COSO Committee of Sponsoring Organizations of the Treadway Commission
Committee of Sponsoring Organizations of the Treadway Commission
COSO's Internal Control—Integrated Framework (Framework) sets forth three categories of objectives: operations, reporting, and compliance. The focus of this publication, Internal Control over External Financial Reporting: A Compendium of Approaches and Examples (Compendium) is the external financial reporting category of objectives, a subset of the reporting category. External financial reporting objectives address the preparation of financial reports for external parties, including:
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Financial statements for external purposes
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Other external financial reporting derived from an entity's financial and accounting books and records
The Compendium has been developed to assist those users of the Framework who are responsible for designing, implementing, and conducting a system of internal control over external financial reporting (ICEFR) that supports the preparation of financial statements and other external financial reporting. It is also relevant to entities that report on the effectiveness of a system of internal control over external financial reporting relating to the preparation of financial statements. The preparation of financial statements for external purposes and other external financial reporting applies to the following types of entities:
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Public Entities—Often, public entities are required to prepare financial statements for external purposes in accordance with applicable accounting standards, rules, and regulations. Additionally, they often prepare other external financial reporting derived from its financial and accounting books and records, such as earnings press releases, or information included in stipulated reports for business partners or lending agencies as required by contract.
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Private Entities—Entities whose ownership may be closely held may prepare financial statements to provide to banks and other third parties in order to raise capital or to meet contractual obligations. These statements can be prepared in accordance with standards and regulations, even though often, doing so may not be a requirement for private entities. More commonly, the form of the financial statements or of other external financial reporting is stipulated by contractual obligations or a third party.
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Not-For-Profit Entities—These entities may prepare financial statements for external purposes in accordance with appropriate rules and regulations. However, because the purpose of these entities is something other than realizing and generating profit, they may also prepare financial reporting for donors, government agencies, or other third parties that is not necessarily in accordance with specific standards, rules, or regulations, but aims to raise funds to support the stated cause.
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Governmental Entities—These entities prepare financial statements that are required by law. As well, they may prepare financial reporting in accordance with specific standards, rules, or regulations, but which is not necessarily required, for the public or governmental oversight agencies.
In applying the Framework, users will find relevant approaches and examples in the Compendium of how organizations may apply the principles in the design, implementation and conduct of internal control over external financial reporting. These approaches and examples relate to each of the five components and seventeen principles set forth in the Framework.
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Approaches describe how organizations may apply these principles within their system of internal control over external financial reporting. Approaches are designed to give users of the Compendium a summary-level description of activities that management may consider as they apply the Framework in an ICEFR context.
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Examples provide specific illustrations to users on the application of each principle, based on situations drawn from practical experiences. Examples illustrate one or more points of focus of a particular principle. They are not designed to provide a comprehensive example of how the principle may be fully applied in practice.
Further, the Compendium illustrates how various characteristics of principles may be present and functioning fn 1 within a system of internal control relating to external financial reporting objectives.
Finally, the Compendium includes an index to all the examples, by topic, in Appendix A, organized by topics relating to the changes in business and operating environments noted in the Foreword to the Framework.
The approaches and examples do not attempt to illustrate all aspects of the components and relevant principles necessary for effective internal control relating to external financial reporting objectives. Further, they are not sufficient to enable an organization to determine that each of the five components and relevant principles is present and functioning. Instead, the approaches and examples are intended to illustrate how principles may be present and functioning.
The approaches and examples are samples of activities for management to consider, rather than a complete or authoritative list. The components, principles, and definitions illustrated in the Compendium are consistent with those found in the Framework, and readers should refer to the Framework for a comprehensive discussion of how entities design, implement, and conduct a system of internal control, and for the requirements of effective internal control.
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