Accountants' Handbook Volume One: Financial Accounting and General Topics, Eleventh Edition

Chapter 4. INTRODUCTION TO INTERNAL CONTROL ASSESSMENT AND REPORTING

Michael J. Ramos

INTRODUCTION

The Sarbanes-Oxley Act of 2002 made significant changes to many aspects of the financial reporting process. One of those changes is a requirement that management evaluate the effectiveness of its internal control over financial reporting and provide a report on this evaluation. Additionally, the company's independent auditors are required to audit this internal control report in conjunction with their traditional audit of the company's financial statements.

This chapter summarizes management's evaluation and reporting requirements and provides a structured, comprehensive approach for compliance. The material in this chapter has been excerpted from How to Comply with Sarbanes-Oxley Section 404: Assessing the Effectiveness of Internal Control, by Michael Ramos, published by John Wiley & Sons.

DEFINITION OF INTERNAL CONTROL

For the purposes of complying with the internal control reporting requirements of the Sarbanes-Oxley Act, the SEC rules provide the working definition of the term internal control over financial reporting. Rule 13a-15(f) defines internal control over financial reporting as follows:

The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other ...