Ratios,_Vertical,_and_Horizontal_Analysis

Individual Internal Controls Financial Accounting Concepts and Principles Leda Solis September 9, 2012 University of Phoenix Zeno Gavales Internal Control is the process of ensuring the integrity of the accounting and finance records of company, and to catch any accounting irregularities. Internal Controls are used to evaluate the efficiency of a company, and to maintain the integrity of financial records. Controls are updated on the regular basis to reflect changes in regulations. “The Sarbanes-Oxley Act of 2002 addresses perceived weaknesses in internal controls, the systems a public company employs to collect, process, and disclose financial information to satisfy its statutory reporting requirements. Recent corporate and accounting frauds have demonstrated the inadequacy of internal controls with regard to revenue recognition. The Act also contains requirements aimed at ensuring proper revenue recognition.” Internal Controls are required by law, and when kept by a company it increases the likelihood that goals are met. There are two primary internal controls, which are the COSO model, and the COCO model. The COCO model is the most popular, and is based on a model published by the Committee of Sponsoring Organization of the Treadway Commission in 1992. It was created to help businesses provide assurance regarding the effectiveness and efficiency of operations, and reliability of financial reporting. The COCO model identifies three objectives, effectiveness, efficiency of operations, and reliability of internal and external reporting, and compliance with applicable laws and regulations as well as internal policies. The COCO model defines purpose, capability, commitment, and monitoring. The COCO model was published in 1995 by the Canadian Institute of Chartered Accountants with the purpose of gathering the best results for a company to achieve the best resources, systems, processes, culture, structure, and tasks to support people in achieving the company’s objectives. “Auditors must “test” the scope of a company’s internal control procedures and present its findings in its annual audit report. The audit report must include an evaluation of whether the internal controls provide both a system of maintaining records that fairly and accurately reflect the company’s transactions, and a reasonable assurance that transactions are recorded in accordance with the preparation of GAAP financial statements. The audit report must also contain a description of any material weaknesses in the internal controls and any material noncompliance.” The Securities and Exchange Commission voted to adopt new rule 3a-8 to provide safe harbor for the development of companies. The commission voted for the rule to crate amendments to implement requirements of section 404 of the Sarbanes-Oxley Act in 1992. The act was signed by George W Bush, and became effective in 1992. The act was created as a reaction to several accounting and corporate scandals that involved Enron, Tyco International, and WorldCom. These costs Investors billions of dollars as the share prices collapsed. The act contains several sections ranging from criminal penalties to additional corporate bears responsibilities, which require Security and Exchange Commission to rule on the requirements to comply with the law. The act requires companies to report on the accuracy of the company’s financial reporting. Companies are required to produce and Internal Control Report, and the report must proof the company is maintaining adequate internal control structure and procedures. Internal Controls limit any unethical behavior or mistakes that might happen when reporting, and there are two primary goals for internal control, which are to make sure the company’s assets, are safe, and to make sure the company’s accounting records are kept properly whether is intentional or unintentional. When a company announces deficiency in internal control it can be because investors pull their funding if they believe findings are not properly used. Another reason can be that people would not buy stock if they believe the company is losing money. Establishment of Responsibility, Mechanical, Electronic Controls, Physical, and Segregation of Duties, each have an important part as they help make sure that any errors or missing assets are caught. Establishment of Responsibility makes sure that there is someone responsible if money was to come missing. Physical Control would be making sure all files are safe, under key, using a password, and safe. Mechanical and Electronic Controls are an alarm system, and a time clock for all employees. Independent Internal Verification allows someone besides the person in charge of the company books to verify and catch any mistakes or unusual activities. It is always a good idea to have someone verify your work. Internal Controls are set for companies to protect themselves from any type of fraud, and accounting is properly kept. Internal Controls are important for companies to keep Internal Control procedures in place. References “3003 SEC Implements Internal Control Provisions of Sarbanes-Oxley Act; Adopts Investment Company R&D Safe Harbor” http://www.sec.gov Bloch, G (2003) “Sarbanes-Oxley’s Effects on Internal Controls for Revenue” http://www.nysscpa.org