Revenue Process Internal Control For Manufacturers: An Evaluation Tool For Independent Auditors And Managers

Effective management of the revenue process is critical to the success and long-run viability of any business. The revenue process also entails an elevated risk area for financial reporting fraud (AICPA 2002; Beasley et al., 2010). Accordingly, this important process demands heightened attention from independent auditors and company managers, and internal control activities must be considered as part of the ongoing evaluations of this important area. This paper presents a tool for evaluating internal control objectives and activities pertinent to the revenue process for companies operating in the manufacturing sector. This evaluation tool may be used by independent auditors as a general benchmark in performing a preliminary evaluation of a manufacturing clients internal control over the revenue process. Independent auditors who will find the tool most useful will primarily be those wishing to comply with U.S. Generally Accepted Auditing Standards (GAAS), including those performing integrated audit engagements in accordance with Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5 and the new requirements set forth in the Committee of Sponsoring Organizations of the Treadway Commissions (COSO) Internal Control Integrated Framework. In instances where important internal control activities have been omitted from the clients system, the auditor should consider whether the omission increases the risk of material misstatement. This tool may also be used by managers to evaluate the adequacy of their companys internal control activities within the revenue process.

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An Internal Control Evaluation Tool For The Construction Industry

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v7i12.2370 ◽

2011 ◽

Vol 7 (12) ◽

Author(s):

Lou X. Orchard ◽

Scott L. Butterfield

Keyword(s):

Control System ◽

Construction Industry ◽

Internal Control ◽

Preliminary Evaluation ◽

Evaluation Tool ◽

Construction Company ◽

Significant Control ◽

Internal Control System ◽

Independent Auditors ◽

Control Evaluation

This paper presents a Control Objectives Reconciliation, a tool that independent auditors of clients in the construction industry should find useful in performing a preliminary evaluation of the client’s internal control system.  Auditors are advised to compare their client’s control objectives with those presented in Exhibits 1 through 7.  Where the client’s system appears to omit significant control objectives, the auditor should consider the risks brought on or magnified by the omission during the preliminary evaluation of the client’s internal control system.  The Control Objectives Reconciliation is also potentially useful to Construction Company CFOs or Controllers who may be concerned about the adequacy of their company’s internal control system.  The Reconciliation also highlights for Construction Company CFOs or Controllers those internal controls deemed to be important to their external, independent auditors.

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An Internal Control Evaluation Tool For Advertising Revenue In The Newspaper And Magazine Publishing Industry

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v8i9.761 ◽

2010 ◽

Vol 8 (9) ◽

Author(s):

Lou X. Orchard

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Publishing Industry ◽

Internal Controls ◽

Economic Downturn ◽

Preliminary Evaluation ◽

Evaluation Tool ◽

Advertising Revenue ◽

Magazine Publishing ◽

Revenue Cycle

Even before the recent economic downturn, the newspaper and magazine publishing industry had been experiencing unprecedented change, with some companies facing an immediate need to either invent a new business model or else cease operations.  The current economic slowdown has, in many cases, exacerbated those challenges.  These trends have had the effect of increasing the risk of fraudulent financial reporting.  The revenue cycle continues to be one of the most important areas for auditors to examine for possible fraud and one for which strong, comprehensive internal controls are especially important (AICPA 2002).  This paper presents an internal control review checklist for advertising revenue in the newspaper and magazine publishing industry.  This checklist may be used by independent auditors as a general benchmark in performing a preliminary evaluation of a company’s internal controls over advertising revenue.  In instances where important internal controls on the checklist have been omitted from the client’s system, the auditor should consider whether the omission increases audit risk.  The checklist may also be used by CFOs or controllers in the industry to help determine whether their company’s internal control system is adequate.

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Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One?

