Effectiveness and efficiency for SOX testing is very important in internal control of operations.Explain

Week 5 DQ part 2

Chapter 13

Please answer each question

1) If companies or schools can define and follow ‘best practices’ this can directly support internal controls if the company has considered the process and what would make for good internal controls. Controls can be include in the annual statements- Form 10-K is the annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. There can be many items listed in the table of contents to Form 10-K. Part I can include Items of Business, Risk Factors, and Legal Proceedings. Part II can include Items of Selected Financial Data, Financial Statements, and Controls and Procedures. Part III can include Items of Executive Compensation, Related Transactions, and Principal Accounting Fees and Services. Part IV would have Items of Schedules and Exhibits.

What do you think could be included in an Annual Report to make it more user friendly?

2) Peter F. Drucker, a noted business historian once said that you can teach and train people to perform a job but you cannot train integrity. You either have it or you don’t. This is similar to the fact that people say you cannot legislate morals. May people may be very good people but when they begin to work with cash for the first time, each one has this second of choosing “No I will not consider or desire the money I am handling’ or choosing, ‘I deserve more money for the job I do.’ Once a person starts down a road of wanting more money directly from what they handle every day then it is hard to win the battle of staying honest.

My father always felt that companies and the government owned him money since he was in World War II in the submarine division. I had to weigh these thoughts as I grew up and chose the idea that if I wanted or desired more that I would work for it.

Have you had to chose different paths as you made your way through the choices of work? Have you read Robert Frost’s “The Road Not Taken”?

3) Effectiveness and efficiency for SOX testing is very important in internal control of operations. When we are auditing using SOX by applying a risk and control matrix, the controls can fail due to the fact that the control written can fail because it does not effectively cover the risk or it can fail because the control is not efficiently being performed in the application of use such as second level sign off by the next level of management. If effectiveness and efficiency are good then we can begin to rely on the financial statements. There is testing to the laws and regulations by those governing agencies since step 1 and 2 can be passed but not pass step 3 where government bodies may interpret their expectations of what is required. .

Does this makes sense?

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4) On a side issue I use to work at. We had $163 million of Goodwill on our books that we were amortizing. Goodwill is defined as the excess cost of an entity acquired over the net amount of assets and liabilities. Goodwill was amortized over a 50 year period but I have not checked lately if this has changed. That company would list assets and their appreciated years but not Goodwill in the footnotes of their annual statement but I don’t know why:

Buildings & Improvements 20 to 40 years

Machinery & Equipment 3 to 10 years

Furniture and fixtures 3 to 5 years

Additionally there is Financial Accounting Standard (FAS) 145 requires an annual review of Goodwill for impairment (reduction of Goodwill on the books). If there was an impairment the Goodwill on the books would have to be written down. This would imply that the company writing down Goodwill is losing value and is now being reflected in the financial statements. This can lower the Earnings per Share calculation which would be a concern for stockholders and investors. Just a few years ago McDonald’s had an impairment of $99 million.

Additionally this has been identified as a risk area for Sarbanes – Oxley testing. We quarterly have to ask the locations to fill out a form that states they have reviewed their Goodwill for impairment. The Controller and Plant Managers have to fill the form out and sign-off. This is filed at our World Headquarters and is reviewed once a year by our external auditors.

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