change Continuum Evidence
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Test Scripts with supporting documents
Sub-certifications on Controls
Change Continuum Evidence
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Policy & Procedure for changes
Change Mgmt Form
Documentation Authorization with Changes (1)
(1) See Appendix B-Chg Mgmt Narrative Form
Vol. II Application of Design & Execute
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Source: Vol.2 Figure 7 COSO 2009 Monitoring Guidance
Risk Assessment
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•COSO’s monitoring guidance does not state to create a separate risk assessment just for monitoring•Prioritizing risks will allow management to decide on the type, timing and extent of monitoring of controls•Risk Factors to consider:
1. Nature of Operations2. Changes in Operations3. Environmental Factors4. Susceptibility to Theft or Fraud
COSO’s Risk Assessment Examples
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Revenue Example without score detail and objective = Vol.2
Inventory Example with score detail without objective = Vol.3
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ID Key Controls
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• Key-Controls determination can occur at various levels within an organization (e.g. supervisor of a plant has different key monitoring controls than the CFO).
• Key-Control Analysis can be facilitated by considering factors that increase the risk that the internal control system will fail to properly manage or mitigate a given risk, these factors are:1. Complexity2. Judgment3. Manual vs. Automated4. Known Control Failures5. Competence/experience of personnel6. Risk of management override7. Likelihood of control failure detection
ID Persuasive Information
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•Persuasive information is both suitable AND sufficient in the circumstances and give the evaluator reasonable, but not necessarily absolute, support for the conclusion regarding the continued effectiveness of the internal control system in a given risk area.•Suitable information MUST be relevant, reliable and timely.•Sufficiency is a measure of the quantity of information (i.e., whether the evaluator has enough suitable information)
ID Persuasive Information (Cont.)Relevance of Information
Direct vs. Indirect Information Information that directly confirms the operations of the control
is more relevant than indirectDirect: substantiates the operation of controls and obtained by:
1. Observing controls in operation2. Reperformance or 3. Otherwise evaluating their operation directly and can be
useful in both ongoing monitoring and separate evaluationsIndirect: is all other information that may indicate a change or
failure in the operation of controls such as:1. Operating statistics2. Key risk indicators3. Key performance indicators and4. Comparative industry metrics
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ID Persuasive Information (Cont.)Reliability of Information
Reliable information: is accurate, verifiable and comes from an objective source. Accurate information: represents the degree to which
information can reasonably be expected to be free from error and/or to communicate results that reflect reality.
Verifiable: represents information that can be established, confirmed or substantiated as true.
Objectivity: is the degree to which the information source is unbiased when evaluated
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ID Persuasive Information (Cont.)Sufficient Information
Management is required to maintain sufficient suitable information to support its conclusion on the effectiveness of internal controls.
SEC has provided smaller public companies with a general guideline dependent upon risks to determine the sufficient level of support.
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SEC’s Guidance on Information
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http://www.sec.gov/info/smallbus/404guide.pdf
Companies Should Consider New Sampling Guidance
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•May 2008: AICPA issued new Sampling guidelines to align better with their risk based auditing standards (i.e. SAS 101 to SAS 112).
•Management should consider multi-location issues as documented in this new guidance as PCAOB and SEC do not provide best practices on how to make sample selections on a risk-based approach for multi-locations.
Implementing Monitoring
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COSO Provides in Vol.3 Example of Implementing Monitoring Processes for Inventory, which the template can be applied to any business cycle, including IT.
Can add columns for 1)Evidence to Collect2)Qty of Evidence (is it all stores and all months, if so what periods)
Assess & ReportPrioritize Findings by Risk
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Risk Examples provided by Vol. 2, have one example of each type of Risk Rating Type (by Significance and Likelihood)
Vol. 2 – Applying Concepts of Monitoring Prioritized Risks
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Extends the concept in prior slide, in how to prioritize monitoring efforts by rating as well (i.e. High, Med. Low)
IT Guidance to Help Prioritize Findings
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2006 SOX IT Guidance helps users to assess the prioritization based upon risks
Site: www.isaca.org
Internal Reporting: protocol must be established. Typically includes senior management and the board.
External Reporting: a properly designed & executed monitoring program helps support external certifications or assertions because it provides persuasive information that internal controls operated effectively at a point in time or during a particular period.
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Reporting Results
COSO’s suggested documentation should include evidence of:Reporting items agrees to source scoping
documentsEvidence collected support that the control has
been adequately corrected/remediatedManagement approval of corrective action and
related evidence
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Follow-up CorrectiveAction
Impact to Smaller Public Companies
Linking Monitoring Principles (i.e. Principal #19 and 20) to actual business processes (i.e. Financial Statement Close Process, Inventory etc.) will reduce the number of key controls required to assess for SOX
Providing more detailed monitoring reports substantiates management’s evidence of reviewing key controls
Guidance provides management more information on how to leverage key controls for more than one type of risk
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Practical Steps Using 2009 GuidanceStep 1: Entity-Level Control Assessment, use color coding
offered by 2006 COSO GuidanceStep2: Risk Assessment exercise should include IT to
prevent any miscommunication of prioritizing risks for the organization
Step 3: Evaluate Monitoring guidance issued 2009 by COSO, especially considering three top templates from the guidance:1. Quarterly and Annual Management Representations
(vol.3 – Appendix B)2. Enterprise Wide Risk Matrix (vol.3 – Appendix C)3. Prioritize Risk and Controls (vol.2 – pg. 51 to pg. 55)
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Segregation of Duties (SOD)2009 Due to economy less staff and more
work allocated to others.Leveraging too smaller staff size may cause a
lack of SOD.2009 & 2006 COSO Guidance have stated
compensating controls are the critical factor to avoid a material weakness.
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SOD Case Study
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Q & A
My Contact info:Sonia Luna email: [email protected]
Phone: (323) 828-5862
Blog: www.sox-blog.com
Twitter: http://twitter.com/Sox_Solutions
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