How do large entities control their operations?..this is for my management class?

“Internal Control Over Financial Reporting” (“ICFR”)





The significance of Section 404 of Sarbanes-Oxley is that it re-


emphasizes the important relationship between the maintenance of effective ICFR and


the preparation of reliable financial statements. Effective ICFR can also help companies


deter fraudulent financial accounting practices or detect them earlier and perhaps reduce


their adverse effects. While controls are susceptible to manipulation, especially in


instances of fraud involving the collusion of two or more people, including senior


management, these are known limitations of internal control systems. Therefore, it is


possible to design ICFR to reduce, though not eliminate, instances of fraud.





The overall objective of ICFR is to foster the


preparation of reliable financial statements. Reliable financial statements must be


materially accurate. Therefore, the central purpose of the evaluation is to assess whether


there is a reasonable possibility of a material misstatement in the financial statements not


being prevented or detected on a timely basis by the company’s ICFR.








Generally, the identification of financial reporting risks (that is, those risks of misstatement that could, individually or in combination with others, result in a material misstatement of the financial statements) begins with an evaluation of how the requirements of GAAP (Generally Accepted Accounting Principles) apply to the company’s business, operations and transactions. Then, using its knowledge of the business and related risks, including risks from sources such as the initiation, authorization, processing and recording of transactions and other adjustments, management should consider ';what could go wrong'; to identify the sources and likelihood of potential problems.