Overview (+3)
Overview
SOX Section 404 requires management to assess the effectiveness of internal controls over financial reporting (ICFR). This involves:
- Scoping: Identify significant accounts and relevant assertions
- Risk assessment: Evaluate the risk of material misstatement for each significant account
- Control identification: Document the controls that address each risk
- Testing: Test the design and operating effectiveness of key controls
- Evaluation: Assess whether any deficiencies exist and their severity
- Reporting: Document the assessment and any material weaknesses
Scoping Significant Accounts
An account is significant if there is more than a remote likelihood that it could contain a misstatement that is material (individually or in aggregate).
Quantitative factors:
- Account balance exceeds materiality threshold (typically 3-5% of a key benchmark)
- Transaction volume is high, increasing the risk of error
- Account is subject to significant estimates or judgment
Qualitative factors:
- Account involves complex accounting (revenue recognition, derivatives, pensions)
- Account is susceptible to fraud (cash, revenue, related-party transactions)
- Account has had prior misstatements or audit adjustments
- Account involves significant management judgment or estimates
- New account or significantly changed process
Relevant Assertions by Account Type
| Account Type |
Key Assertions |
| Revenue |
Occurrence, Completeness, Accuracy, Cut-off |
| Accounts Receivable |
Existence, Valuation (allowance), Rights |
| Inventory |
Existence, Valuation, Completeness |
| Fixed Assets |
Existence, Valuation, Completeness, Rights |
| Accounts Payable |
Completeness, Accuracy, Existence |
| Accrued Liabilities |
Completeness, Valuation, Accuracy |
| Equity |
Completeness, Accuracy, Presentation |
| Financial Close/Reporting |
Presentation, Accuracy, Completeness |
Design Effectiveness vs Operating Effectiveness
Design effectiveness: Is the control properly designed to prevent or detect a material misstatement in the relevant assertion?
- Evaluated through walkthroughs (trace a transaction end-to-end through the process)
- Confirm the control is placed at the right point in the process
- Confirm the control addresses the identified risk
- Performed at least annually, or when processes change
Operating effectiveness: Did the control actually operate as designed throughout the testing period?
- Evaluated through testing (inspection, observation, re-performance, inquiry)
- Requires sufficient sample sizes to support a conclusion
- Must cover the full period of reliance
1---2name: audit-support-overview3description: Sub-skill of audit-support: Overview (+3).4---56# Overview (+3)78## Overview91011SOX Section 404 requires management to assess the effectiveness of internal controls over financial reporting (ICFR). This involves:12131. **Scoping:** Identify significant accounts and relevant assertions142. **Risk assessment:** Evaluate the risk of material misstatement for each significant account153. **Control identification:** Document the controls that address each risk164. **Testing:** Test the design and operating effectiveness of key controls175. **Evaluation:** Assess whether any deficiencies exist and their severity186. **Reporting:** Document the assessment and any material weaknesses192021## Scoping Significant Accounts222324An account is significant if there is more than a remote likelihood that it could contain a misstatement that is material (individually or in aggregate).2526**Quantitative factors:**27- Account balance exceeds materiality threshold (typically 3-5% of a key benchmark)28- Transaction volume is high, increasing the risk of error29- Account is subject to significant estimates or judgment3031**Qualitative factors:**32- Account involves complex accounting (revenue recognition, derivatives, pensions)33- Account is susceptible to fraud (cash, revenue, related-party transactions)34- Account has had prior misstatements or audit adjustments35- Account involves significant management judgment or estimates36- New account or significantly changed process373839## Relevant Assertions by Account Type404142| Account Type | Key Assertions |43|-------------|---------------|44| Revenue | Occurrence, Completeness, Accuracy, Cut-off |45| Accounts Receivable | Existence, Valuation (allowance), Rights |46| Inventory | Existence, Valuation, Completeness |47| Fixed Assets | Existence, Valuation, Completeness, Rights |48| Accounts Payable | Completeness, Accuracy, Existence |49| Accrued Liabilities | Completeness, Valuation, Accuracy |50| Equity | Completeness, Accuracy, Presentation |51| Financial Close/Reporting | Presentation, Accuracy, Completeness |525354## Design Effectiveness vs Operating Effectiveness555657**Design effectiveness:** Is the control properly designed to prevent or detect a material misstatement in the relevant assertion?58- Evaluated through walkthroughs (trace a transaction end-to-end through the process)59- Confirm the control is placed at the right point in the process60- Confirm the control addresses the identified risk61- Performed at least annually, or when processes change6263**Operating effectiveness:** Did the control actually operate as designed throughout the testing period?64- Evaluated through testing (inspection, observation, re-performance, inquiry)65- Requires sufficient sample sizes to support a conclusion66- Must cover the full period of reliance
vamseeachanta