An effective internal control system enables you to manage significant risks and monitor the reliability and integrity of financial and operating information. It also ensures that the audit committee acts as a powerful and proactive agent for corporate self-regulation. The Committee of Sponsoring Organizations of the Treadway Commission developed the following questions to help senior executives and directors gain a better understanding of their organization’s control systems.

 

Ethical Environment

• Do board members and senior executives set a day-in, day-out example of high integrity and ethical behavior?

• Is there a written code of conduct for employees? Is it reinforced by training, top-down communications, and periodic written statements of compliance from key employees?

• Are performance and incentive compensation targets reasonable and realistic, or do they create undue pressure for short-term results?

• Is it clear that fraudulent financial reporting at any level and in any form will not be tolerated?

• Are ethics woven into criteria used to evaluate individual and business unit performance?

• Does management react appropriately when receiving bad news from subordinates and business units?

• Does a process exist to resolve close ethical calls?

• Are business risks identified and candidly discussed with the board of directors?

Risk Assessment and Control Activities

• Is relevant, reliable internal and external information timely identified, compiled and communicated to those positioned to act?

• Are risks identified and analyzed and actions taken to mitigate them?

• Are controls in place to ensure management decisions are properly carried out?

• Does management routinely monitor controls in the process of running the organization’s operations?

• Are periodic, systematic evaluations of control systems conducted and documented?

Audit Committee Effectiveness

• Has the board recently reviewed the audit committee’s written charter?

• Are audit committee members functioning independently of management?

• Do committee members possess an appropriate mix of operating and financial control expertise?

• Does the committee understand and monitor the broad organizational control environment?

• Does the committee oversee appropriateness, relevance and reliability of operational and financial reporting to the board, as well as to investors and other external users?

• Does the committee oversee existence of and compliance with ethical standards?

• Does the committee or full board have a meaningful but challenging relationship with independent and internal auditors, senior financial control executives and key corporate and business unit operating executives?

Internal Auditing Function Effectiveness

• Does internal auditing have the support of top management, the audit committee and the board of directors?

• Is the organizational relationship between internal auditing and senior executives appropriate?

• Does internal auditing have and use open lines of communication and private access to all senior officers and the audit committee?

• Is there an internal audit plan (reviewed by the audit committee) describing internal audit responsibility?

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