The Accounting Review ◽

10.2308/accr-52197 ◽

2018 ◽

Vol 94 (2) ◽

pp. 53-81 ◽

Cited By ~ 10

Author(s):

Lori Shefchik Bhaskar ◽

Joseph H. Schroeder ◽

Marcy L. Shepardson

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Audit Quality ◽

Internal Controls ◽

Data Availability ◽

Financial Statement ◽

Auditor Judgment ◽

Public Company ◽

Better Than

ABSTRACT The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits—in which substantial ICFR testing is required—may result in lower FS audit quality than FS-only audits. We compare a 2007–2013 sample of small U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues, and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality. Data Availability: Data are publicly available from the sources identified in the text.

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Repeat offenders: examining cases of multiple years of internal control weaknesses

Managerial Auditing Journal ◽

10.1108/maj-05-2019-2302 ◽

2020 ◽

Vol 35 (4) ◽

pp. 499-520

Author(s):

Kathleen Bakarich ◽

Devon Baranek

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Securities And Exchange Commission ◽

Repeat Offenders ◽

Content Type ◽

Public Company ◽

Material Weaknesses ◽

General Material ◽

Current Sample ◽

One Year

Purpose This study aims to identify characteristics of firms reporting multiple years of material weaknesses in internal control over financial reporting (MWICFR), labeled “Repeat Offenders”, and examine their characteristics and the types of material weaknesses they report using both broad and COSO-based classification schemes. The analysis compares these firms with firms reporting only one year of MWICFR and examines the differences between Repeat Offenders reporting consecutive and non-consecutive weaknesses. Design/methodology/approach Univariate and multivariate analyses were conducted on a sample of 1,793 firm-year observations, split into Repeat Offenders and non-Repeat Offenders, and collected from AuditAnalytics and Compustat from 2007 to 2015. Findings On average, 40% of adverse opinions in ICFR each year can be attributed to Repeat Offenders. Compared to one-time MWICFR firms, Repeat Offenders are significantly more likely to report general material weaknesses and, within the COSO framework, are significantly more likely to report issues with Segregation of Duties and Processes and Procedures. Repeat Offenders reporting consecutive years of MWICFR are significantly more likely to have general weaknesses than non-consecutive Repeat Offenders and are also significantly more likely to report issues with Segregation of Duties and Personnel. Research limitations/implications Prior studies have examined unremediated ICFR issues in the periods immediately following SOX implementation. This study extends this literature with a longer, more current sample period, focusing on both broad and COSO-specific control issues, as well as examining consecutive and non-consecutive MWICFR and firms with more than two years of MWICFR. Originality/value This study underpins recent Securities and Exchange Commission and Public Company Accounting Oversight Board concerns regarding pervasive ICFR issues. This study identifies some of the characteristics of firms associated with weaker ICFR and pinpoints more specific areas within internal controls that frequently lead to adverse opinions.

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Controls, Security, and Audit in Online Digital Accounting

Digital Accounting ◽

10.4018/978-1-59140-738-6.ch010 ◽

2011 ◽

pp. 318-383

Author(s):

Ashutosh Deshmukh

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Annual Report ◽

Control Structure ◽

Internal Controls ◽

Section 404 ◽

Checks And Balances ◽

The Public ◽

Sarbanes Oxley ◽

Public Company

Internal controls have existed since the dawn of business activities. Internal controls are basically systems of checks and balances. The purpose is to keep the organization moving along desired lines as per the wishes of the owners and to protect assets of the business. Internal controls have received attention from auditors, managers, accountants, fraud examiners and legislatures. Sarbanes Oxley Act 2002 now requires the annual report of a public company to contain a statement of management’s responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and management’s assessment of the effectiveness of the company’s internal control structure and procedures for financial reporting. Section 404 of the Act also requires the auditor to attest to and report on management’s assessment of effectiveness of the internal controls in accordance with standards established by the Public Company Accounting Oversight Board (PCAOB).

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Auditors' Internal Control over Financial Reporting Decisions: Analysis, Synthesis, and Research Directions

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50345 ◽

2012 ◽

Vol 32 (Supplement 1) ◽

pp. 131-166 ◽

Cited By ~ 33

Author(s):

Stephen K. Asare ◽

Brian C. Fitzgerald ◽

Lynford E. Graham ◽

Jennifer R. Joe ◽

Eric M. Negangard ◽

...

