COSO FRAMEWORKRyan J. HuttenAaron Zillinger

COSO

Comprised of: AAA

AICPAFEIIMAIIA

COSO: Committee of Sponsoring Organizations

AAA (American Accounting Association) AICPA (American Institute of Certified

Public Accountants) FEI (Financial Executives International) IMA (Institute of Management

Accountants) IIA (Institute of Internal Auditors)

COSO Continued

MISSION STATEMENT: The Committee of Sponsoring Organizations’ (COSO) mission is to provide thought leadership through the development of comprehensive frameworks and guidance on enterprise risk management, internal control and fraud deterrence designed to improve organizational performance and governance and to reduce the extent of fraud in organizations.

…But that’s not really what we’re talking about…

The COSO Framework is about helping senior

executives and managers in their establishment of better and more accurate

internal controls

The Control Environment

Attitudes, awareness, policies, and actions of management, board of directors, and staff concerning internal control and its importance in the entity

Positive control environment: Provides discipline and structure Communicates integrity and ethical values Sets a positive “Tone at the Top” and “Trickle-

down Effect” (Ref. 2)

The Control Environment

7 Factors Affecting the Control Environment

Communication and Enforcement of Integrity and Ethical Values

Commitment to competence Participation of governance Managers Philosophy and Operating Style Organizational Structure Assignment of authority and responsibility

Human resource policies and practices

Risk Assessment

Management’s identification of risk including: Looking for risk relevant to the preparation of

the financial statements Estimating their significance Assessing the likelihood of their occurrence Deciding on the best way to manage them

Where does this risk come from?

Changes in operating environment New Personnel Rapid Growth Corporate Restructurings

Information System and Related Processes

Infrastructure that consists of software, people, procedures, and data

Identifies, captures, and communicates information in a form and timeframe that members involved can carry out their responsibilities

Example: Accounting system Incorporates procedures that initiate, record,

process, and report entity transactions and maintain accountability for related assets

Control Activities

Pertain to internal controls to verify that management’s directives are carried out to address risks

Might include: Performance Reviews Physical Controls Segregation of Duties

Monitoring of Controls

Newly issued by COSO (2009) “Guidance on Monitoring Internal Control Systems”

Purpose: To assess the quality of internal control performance over time and redesign controls when risks change

Also necessary: Establish a baseline for control effectiveness Design and execute monitoring procedures that are

based on the significance of business risks relative to entity objectives

Assess and report results Follow-up and/or corrective actions

Can be ongoing or nonrecurring Example: Inventory Valuation

Conclusion

Control Environment: Verifying Compliance set forth in the Code of Conduct

Risk Assessment: Verifying the controls in place keep the company free of material misstatement

IS & Related Processes: Verification that the IS measures line item accounts and management assertions accurately

Control Activities: Discourages unethical behavior to better achieve management goals

Monitoring of Controls: Assesses the quality and effectiveness of Internal Controls, and how to change them for the better

Works Cited

"Internal Control - Integrated Framework." Committee of Sponsoring Organizations. Web. 2 Oct. 2011. <http://www.coso.org/IC-IntegratedFramework-summary.htm>.

http://www.ventureline.com/accounting-glossary/T/tone-at-the-top-definition/

Messier. Auditing and Assurance Services. 7. New York: McGraw-Hill Irwin, 2010. 187-96. Print