Quiz 7: Sarbanes-Oxley, Internal Control, and Cash


Joel Kimmel is not at all behaving in a professional manner. Lone Peak National Bank will definitely find the mistake in the future when the receiver of the check complains about the error. Either the bank staff or the company to which we issued the check will find the error in the due course of time. Then the bank corrects the error. Anyhow Mr. Joel should not think like that. In the bank statement, we can find that words, "if any discrepancy is found, bring it to the notice of the bank" if Mr. Joel did not inform it to the bank, the company's reputation will become lean in the eyes of the banking staff.

Internal Control are the policies, rules and regulations set up by an organisation to protect its assets, reducing errors, ensuring truthfulness of financial and accounting information, and prevention of frauds in the organisation. It also ensures operational efficiency by improving the timeliness and accuracy of financial reports of the organisation. (a)The five elements of internal control are as follows: 1. Control environment- It is the foundation for other four component of internal control. It sets the tone of the organisation at top level. It also provides discipline and structure. The three major factors that influences control environment of a company is the philosophy of its management and its operating style, its organisational structure, and its personnel policies. 2. Risk assessment- The identification and analysing of the potential risk should be done which prevents the company to achieve its objective. With the proper identification, a company will be able to alleviate and manage the risk. 3. Control procedures- The control procedures are set in order to ensure that the company can achieve its objective. 4. Monitoring- The top management is held responsible for the internal control monitoring and govern if they are operating as they are supposed to. If not, the management is held responsible to modify it. 5. Information and communication- It is the exchange of information within the business. The clear communication should flow not just from management to employee but also other way around. Also, the access of confidential information should be to authorized persons. (b)No, it is not true that one element of internal control is of more importance than another as all elements are interrelated to each other. Also, in order to ensure proper internal control all elements must be achieved.

Under section 404 of the Act, every management has to furnish an "Internal control report". The report should contain about the responsibility of the management for establishing and maintaining a proper internal control system and the structure is so designed that the internal check is possible. At the end of the year the management should ensure that there is a proper assessment of the working of the internal control system. What are the changes that the management is going to implement for better internal control structure also be furnished. Since the cost of implementing the Sarbanes Oxley Act is very high, smaller companies whose shares are not publicly traded are excluded from the orbit of the Act. They require that every management should: a. Assess the design and operational effectiveness of the internal control system. b. Evaluate the structure designed to detect frauds c. Perform a fraud risk assessment d. Evaluate controls over yearend financial reporting process.

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