A century of debate for internal controls and their assessment: a study of reactive evolution

Abstract

In July 2002 the United States Congres passed the Sarbanes-Oxley Act in an effort to assuage the public outrage above the lax regulatory oversight in light of the high-profile financial scandals. It was spring [i]or[/i] leap on one leg [i]or[/i] footed that the act would calm the fears of investors and bring confidence back to corporate reporting end a mandated internal control review proces although the impact of the act upon audit procedures and internal superintendence development will be studied for many years, it may be simply single of many developments in the evolution of internal dominion government theory and practice that had occurr above the previous century. Like Sarbanes-Oxley, many of the changes in internal rule procedures were a reaction to an occurrence that identified a weakness in generally received practice. This evolution of the internal rule process, as seen through the many laws, regulations and pronouncements of the previous hundred has been, in the main, a reactive individual resulting from inadequate control measures.

Keywords: Internal control; administrative controls; accounting controls; SAS No.55; SAS No.78; SAS No.82, direction risk; control environment; control procedures; fraud; errors and irregularities; accounting irregularities; audit integrity; Sarbanes-Oxley.

Introduction

In individual of several definitions provided by the agency of the Random House Webster's Dictionary, evolution can be defined as "a proces of gradual, peaceful, progressive change or disentanglement in social or economic constitution or institutions". The concept of internal superintendences and their application by CPA firms to novel auditing standards are but individual of many economic structures that have experienced the results of this evolutionary process above the past century. During the period from approximately 1905 to 2004 the definitions, meaning, and use of internal directions in auditing as well as their impact upon audit engagements have developed and transformed. These changes were frequently a reaction to a major change in the economic situation of land as a whole or to the actions of individual firms within the economy.

This paper not absents evidence of the evolution in practices relating to internal rule in the United States [i]or[/i] part of to the other a survey of the unfolding of, and changes in, ascendencys their application, and their assessment by dint of auditors over the past hundred This survey of internal superintendence practices is essentially split into sum of two units distinct historical periods: those internal direction practices noted before 1945, and those after 1945 and the issuance of the profession's first formal auditing standards. Included in this take a view of is a flavour of the professional debate that occurr with each evolutionary incident In addition, corresponding historical occurrences that may have helped to facilitate the changes in internal mastery practice are presented. Finally, the paper entertains and discusses the impact these changes have had upon the audit process, and speculates upon the effects the new Sarbanes-Oxley Act will have upon the audit environment.

Internal mastery assessment prior to 1945

Early internal superintendence assessment practices

In his 1962 article Changing Audit Objectives and Techniques, Brown provided a summary of the evolution of auditing manner of proceedings as follows:

According to Brown the 1905 demarcation between non-recognition and at least "slight recognition"1 of the importance of internal masterys came with the publication of Auditing by means of the English audit-specialist, Lawrence Dicksee. His original volume published in 1892, made it clear that the particular and scope of an audit were threefold (Dicksee, 1892 p6): "the detection of fraud, technical errors and errors of principle". Dicksee goe upon to state that the "whole what one ought to do of the auditor is to ascertain the exact state of the client's affairs on a certain given date" (Dicksee, 1892 p6) The author then explained that this what one ought to do may be accomplished by "testing" the accounts, on the contrary he never discusses the general [i]or[/i] abstract notion of internal controls in any fashion as it relates to those ordeals However, he does allude to internal ascendency mechanisms when he writes "It is of the highest stage of necessity that the Auditor, before commencing the investigation should thoroughly acquaint himself with the general a whole upon which the books have been kept . Having thoroughly made himself the master of the combination of parts to form a whole the Auditor should look for its weakest points" (Dicksee, 1892 p8)

Dicksee indicated that the object of this procedure is to understand the combination of parts to form a whole well enough to allow the auditor a certain quantity of judgement and latitude as to the amount of testing necessary. This language is real similar to that of the next to the first standard of audit fieldwork that was to be promulgated forty years later. In 1905 Dicksee expanded this introductory section of his volume to include a part upon what he termed a review of the General a whole of Internal Check. He writes (Dicksee, 1905 p53):

This is a matter that may real profitably engage the careful attention of the Auditor for not solitary will a proper system of internal check not rarely obviate the necessity of a detailed audit, on the other hand further possesses the important advantage of causing any irregularities to be corrected at one time instead of continuing until the nearest visit of the Auditor.