Posted by: Charles Denyer
aicpa, american institute of certified public accountants, charles denyer, coso, internal controls, sas 55, SAS 70, SAS 70 Type I, sas 78, The Committee of Sponsoring Organizations of the Treadway Commission, type ii audit
COSO is a widely used and accepted internal control framework in today’s growing corporate governance initiatives. It’s also heavily found in Statement on Auditing Standards No. 70 (SAS 70) audits.
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework essentially defines internal control as a process, effected by an entity’s board of directors, management and other personnel. This process is designed to provide reasonable assurance regarding the achievement of objectives in effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.
1. Internal control is a process. It is a means to an end, not an end in itself.
2. Internal control is not merely documented by policy manuals and forms. Rather, it is put in by people at every level of an organization.
3. Internal control can provide only reasonable assurance, not absolute assurance, to an entity’s management and board.
4. Internal control is geared to the achievement of objectives in one or more separate but overlapping categories.
What’s notable about the relationship with COSO and SAS 70 are COSO’s framework for internal control, which consists of the following five (5) broad based themes:
1. Control Environment
2. Control Activities
3. Risk Assessment
4. Information and Communication
Many SAS 70 Type I and Type II audit reports will discuss, in narrative form, these above five areas and how they relate to the organization undergoing the SAS 70 audit and what specific controls they have in place in relation to these five areas.
And let’s not forget the Statement on Auditing Standards (SAS pronouncements) that help bring these five internal control themes to light.
In 1988, the American Institute of Certified Public Accountants (AICPA) issued SAS 55, which describes internal control in terms of its three major components: control environment, accounting system, and control procedures. Shortly thereafter, the Committee of Sponsoring Organizations (COSO) released the following: Internal Control: Integrated Framework, in which internal control was characterized as five components: control environment, control activities, risk assessment, information and communication, and monitoring.
Thus, in 1995, the AICPA adopted COSO’s definition and it’s five components of internal control, issuing SAS No. 78 to supplement SAS No. 55.
So, you should be able to now clearly see the relationship with SAS 70 and COSO and the relationship with SAS 70 and other SAS pronouncements, specifically, SAS 55 and SAS 78.
If you want to learn more about SAS 70 audits, visit the official SAS 70 Resource Guide.