Question

In: Accounting

In your own word and answer in at least 5 sentence. What does section 404 of...

In your own word and answer in at least 5 sentence.

What does section 404 of the Sarbanes-Oxley Act require? What is the meaning of internal control? What are the five components of internal control? What are the four types of control activities?

Solutions

Expert Solution

The Sarbanes-Oxley Act requires that the management of public companies assess the effectiveness of the internal control of issuers for financial reporting.Section 404(b) requires a publicly-held company's auditor to attest to, and report on, management's assessment of its internal controls.

Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies.

To assist this process it identifies five components of an internal control system:

  • the control environment;
  • the entity's risk assessment process;
  • the information system;
  • the control activities; and.
  • the monitoring of controls.

Internal control activities are usually classified into the following three types:

  • preventive controls.
  • detective controls.
  • corrective controls.

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