Chapter 7 Sarbanes-Oxley, Internal Control, and Cash
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3. Control procedures 4. Monitoring
5. Information and communication
The elements of internal control are illustrated in Exhibit 2.
E X H I B I T 2
Elements of Internal Control
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© C engage L
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In Exhibit 2, the elements of internal control form an umbrella over the business to protect it from control threats. The control environment is the size of the umbrella. Risk
assessment, control procedures, and monitoring are the fabric of the umbrella, which keep it from leaking. Information and communication connect the umbrella to management.
Control Environment
The control environment is the overall attitude of management and employees about the importance of controls. Three factors influencing a company’s control environ-
ment are as follows:
1. Management’s philosophy and operating style 2. The company’s organizational structure
3. The company’s personnel policies
Control Environment
Organizational Structure
Employees
Management’s Philosophy
and Operating Style Personnel
Policies CEO
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Chapter 7 Sarbanes-Oxley, Internal Control, and Cash
Management’s philosophy and operating style relates to whether management em- phasizes the importance of internal controls. An emphasis on controls and adherence to
control policies creates an effective control environment. In contrast, overemphasizing operating goals and tolerating deviations from control policies creates an ineffective
control environment.
The business’s organizational structure is the framework for planning and control- ling operations. For example, a retail store chain might organize each of its stores as
separate business units. Each store manager has full authority over pricing and other operating activities. In such a structure, each store manager has the responsibility for
establishing an effective control environment.
The business’s personnel policies involve the hiring, training, evaluation, compen- sation, and promotion of employees. In addition, job descriptions, employee codes of
ethics, and conflict-of-interest policies are part of the personnel policies. Such policies can enhance the internal control environment if they provide reasonable assurance
that only competent, honest employees are hired and retained.
Risk Assessment
All businesses face risks such as changes in customer requirements, competitive threats, regulatory changes, and changes in economic factors. Management should
identify such risks, analyze their significance, assess their likelihood of occurring, and take any necessary actions to minimize them.
Control Procedures
Control procedures provide reasonable assurance that business goals will be achieved, including the prevention of fraud. Control procedures, which constitute one of the most
important elements of internal control, include the following as shown in Exhibit 3.
1. Competent personnel, rotating duties, and mandatory vacations 2. Separating responsibilities for related operations
3. Separating operations, custody of assets, and accounting 4. Proofs and security measures
E X H I B I T 3
Internal Control Procedures
Competent Personnel, Rotating Duties, and Mandatory Vacations
A suc- cessful company needs competent employees who are able to perform the duties that they
are assigned. Procedures should be established for properly training and supervising em- ployees. It is also advisable to rotate duties of accounting personnel and mandate vacations
for all employees. In this way, employees are encouraged to adhere to procedures. Cases
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Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook andor eChapters. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Chapter 7 Sarbanes-Oxley, Internal Control, and Cash
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