International companies, advancements in technology, the increasing amount of business failures, and widely publicized fraud in America have forced companies to place more emphasis on internal control systems and internal audits. Internal controls consist of procedures that management uses to ensure accuracy in performing certain business functions. These procedures make up a company's internal control system. Internal controls helps to ensure the reliability of financial reporting. Section 404 of the Sarbanes Oxley act requires auditors to perform an audit of financial statements as well as report on the effectiveness of internal controls. To address internal control issues, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued control guidelines called the Internal Control-Integrated Framework in September of 1992. The COSO helps to emphasize the understanding of a good internal control system. It provides guidelines for establishing criteria to assess the adequacy and effectiveness of a companies internal control system. The COSO report has played an important role in increasing the responsibilities and obligations of auditors.
Internal controls are designed for three basic purposes; the reliance of financial reporting, efficiency and effectiveness of operations and compliance with laws and regulation. The management of a company prepares its financial statements for external users. Management is responsible for providing reliable information in their financial statements. Controls within an entity are meant to promote efficiency and effectiveness. Section 404 requires public companies to include a report about the effectiveness of controls in their annual form 10-k. Internal controls are designed to achieve all three objectives.
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