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Wednesday, March 12, 2008 San Bernardino Hilton

The Association of Government Accountants Inland Empire of California Chapter. INTERNAL CONTROL OVER FINANCIAL REPORTING. Wednesday, March 12, 2008 San Bernardino Hilton. McGladrey & Pullen, LLP / RSM McGladrey Inc. Accounting, Tax and Consulting Firm Founded 1926 100 Offices in U.S.

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Wednesday, March 12, 2008 San Bernardino Hilton

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  1. The Association of Government Accountants Inland Empire of California Chapter INTERNAL CONTROL OVER FINANCIAL REPORTING Wednesday, March 12, 2008San Bernardino Hilton

  2. McGladrey & Pullen, LLP / RSM McGladrey Inc. • Accounting, Tax and Consulting Firm • Founded 1926 • 100 Offices in U.S. • 8000 U.S. personnel • 630 offices worldwide in 72 Countries • 4 Southern California Offices • 5th Nationally amongst CPA/Consulting Firms

  3. Agenda • Internal Control Standards – historical perspective • Internal Control And The Risk Based Audit Standards • Internal Control, an integrated process • SAS 112, Communicating Internal Control Matters

  4. Internal Control Standards – historical perspective • SAS 55, adopted 1988 An entity's internal control structure consists of three elements: • The control environment • The accounting system • The control procedures A sufficient understanding of the internal control structure is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.

  5. Internal Control Standards – historical perspective • SAS 78, adopted 1995 Adopts definition and description contained in Internal Control — Integrated Framework, from COSO report Five interrelated components: • Control environment • Risk assessment • Control activities • Information and communication • Monitoring

  6. Internal Control and The Risk Based Audit Standards SAS 107, Audit Risk and Materiality in Conducting an Audit • Standard introduces risk assessment and risk of material misstatement - RMM • Audit risk and materiality are affected by the size and complexity of the entity and the auditor's experience with and knowledge of the entity and its environment, including its internal control • No longer understanding IC for planning purposes, now a function of risk assessment

  7. Internal Control and The Risk Based Audit Standards • SAS 109, Understanding the Entity and Its Environment and Assessing RMM • The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures • Obtaining an understanding of internal control involves evaluating the design of a control and determining whether it has been implemented. Evaluating the design of a control involves considering whether the control, individually or in combination with other controls, is capable of effectively preventing or detecting and correcting material misstatements

  8. Internal Control and The Risk Based Audit Standards SAS 110, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained Provides guidance to the auditor in designing and performing further audit procedures, including tests of the operating effectiveness of controls, where relevant or necessary, and substantive procedures, whose nature, timing, and extent are responsive to the assessed risks of material misstatement at the relevant assertion level.

  9. Internal Control, an integrated process

  10. SAS 112, Communicating Internal Control Matters • Defines the terms significant deficiency and material weakness • Requires the auditor to communicate, in writing, to management and those charged with governance, significant deficiencies and material weaknesses identified in an audit • The term those charged with governance is defined as “the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting and disclosure process

  11. SAS 112, Communicating Internal Control Matters • Each of the following is an indicator of a control deficiency that should be regarded as at least a significant deficiency and a strong indicator of a material weakness in internal control: • Ineffective oversight of the entity’s financial reporting and internal control by those charged with governance • An ineffective internal audit function or risk assessment function at an entity for which such functions are important to the monitoring or risk assessment component of internal control, such as for very large or highly complex entities. • Person(s) responsible for the accounting and reporting function lack the skills and knowledge to apply generally accepted accounting principles in recording the entity’s financial transactions or preparing its financial statements.

  12. Closing Comments Internal Control Remediation City of San Diego

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