Relating Operational and Financial Factors to Assess Risk and Identify Fraud in an Operational Setting

2011 ◽  
Vol 26 (2) ◽  
pp. 361-376 ◽  
Author(s):  
Richard H Gifford ◽  
Harry Howe
Keyword(s):  
Critical Thinking ◽  
Financial Reporting ◽  
Current Literature ◽  
Internal Control ◽  
Internal Controls ◽  
Financial Factors ◽  
Analytical Skills ◽  
Auditing Standards ◽  
Operational Factors ◽  
The Relationship

ABSTRACT The current literature and Statement on Auditing Standards (SAS) 99 emphasize the importance of relating operational factors to financial factors when evaluating the risk of fraud. The following case is based on an actual company and demonstrates how an understanding of the relationship between operational factors and financial reporting can aid an auditor in assessing risk and identifying fraud. The case also gives students an opportunity to directly evaluate internal control in an operational setting. The case is intended to strengthen students' critical thinking and analytical skills and to give them exposure to the importance of internal controls in an operational setting.

COSO 2013: Aligning Internal Controls and Principles

2016 ◽  
Vol 32 (3) ◽  
pp. 117-127 ◽  
Author(s):  
Denise Dickins ◽  
Rebecca G. Fay
Keyword(s):  
Critical Thinking ◽  
Financial Reporting ◽  
Internal Control ◽  
Financial Statements ◽  
Thinking Skills ◽  
Securities And Exchange Commission ◽  
Internal Controls ◽  
Critical Thinking Skills ◽  
Reading Assignment

ABSTRACT Strong systems of internal control over financial reporting (ICFR) are critical to the production of reliable financial statements. Securities and Exchange Commission (SEC) regulations require that companies design, maintain, and regularly evaluate their systems of ICFR, and Auditing Standard No. 5 requires that auditors evaluate companies' systems of ICFR. Therefore, it is necessary for accountants to be able to (1) describe and classify internal controls and (2) determine deficiencies in internal control. Recent reports suggest that accountants may lack sufficient training and guidance in these respects (e.g., Rapoport 2012). This activity provides an opportunity for students to practice these skills while learning more about the Committee of Sponsoring Organizations of the Treadway Commission's (COSO) 2013 Framework. Provided are a summary discussion of ICFR and the COSO 2013 Framework, an outside-of-class reading assignment, and an activity that requires students (independently or in groups, either in or outside of class) to employ critical-thinking skills to: (1) classify (i.e., map) a listing of controls as being aligned with one (or more) of the COSO 2013 Framework's five components and 17 principles that comprise a well-designed system of internal control, and (2) identify any deficiencies (gaps) in design due to missing or inadequate internal controls.

Management Reporting on Internal Control and Accruals Quality: Insights from a “Comply-or-Explain” Internal Control Regime

2011 ◽  
Vol 30 (3) ◽  
pp. 181-209 ◽  
Author(s):  
Katrien Van de Poel ◽  
Ann Vanstraelen
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Data Availability ◽  
Control Regulation ◽  
Accruals Quality ◽  
Regulatory Regimes ◽  
The Relationship ◽  
Control Regime ◽  
Comply Or Explain

SUMMARY Internal control regulation remains the subject of an ongoing global debate among academics, regulators, and practitioners in terms of costs and effectiveness. This is reflected by different internal control regulations in different countries, resulting in varying management's incentives across regulatory regimes. Prior research, however, has primarily focused on the U.S. rules-based setting to study the relationship between internal control regulation and financial reporting. The purpose of this paper is to study the relationship between internal control reporting and accruals quality in an alternative internal control regime based on the “comply-or-explain principle” in The Netherlands. We show that in this setting accruals quality is not associated with the description of the internal control system, while there is evidence of a positive association with an unaudited statement of effective internal controls. Further, we find that the noncompliance rate of providing a statement of effective internal controls is relatively high, and that companies give generic explanations for noncompliance or no explanation at all. Overall, insights from different internal control regulatory regimes may further advance our knowledge on internal control regulation effectiveness. Data Availability: All data are publicly available.