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Future Research ◽

The Public ◽

Road Map ◽

Sarbanes Oxley ◽

Environmental Attributes ◽

Public Company ◽

Reporting Decisions ◽

Five Phases

SUMMARY We synthesize the literature on auditors' evaluation of, and reporting on, internal control over financial reporting (ICOFR), as required by the Sarbanes-Oxley Act. The purpose of the synthesis is (1) to provide information on how and how well auditors perform the task, which serves as feedback to the Public Company Accounting Oversight Board on implementation issues and problems related to auditors' application of the professional standards on ICOFR; and (2) to identify gaps in the current literature and fruitful areas of future research. Consistent with Auditing Standard No. 5, we delineate five phases of the ICOFR audit: (1) planning; (2) scoping; (3) testing; (4) evaluation; and (5) reporting. We structure our synthesis using a framework that classifies the determinants of performance in each phase into five broad areas: (a) the auditor's attributes, (b) the client's attributes, (c) the interaction between the auditor and the client, (d) task attributes, and (e) environmental attributes. Key contributions include providing an ICOFR tasks taxonomy, proposing a model of the determinants of performance for each task, evaluating auditors' performance of the tasks in our taxonomy, highlighting findings and gaps of importance to regulators, and providing a road map for future research.

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Why Non-accelerated Filers Voluntarily Comply with SOX 404b?

International Journal of Accounting & Finance Review ◽

10.46281/ijafr.v5i2.709 ◽

2020 ◽

Vol 5 (2) ◽

pp. 1-10

Author(s):

Zhenfeng Liu ◽

Yun Cheng ◽

Ruonan Liu

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Ex Post ◽

Independent Auditors ◽

To Receive ◽

Parent Companies ◽

Big Four

This paper investigates the managers’ incentives to voluntarily comply with SOX 404b and the determinants of firms who voluntarily disclose SOX 404b internal control over financial reporting assessment. We find that voluntary SOX 404b reporting non-accelerated filers are more likely to receive effective internal control over financial reporting opinion than accelerated filers and large accelerated filers. We find that voluntary SOX 404b reporting non-accelerated filers are more likely to hire Big Four as independent auditors than non-SOX 404b reporting non-accelerated filers. We also predict and found substantially sufficient cases where non-accelerated filers which used to be, or ex-post became accelerated filers or large accelerated filers, and non-accelerated filers with parent companies complying with SOX 404b are motivated to voluntarily comply with SOX 404b.

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Audit Partners' Judgments and Challenges in the Audits of Internal Control over Financial Reporting

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-18-088 ◽

2020 ◽

Vol 39 (4) ◽

pp. 57-85

Author(s):

Jeffrey R. Cohen ◽

Jennifer R. Joe ◽

Jay C. Thibodeau ◽

Gregory M. Trompeter

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Data Availability ◽

Audit Committees ◽

Structured Interviews ◽

Material Weakness ◽

The Public ◽

National Office ◽

Evaluation Task ◽

Public Company

SUMMARY Internal control over financial reporting (ICFR) audits have been the subject of intensive examination by the Public Company Accounting Oversight Board (PCAOB) and researchers but the process through which auditors make ICFR judgments is largely a “black box.” To understand ICFR judgments, we conducted semi-structured interviews with 20 audit partners. Common themes in our interviews suggest that the subjectivity inherent in the ICFR evaluation task contributes to resistance against ICFR audit findings and cougnterarguments from management. Moreover, auditors perceive that their judgments are being second-guessed by PCAOB inspectors. Auditors believe that managers have difficulty accepting that material weaknesses can exist without a detected error, that management's reflexive reaction is to deny/avoid a material weakness finding, and managers routinely claim that management review controls (MRCs) would have caught the detected control deficiency. Auditors cope with management's defenses by consulting with their national office and leveraging support from strong audit committees. Data Availability: Requests for the data should be accompanied by a description of intended uses.

