internal control–integrated framework

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    Presented by:Richard F. Chambers CIA, CCSA, CGAP, CRMAGlobal President and CEOThe Institute of Internal Auditors

    May 21, 2013

    Internal Control Integrated Framework

    The ICGFM 27th Annual International Training Conference

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    Presentation Overview

    COSO & Project Overview Internal Control-Integrated Framework

    Illustrative Documents Illustrative Tools for Assessing Effectiveness of a System of Internal Control Internal Control over External Financial Reporting: A Compendium of

    Approaches and examples Transition & Impact Recommended Actions Questions & Comments

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    COSO & Project Overview

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    COSO Overview Internal Control Publications

    1992 2006 2009 2013

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    Original Framework

    COSOs In ternal Contro l In tegrated Framewo rk (1992 Edition)

    RefreshObjectives

    Updated

    Framework

    COSOs In ternal Contro l In tegrated Framewo rk (2013 Edition)

    Broadens Application Clarifies Requirements

    Articulate principles to

    facilitate effective

    internal control

    Why update what works The Framework has become themost widely adopted control framework worldwide.

    UpdatesContext

    Enhancements

    Reflect changes in

    business & operating

    environments

    Expand operations and

    reporting objectives

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    Project timetable

    Assess & SurveyStakeholders Design & Build

    Public Exposure,Assess & Refine Finalize

    2010 2011 2012 2013

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    Project participantsCOSO

    Board of Directors

    COSO Advisory Council

    AICPA AAA FEI IIA IMA Public Accounting Firms Regulatory observers (SEC, GAO, FDIC,

    PCAOB) Others (IFAC, ISACA, others)

    PwC

    Author &Project Leader

    Stakeholders

    Over 700 stakeholders in Framework

    responded to global survey during 2011 Over 200 stakeholders publically commented

    on proposed updates to Framework duringfirst quarter of 2012

    Over 50 stakeholders publically commented onproposed updates in last quarter of 2012

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    Project deliverable #1 Internal Control-IntegratedFramework (2013 Edition)

    Consists of three volumes: Executive Summary

    Framework and Appendices Illustrative Tools for

    Assessing Effectiveness of aSystem of Internal Control

    Sets out:

    Definition of internal control Categories of objectives Components of internal

    control Requirements for

    effectiveness

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    Project deliverable #2 Internal Control over ExternalFinancial Reporting: A Compendium....

    Approaches and Examplesillustrate how principles areapplied in preparing financialstatements

    Considers changes inbusiness and operatingenvironments during past two

    decades Relevant for variety of entities

    public, private, not-for-profit,and government

    Consistent with updatedFramework

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    Internal Control Integrated Framework

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    Defining Internal Control:

    Internal control is a process, effectedby an entitys board of directors,management, and other personnel,designed to provide reasonableassurance regarding theachievement of objectives relating to

    operations, reporting andcompliance.

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    The Internal Control DefinitionReflects Fundamental Concepts:

    Geared to the achievement of objectives in one or more categories

    Operations Reporting Compliance

    A process consisting of ongoing tasksand activities: a means not an end.

    Effected by people Able to provide reasonable

    assurance. Adaptable to the entity structure

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    The Components of InternalControl Remain Unchanged:

    Control environment

    Risk assessment Control activities

    Information and communication

    Monitoring activities

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    Relationship of Objectives andComponents:

    Objectives are what an entitystrives to achieve (3 columns)

    Components represent whatare required to achieveobjectives (5 Rows)

    The organizational structure willvary by the nature andcomplexity of the entity (the 3 rd dimension in the cube)

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    Update expected to ease use and application

    What is not changing... What is changing...

    Core definition of internal control

    Three categories of objectives andfive components of internal control

    Each of the five components of internal control are required foreffective internal control

    Important role of judgment indesigning, implementing andconducting internal control, and inassessing its effectiveness

    Changes in business and operating

    environments considered

    Operations and reporting objectivesexpanded

    Fundamental concepts underlyingfive components articulated asprinciples

    Additional approaches andexamples relevant to operations,compliance, and non-financialreporting objectives added

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    Environm ents changes . .. have driven Framework updates

    Expectations for governance oversight

    Globalization of markets and operations

    Changes and greater complexity in business

    Demands and complexities in laws, rules,regulations, and standards

    Expectations for competencies andaccountabilities

    Use of, and reliance on, evolving technologies

    Expectations relating to preventing anddetecting fraud

    COSO Cube (2013Edition)

    Update considers changes in business and operatingenvironments

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    Control Environment

    Risk Assessment

    Control Activities

    Information &Communication

    Monitoring Activities

    Update articulates principles of effective internal control 1. Demonstrates commitment to integrity and ethical values2. Exercises oversight responsibility 3. Establishes structure, authority and responsibility 4. Demonstrates commitment to competence5. Enforces accountability

    6. Specifies suitable objectives7. Identifies and analyzes risk 8. Assesses fraud risk 9. Identifies and analyzes significant change

    10. Selects and develops control activities

    11. Selects and develops general controls over technology 12. Deploys through policies and procedures

    13. Uses relevant information14. Communicates internally 15. Communicates externally

    16. Conducts ongoing and/or separate evaluations17. Evaluates and communicates deficiencies

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    Control Environment

    Update articulates principles of effective internal control(continued)

    1. The organization demonstrates a commitment tointegrity and ethical values.

    2. The board of directors demonstrates independencefrom management and exercises oversight of thedevelopment and performance of internal control.

    3. Management establishes, with board oversight,structures, reporting lines, and appropriateauthorities and responsibilities in the pursuit of

    objectives.4. The organization demonstrates a commitment to

    attract, develop, and retain competent individualsin alignment with objectives.

    5. The organization holds individuals accountable for their internal control responsibilities in the pursuitof objectives.

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    6. The organization specifies objectives withsufficient clarity to enable the identification and

    assessment of risks relating to objectives.7. The organization identifies risks to the

    achievement of its objectives across the entityand analyzes risks as a basis for determininghow the risks should be managed.

    8. The organization considers the potential for fraud in assessing risks to the achievement of objectives.

    9. The organization identifies and assesseschanges that could significantly impact thesystem of internal control.

    Risk Assessment

    Update articulates principles of effective internal control(continued)

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    13. The organization obtains or generates and usesrelevant, quality information to support the

    functioning of other components of internalcontrol.

    14. The organization internally communicatesinformation, including objectives andresponsibilities for internal control, necessary tosupport the functioning of other components of internal control.

    15. The organization communicates with externalparties regarding matters affecting thefunctioning of other components of internalcontrol.

    Information &Communication

    Update articulates p

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