The Severity of Internal Controls over Financial Reporting Deficiencies: Differences among Types and Industries

2014 ◽  
pp. 55-77
Author(s):  
Tatiana Mazza ◽  
Stefano Azzali
Keyword(s):  
Information Technology ◽  
Financial Reporting ◽  
Internal Control ◽  
Service Industry ◽  
Listed Companies ◽  
Internal Controls ◽  
Service Companies ◽  
Finance Industry ◽  
Material Weaknesses ◽  
Fixed Assets

This study analyzes the severity of Internal Control over Financial Reporting deficiencies (Deficiencies, Significant Deficiencies and Material Weaknesses) in a sample of Italian listed companies, in the period 2007- 2012. Using proprietary data the severity of the deficiencies is tested for account-specific, entity level and information technology controls and for industries (manufacturing and services vs finance industries). The results on ICD severity is compared with one of the most frequent ICD (Acc_Period End/Accounting Policies): for account-specific, ICD in revenues, purchase, fixed assets and intangible, loans and insurance are more severe while ICD in Inventory are less severe. Differences in ICD severity have been found in the characteristic account: ICD in loan and insurance for finance industry and ICD in revenue, purchase for manufacturing and service industry are more severe. Finally, we found that ICD in entity level and information technology controls are less severe than account specific ICD in all industries. However, the results on entity level and information technology deficiencies could also mean that the importance of these types of control are under-evaluated by the manufacturing and service companies.

Do Negative Corporate Social Responsibility Events Signal Financial Misreporting? — Empirical Finding from Taiwan

2021 ◽  
Vol 24 (01) ◽  
pp. 2150004
Author(s):  
Ching-Lung Chen ◽  
Hann-Pyng Wang ◽  
Hung-Shu Fan ◽  
Shiu-Chieh Chiu
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Cash Flow ◽  
Financial Reporting ◽  
Internal Control ◽  
Empirical Finding ◽  
Internal Controls ◽  
Control Rights ◽  
Cash Flow Rights ◽  
Corporate Social

This study examines whether negative corporate social responsibility events (NCSRs) signal potential firm misreporting and pending financial reporting restatements. Without formal opinions on the effectiveness of internal controls over financial reporting in Taiwan, we hypothesize NCSRs can represent and/or signal a firm’s internal control weakness, which may in turn result in poor financial reporting. Note that the concern with controlling owners expropriating wealth through ineffective internal controls is given important weight by investors and regulators. We further examine whether the signaling function of NCSRs is more pronounced in contexts with a serious agency problem, such as is found in the high divergence of control and cash flow rights case (denoted as high excess control rights) in Taiwan. Empirical results indicate that, as conjectured, incidence of NCSRs is positively associated with the likelihood of reporting restatements. Further evidence reveals that this result is particularly pronounced in the high divergence of control and cash-flow rights subsample test. We demonstrate several diagnostic tests and show the results are robust in various specifications.

scholarly journals Causality and multidimensionality of internal controls: Impact on organizations

2011 ◽  
Vol 8 (2-5) ◽  
pp. 502-515
Author(s):  
Joshua Onome Imoniana ◽  
Verônica Moreira Costa ◽  
Mariana Araujo ◽  
Luiza Helena Pereira Alberto ◽  
Patrícia P. Alves
Keyword(s):  
New York ◽  
Financial Reporting ◽  
Internal Control ◽  
Response Rate ◽  
Research Question ◽  
Internal Controls ◽  
Causal Effects ◽  
Chief Financial Officer ◽  
Final Response ◽  
Final Response Rate

This study analyzes the managers’ (Chief Financial Officer (CFO)) perception of impact of implementation of internal controls. It investigates the causes of adoption in the multidimensionality of internal control of the Brazilian companies traded in the New York Stock market. A survey sent to the CFOs of the 70 companies listed in the NYSE collected empirical data from these companies. The final response rate was 15.16 %. The study uses partial least squares modeling for statistical analysis to test the research question. Our empirical evidence supports the hypotheses that “the greater the level of multidimensionality of controls in an organization the lower the level of causal effects and damage to the control environment. Based on work performed, one is able to infer that overall, there is a significant relationship between causal effects on operating activities, financial reporting and compliance in relation to the multidimensionality of internal controls, thus, when there are uncommon features, depending on the level of multidimensionality special attention should be paid to the causes of adoption of controls to track risks posed to business.

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

2018 ◽  
Vol 94 (2) ◽  
pp. 53-81 ◽  
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.

How Effective are Organizations' Internal Controls? Insights into Specific Internal Control Elements

2012 ◽  
Vol 6 (1) ◽  
pp. A31-A50 ◽  
Author(s):  
Dana R. Hermanson ◽  
Jason L. Smith ◽  
Nathaniel M. Stephens
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Financial Services ◽  
Audit Committee ◽  
Internal Audit ◽  
Internal Controls ◽  
Component Level ◽  
Public Companies ◽  
Tone At The Top ◽  
Survey Responses

