How important a role does the control environment play in the auditing process?

A key component of entity level controls is the control environment. This addresses the ‘tone at the top.’ The auditors will consider if management promotes effective internal control over financial reporting and has sound integrity and ethical values, and if the board or audit committee understands and exercises the appropriate level of oversight on financial reporting and internal control. How should management prepare for the SOX 404(b) audit? Management should base its 404(a) evaluation of the effectiveness of the company’s internal control over financial reporting on a suitable recognized framework (e.g. COSO framework). Re-emphasize to the board and audit committee their responsibilities related to internal control over financial reporting. Communicate with your auditors early about what the scope of your testing will be, including the number of transactions you intend to select and the period you will cover. Discuss the way you are setting up the files and who will be doing ...  more