UNDERSTANDING THE FINANCIAL STATEMENT CLOSE PROCESS

Guidance

SYSTEM DESCRIPTION:

Documentation of the FSCP (and any process to generate significant disclosures) assumes a substantive approach will be taken and therefore does not contain the ability to document and test controls. This approach is consistent with the expectations of a non-complex entity under the criteria for use of this documentation package.

Considerations Related to Authorization, Segregation of Duties, Asset Safeguarding, and Asset Accountability

We evaluate the proper authorization of transactions, presence of proper segregation of duties, asset safeguarding, and asset accountability in determining the types of errors that could occur within a flow of transactions.

Proper authorization of transactions, adequate segregation of duties, asset safeguarding, and asset accountability are important considerations in determining if a client's control activities are effective in achieving the objectives of internal control. These objectives relate primarily to management's control over the disposition of the entity's assets and liabilities and only indirectly to controls over the processing of data, which are concerned with the accurate, timely, and complete recording of transactions. However, the absence of such controls may increase the risk of errors of audit importance in the financial information maintained in the client's books and records.

For example, as asset accountability procedures frequently take the form of control account reconciliations or other detect controls, on which we might wish to place reliance, the absence of or weakness in such procedures may affect our evaluation of controls over those significant classes of transactions.

Therefore, we consider the absence of these controls in determining the types of errors that could occur within a flow of transactions. We assess the extent to which any significant weaknesses in the client's authorization, segregation of duties, asset safeguarding, and asset accountability procedures could increase the likelihood of errors of audit importance in account balances. We consider such characteristics as the materiality of the assets concerned, their susceptibility to physical loss through errors or fraud, and their susceptibility to losses in value through business risks, errors, or fraud.

Authorization. General and specific authorization and approval levels and procedures designed to ensure that transactions and activities are executed in accordance with management's intentions. We need to consider the risk that transactions are not executed in accordance with management's general or specific authorization.

Safeguarding of assets. Restrictions, designed to prevent or detect the financial statement implications from the loss of assets, on access to and use of assets and records, including physical access and indirect access through the preparation and processing of data that authorize, or otherwise facilitate, the use or disposition of assets. We need to consider the risk that access to assets and data may be permitted without management's authorization.

Asset accountability. Procedures to compare recorded assets with actual assets and to effect appropriate actions when differences are identified. Such procedures help provide assurance that authorization and safeguarding of assets procedures are being followed. We need to consider the risk that amounts recorded for assets are not compared with existing assets at reasonable intervals, or that appropriate action is not taken regarding any differences.

Segregation of duties. Inadequacies in the segregation of duties exist if any individual performs incompatible activities or if a computer application set-up grants users inappropriate or excessive access to functionality (e.g., if an individual is in a position to both perpetrate and conceal errors or fraud in the normal course of performing his or her duties). Thus, we consider the risk that individuals perform processing procedures that are incompatible with each other, or that an individual performs the processing and/or recording of transactions procedures and related controls, and/or recording, or has access to related assets.

Walk-Through Procedure Guidance

We perform at least one walk-through for each significant class of transactions within significant processes, including the sub-processes of the Financial Statement Close Process ("FSCP") and sources and preparation of information resulting in significant disclosures.

Our walk-through includes both the manual and automated steps of the process, including the points at which the transactions are initiated, recorded, processed, and ultimately reported in the general ledger (or serve as the basis for disclosures). We use the same source documents and information technology (e.g., applications, end user computing) that client personnel typically would use.

As we perform each walk-through, we should question client personnel involved in the significant class of transactions and sources of information about their understanding of the client's prescribed procedures. We should determine whether processing procedures are performed as originally understood and in a timely manner, and we are alert for exceptions to the company's prescribed procedures. When we encounter exceptions, we should make follow-up inquiries to determine whether these exceptions indicate potential fraud. As we perform the walk-through, we also consider whether those individuals performing the processing have any conflicting duties or whether any potentially conflicting duties have been addressed.

When there have been significant changes to flows of significant classes of transactions or sources of information, including key computer applications, we need to evaluate the nature of the change(s) and the effect on related accounts and disclosures and determine whether to walk-through transactions that were processed both before and after the change(s).

Walk-Through of Significant Class of Transaction Guidance

Describe the walk-through tests performed on the flow of transactions. In doing so ensure that the walk-through encompasses the entire flow of initiating, recording, processing and reporting individual transactions and, to the extent necessary, related controls. Furthermore, ensure use is made of original source documentation and information technology that the client personnel typically would use in the flow of transactions.