Financial Accounting: An Integrated Statements Approach, 2nd Edition

How would you address these issues? You could, for example, develop a schedule

at the beginning of each day and then inspect the work at the end of the day to verify

that it was completed according to quality standards. You could have “surprise” in-

spections by arriving on site at random times to verify that the teams are working

according to schedule. You could require employees to “clock in” at the beginning of

the day and “clock out” at the end of the day to make sure that they are paid for hours

worked. You could require the work teams to return the vehicles and equipment to a

central location to prevent unauthorized use. You could keep a log of odometer read-

ings at the end of each day to verify that the vehicles have not been used for “joy rid-

ing.” You could bill customers after you have inspected the work and then monitor the

collection of all receivables. All of these are examples of internal control.

In this section, we describe and illustrate internal control using the framework de-

veloped by the Committee of Sponsoring Organizations, which was formed by five

major business associations. The committee’s deliberations were published in Internal

Control—Integrated Framework.^4 This framework, cited by GEin Exhibit 1, has become

the standard by which companies design, analyze, and evaluate internal control. We

describe and illustrate the framework by first describing the objectives of internal con-

trol and then showing how these objectives can be achieved through the five elements

of internal control.

Objectives of Internal Control

The objectives of internal control are to provide reasonable assurance that: (1) assets are

safeguarded and used for business purposes, (2) business information is accurate, and

(3) employees comply with laws and regulations. These objectives are illustrated below.

308 Chapter 7 Sarbanes-Oxley, Internal Control, and Cash

4 Internal Control—Integrated Frameworkby the Committee of Sponsoring Organizations (COSO) of the

Treadway Commission, 1992.

Safeguarded

Assets

Compliance with

Laws and Regulations

Objectives

of

Internal

Control

Accurate

Information

Income

StatementIncome

Statement