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SARBANES-OXLEY SECTION 404

SARBANES-OXLEY SECTION 404:A Guide for Management by Internal Controls PractitionersSARBANES-OXLEY SECTION 404:A Guide for Management by Internal Controls PractitionersThe Institute of Internal Auditors2nd Edition, January 2008 The Institute of Internal Auditors / iTable of ContentsAbout the Second to Use This Guide .. for the CEO and CFO ..3A. SECTION 404: Rules or principles ..9B. Revisiting the principles of Internal Control ..11 The COSO Framework ..15C. What Constitutes an Effective System of Internal Control as it Relates to the Requirements of SECTION 404?

Each of the major certified public accounting (CPA) firms and other providers of audit ... They are experts in the theory and practice of internal controls and related auditing. ... judgment to develop and operate a continuing Section 404 program that is principles-based.

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Transcription of SARBANES-OXLEY SECTION 404

1 SARBANES-OXLEY SECTION 404:A Guide for Management by Internal Controls PractitionersSARBANES-OXLEY SECTION 404:A Guide for Management by Internal Controls PractitionersThe Institute of Internal Auditors2nd Edition, January 2008 The Institute of Internal Auditors / iTable of ContentsAbout the Second to Use This Guide .. for the CEO and CFO ..3A. SECTION 404: Rules or principles ..9B. Revisiting the principles of Internal Control ..11 The COSO Framework ..15C. What Constitutes an Effective System of Internal Control as it Relates to the Requirements of SECTION 404?

2 18D. Who Is Responsible for Internal Controls? ..19E. What Is the Scope of Management s Assessment of the System of Internal Control Over Financial Reporting?..21F. Defining the Detailed Scope for SECTION 404 ..251) Using a Top-down and Risk-based Approach to Defining the Scope ..252) The Detailed Process for Defining the Scope ..273) Materiality ..284) Significant Accounts and Disclosures ..285) Financial Statement Assertions ..306) Significant Locations, Business Processes, and Major Classes of Transactions.

3 307) Key Control ..31a. Identifying Key Controls Within Business Processes ..32b. Identifying Key ITGCs ..35c. Other Entity-level Controls ..39d. Spreadsheets and Other End-user Computing Issues ..41e. Controls Performed by Third-party Organizations (SAS 70 Type II Reports) ..448) Fraud Risk Assessment ..459) Process and Control Documentation ..46ii The Institute of Internal Auditors / Of CONTENTSG. Testing Key Controls ..481) Testing Automated Controls ..512) Testing Indirect Entity-level Controls.

4 52H. Assessing the Adequacy of Controls, Including Assessing Deficiencies ..54I. Management s Report on Internal Controls the End Product ..59J. Closing Thoughts on Efficiency ..61 Acknowledgments ..64 Notes ..65 The Institute of Internal Auditors / iiiAbout the Second EditionThis is an updated version of The Institute of Internal Auditor s (IIA s) SARBANES-OXLEY SECTION 404: A Guide for Management by Internal Controls Practitioners, one of its most frequently down-loaded products. Changes include:Updated references to Auditing Standard No.

5 5 (AS 5) and the Securities and Exchange Commission s (SEC s) guidance for management on SECTION 404 of the SARBANES-OXLEY Act of 2002. The first edition was based on the top-down and risk-based approach adopted in both documents, and the second edition updates the discussion and extends the guidance provided by the expanded and updated discussion of information technology (IT) general controls scoping based on The Institute s Guide to the Assessment IT General Controls Scope Based on Risk (GAIT) products.

6 An extended discussion of the role of entity-level controls. The benefit of additional years of experience with management s assessment of internal control over financial reporting (ICFR).The approach discussed in this guide has proven successful over the last few years, streamlining management s processes, and effecting major reductions in total assessment The Institute of Internal Auditors / to Use This GuideOrganizations can use this guide to ensure their program for assessing the system of internal control over financial reporting is not only effective but also cost-effective.

7 They will use this guide to:Supplement and extend the guidance for management that has been provided by the SEC. Assess the efficiency of their SECTION 404 program, such as how to minimize total assessment costs, including related external auditor their assessment process and compare it to best practices identified by experienced internal control their processes for assessing deficiencies and providing an overall opinion. Management should provide an opinion that is based on principles instead of rules ( , an opinion that provides the investor with a fair assessment of the system of internal control).

8 It should reflect the true condition of the internal control system, not one based on technicali-ties that could mislead the investor who needs to have confidence in the financial on their role in their organization and responsibilities for SECTION 404, readers may use the guide in its entirety or read specific sections based on first and last sections the Summary for the CEO and CFO and Closing Thoughts on Efficiency merit all readers Institute of Internal Auditors / 1 IntroductionVarious organizations have provided guidance on the subject of SECTION 404 and management s annual assessment of its system of ICFR.

9 The Public Company accounting Oversight Board (PCAOB) provided an updated stan- dard for external auditors in May 2007: AS 5, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements. Management actions are governed by the SEC and not the PCAOB. While the SEC endorsed AS 5, it also provided its own Commission Guidance Regarding Management s Report on Internal Control Over Financial Reporting Under SECTION 13(a) or 15(d) of the Securities Exchange Act of 1934 in June 2007.

10 This high-level guidance is not mandatory for manage-ment, but following it provides a safe of the major certified public accounting (CPA) firms and other providers of audit services have published extensive and valuable guidance, generally consistent with PCAOB and SEC noted above, following the SEC s guidance provides management with a safe harbor. However, the guidance is at a high level and management may find additional, more detailed assistance is required. This document provides that additional level of guide includes frequent references not only to SEC guidance but also to PCAOB guidance as the greater level of detail in the latter is often helpful.


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