SUMMARY Based on survey responses from approximately 500 Chief Audit Executives (CAEs) and other internal auditors, this article provides an insider's view of the perceived strength of organizations' internal controls (i.e., internal control over financial reporting) in the Control Environment, Risk Assessment, and Monitoring components of the Committee of Sponsoring Organizations' (COSO 1992a) Internal Control—Integrated Framework. Although the respondents largely rate control strength as relatively high, we identify several areas for potential improvement of internal controls, especially related to assessing the “tone at the top,” as well as following up on deviations from policy and management override of controls. In analyzing individual control elements, we find that public companies' controls are consistently rated as more effective than those of other organizations. We also find a number of interesting differences across key industries, especially in the Monitoring component, where banks and other financial services firms appear to have more robust Monitoring controls than do healthcare and other services firms. The component-level analysis reveals that internal control component strength is positively related to the CAE reporting primarily to the audit committee, public company status, and the average tenure of the internal audit function staff, among other findings. Based on the survey findings, we describe key implications relevant to internal and external auditors, accounting researchers and educators, and management.

scholarly journals Does Control Self-Assessment Influence Financial Reporting Quality?

2020 ◽  
Vol 5 (4) ◽  
pp. 70-76
Author(s):  
Hiroshi Uemura
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Negative Relationship ◽  
Reporting Quality ◽  
Audit Fees ◽  
Internal Controls ◽  
Financial Reporting Quality ◽  
Control Environment ◽  
Self Assessment ◽  
Positive Effects

The aim of this study is to examine the effect of control self-assessment (CSA) on financial reporting quality by using CSA as a proxy of monitoring quality. CSA has an important feature that allows the employees themselves to become involved in the assessment of internal controls’ effectiveness. Moreover, CSA has two important monitoring functions. First, it can add value to internal auditing. Second, because all employees of operational units participate in the assessment of internal controls in CSA, that control environment is expected to be mature. The investigation of this study used data from 3,517 Japanese firms listed on the First Section, Second Section, Mothers, and JASDAQ of the Tokyo Stock Exchange. The result of 2SLS regression shows that CSA adoption has a negative relationship with the number of financial restatements and audit fees, and therefore, I conclude that CSA has positive consequences for financial reporting quality. This result indicates that the internal monitoring mechanism that continuously monitors internal control over financial reporting (ICFR) effectiveness and in which all employees participate has some positive effects on financial reporting quality. There are two reasons for this result. First, employees have easier access to negative information concerning ICFR effectiveness than outsiders and can share that information with the internal personnel in charge of monitoring (e.g., internal auditors). Moreover, CSA is expected raise an entity’s awareness of ICFR, that is, the control environment of ICFR components is made into an environment that prevents and detects impropriety in the accounting process. Keywords: Control

scholarly journals Effective Internal Controls for Not-For Profit Entities

2020 ◽  
pp. 47-58
Author(s):  
Achraf Seyam, CPA ◽  
Barry Copper, CPA
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Continuous Monitoring ◽  
Internal Controls ◽  
Professional Services ◽  
Non Profit ◽  
The Public ◽  
For Profit ◽  
Not For Profit ◽  
Non Profit Organizations

The importance of internal control is clear. Effective internal control makes sure non-profit organizations to carried out their mission and objectives, such as proper use of funds and provide professional services to the public without any risk of fraud and mismanagement or breach of ethics. Through continuous monitoring of non-profit’s performance and activities, internal controls dispose of the behaviors of non-profit organizations with their objectives. Internal controls also engaged in good management and make sure to provide appropriate financial reporting by providing accurate and complete reports to the management in a timely manner and make sure the sources are correctly allocated. Internal control is also the tool to safeguard assets that make sure the organizations physical and intangible assets are protected from fraud, misused, and error. Internal control is not only able to deter and detect fraud and error but also is able to reduce the chance to risks.

scholarly journals Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management

2017 ◽  
Vol 39 (1) ◽  
pp. 25-44 ◽  
Author(s):  
Cristi A. Gleason ◽  
Morton Pincus ◽  
Sonja Olhoft Rego
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Internal Control ◽  
Internal Controls ◽  
Early Years ◽  
Control Material ◽  
Material Weaknesses ◽  
Implementation Period ◽  
Tax Expense

ABSTRACT We investigate the consequences of tax-related internal control material weaknesses (ICMWs) for financial reporting. We hypothesize that the presence of ineffective controls over the tax function makes earnings management through the income tax accrual (both income increasing and income decreasing) easier to implement relative to firms with effective controls. We also predict that the remediation of tax-related ICMWs has the effect of constraining earnings management through the tax accrual. The results provide support for our predictions. We also find that last chance earnings management via tax-related ICMWs is concentrated in the early years of our sample, during the initial SOX implementation period. Our results suggest that tax-related ICMWs were initially associated with greater tax-expense management but that SOX internal control assessments subsequently improved the quality of financial reporting by reducing opportunities for tax-expense management.

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