Case Study 2 - Internal Control
Case Study 2 – Internal Control
The following are the internal control requirements a company who wants to go public needs to be put into place.
INTERNAL CONTROL REQUIREMENTS
Management’s Assessment
Section 404(a) of the Act and the related rules adopted by the SEC require management to assess the effectiveness of the company’s internal control over financial reporting as of the end of the company’s most recent fiscal year, and to state in the company’s annual report whether the company’s internal control over financial reporting is effective. The SEC rules implementing Section 404 of the Act include the following within the areas that management must consider in its assessment:
1. Controls over initiating, recording, processing and reconciling account balances, classes of transactions and disclosure, and related assertions included in the financial statements;
2. Controls related to the initiation and processing of non-routine and non-systematic transactions;
3. Controls related to the selection and application of appropriate accounting policies; and
4. Controls related to the prevention, identification and detection of fraud.
The rules require that the assessment be based on procedures sufficient to evaluate the design of the controls and to test their operating effectiveness, and that the assessment be supported by “evidential matter,” including documentation, regarding both the design of the controls and the testing process. Management must disclose any “material weaknesses” in its report and must state that internal control over financial reporting is not effective if there are one or more material weaknesses. http://www.alston.com/files/Publication/ad87366f-ed89-4984-a0d2-284a41dd19b8/Presentation/PublicationAttachment/f56ba12b-e063-4e51-843e-6b57872991e4/Internal%20Control%20Requirements.pdf
The SEC recently extended the dates for companies to comply with the requirements of Section 404 of the Act. The SEC announced on February 4, 2004 that
The following are the internal control requirements a company who wants to go public needs to be put into place.
INTERNAL CONTROL REQUIREMENTS
Management’s Assessment
Section 404(a) of the Act and the related rules adopted by the SEC require management to assess the effectiveness of the company’s internal control over financial reporting as of the end of the company’s most recent fiscal year, and to state in the company’s annual report whether the company’s internal control over financial reporting is effective. The SEC rules implementing Section 404 of the Act include the following within the areas that management must consider in its assessment:
1. Controls over initiating, recording, processing and reconciling account balances, classes of transactions and disclosure, and related assertions included in the financial statements;
2. Controls related to the initiation and processing of non-routine and non-systematic transactions;
3. Controls related to the selection and application of appropriate accounting policies; and
4. Controls related to the prevention, identification and detection of fraud.
The rules require that the assessment be based on procedures sufficient to evaluate the design of the controls and to test their operating effectiveness, and that the assessment be supported by “evidential matter,” including documentation, regarding both the design of the controls and the testing process. Management must disclose any “material weaknesses” in its report and must state that internal control over financial reporting is not effective if there are one or more material weaknesses. http://www.alston.com/files/Publication/ad87366f-ed89-4984-a0d2-284a41dd19b8/Presentation/PublicationAttachment/f56ba12b-e063-4e51-843e-6b57872991e4/Internal%20Control%20Requirements.pdf
The SEC recently extended the dates for companies to comply with the requirements of Section 404 of the Act. The SEC announced on February 4, 2004 that