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Internal control over financial reporting: opportunities using the COBIT framework

Managerial Auditing Journal ◽

10.1108/maj-03-2014-1016 ◽

2014 ◽

Vol 29 (8) ◽

pp. 736-771 ◽

Cited By ~ 11

Author(s):

Michele Rubino ◽

Filippo Vitolla

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Interdisciplinary Approach ◽

Content Type ◽

Sarbanes Oxley ◽

Public Company ◽

Control Framework ◽

Material Weaknesses ◽

Technical Issues ◽

Or Organization

Purpose – The purpose of this paper is to analyze how the COBIT framework, integrated within the internal control framework, enables improvement in the quality of financial reporting while helping to reduce or eliminate the material weaknesses (MWs) of internal control over financial reporting (ICFR). The Control Objectives for Information and Related Technology (COBIT) model is a framework for information technology (IT) management and IT governance. It is a supporting toolset that allows managers to bridge the gap between control requirements, technical issues and business risks. Preliminarily, the analysis in this paper illustrates how the Committee of Sponsoring Organizations (COSO) framework impacts on the MWs, highlighting strengths and weaknesses. This paper shows how these limits can be overcome with the use of the COBIT framework. Design/methodology/approach – This is a conceptual paper that aims to highlight the relationship between COBIT and COSO, by illustrating how the IT processes reduce or eliminate the main MW categories. Findings – The analysis indicates that the implementation of the COBIT framework, or more generally the adoption of effective IT controls, provides important benefits to the entire company or organization. IT control objectives have a direct impact on the IT control weaknesses and indirectly on the other categories of material weaknesses. Practical implications – The adoption of the framework allows managers to implement effective ICFR. In particular, the COBIT approach provides managers with a more evolved tool in terms of compliance with the Sarbanes–Oxley Act requirements. This framework also improves the reliability of financial reporting in relation to the requirements of Public Company Accounting Oversight Board’s Auditing Standards No. 2 and 5. Originality/value – The analysis provides an interdisciplinary approach, connecting accounting and information systems themes, and suggest solutions and tools than can help managers to address the internal control weaknesses. This paper addresses an area of relevance to both practitioners and academics and expands existing accounting literature.

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Fraud Specialists On Independent Audits

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v4i7.2686 ◽

2011 ◽

Vol 4 (7) ◽

Author(s):

James A. Tackett ◽

Fran M. Wolf ◽

Gregory A. Claypool

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Fraud Detection ◽

Internal Controls ◽

Font Size ◽

Fraudulent Financial Reporting ◽

Background Checks ◽

Sarbanes Oxley ◽

Independent Auditors ◽

Accounting Software

The recent audit failures involving Enron, WorldCom, et al., have left the accounting profession and governmental regulators scrambling to find better methods of detecting and preventing fraudulent financial reporting. Congress passed the Sarbanes-Oxley Act of 2002 (SOX) which requires companies to report on the operating effectiveness of their internal controls over financial reporting.  Additionally, the independent auditor is required to assess and report on the effectiveness of their client’s internal controls, and they must attest to management’s internal control assessment.  Notably absent from SOX is a requirement that independent auditors must employ fraud specialists in their independent audits of SEC filers. This study examines the benefits and costs associated with requiring the use of fraud specialists on independent audits of SEC filers.  Fraud specialists have expertise better attuned to fraud detection not ordinarily possessed by regular auditors.  First, the narrow but deep perspective of the fraud specialist enables them to find fraudulent activity that would be missed by regular auditors.  Second, unlike regular auditors, fraud specialists employ methodologies that are effective in the presence of management collusion.  They are more highly skilled at interviewing potential witnesses and fraud suspects and are trained in recognizing deception.  Third, fraud specialists are better trained in the use of antifraud technology, methods, and computerized forensic accounting software.  Fourth, fraud specialists have superior investigative skills and can conduct covert examinations, access restricted databases, conduct background checks, and locate hidden assets better than regular auditors.  Finally, they understand the legalities of gathering evidence of fraud and can operate without violating the rights of potential witnesses and fraud suspects. Qualitative analysis demonstrates that utilizing fraud specialists on independent audits has positive net benefits to financial reporting.  Recommendations are made regarding the types of fraud detection/deterrence skills and techniques that would be beneficial to independent auditors.

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