Question

Effectiveness of Internal Control is an essential component of the auditing process. Define the major components required of an Effective Internal Control System. Discuss how Sarbannes-Oxley placed an extremely high level of importance on the Effectiveness of Internal Control within the GAAS auditing process.

Answer 1

Effectiveness of Internal control is an essential component of the auditing process because it provides reasonable assurance on effectiveness and efficiency of operations, reliability of financial reporting, protection of assets and compliance with applicable laws and regulations.

There are five major components of effective internal control system. These are Control environment, risk assessment, monitoring, information & communication and control activities.

Paul Serbanes and Michel Oxley jointly formed SOX act which is US federal law that provides set of all information requirements for all US public companies, boards, management and public accounting firm. It is also applicable for private firms. It was developed to stop manipulation of financial data and frauds or hiding profits and so on. It is developed for the protection of rights of investors, Governments etc. It helps investors by knowing fair information and also for getting fair returns on their investments. And helps USA government for getting accurate tax revenues from corporate or other companies and private or public firms. It was developed as set of rules which has to follow while audit which can provide a fair and accurate audit report. Generally accepted auditing standards (GAAS) are a set of systematic guidelines used by auditors when conducting audits on companies' financial records, ensuring the accuracy, consistency of auditors' actions and reports. Under GAAS auditing process, A firm or company's internal control can be more efficiently make more transparent to the Government and investors and other all related stakeholders. It is not only protects stakeholders from frauds but also helps to develop economy of the country.