COSO Committee of Sponsoring Organizations of the Treadway Commission
Committee of Sponsoring Organizations of the Treadway Commission
An effective system of internal control provides reasonable assurance of achievement of an entity's objectives. Because internal control is relevant both to the entity and its subunits, an effective system of internal control may relate to a specific part of the organizational structure. An effective system of internal control reduces, to an acceptable level, the risk of not achieving an objective relating to one, two, or all three categories. It requires that:
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Each of the five components of internal control and relevant principles is present and functioning fn 6
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The five components are operating together in an integrated manner
In determining whether a system of internal control is effective, management exercises judgment in assessing whether each of the components and relevant principles is present and functioning and components are operating together.
When internal control is determined to be effective, senior management and the board of directors have reasonable assurance of the following categories of objectives:
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Operations—the organization:
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achieves effective and efficient operations when external events are considered unlikely to have a significant impact on the achievement of objectives or when the organization can reasonably predict the nature and timing of external events and mitigate the impact to an acceptable level
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understands the extent to which operations are managed effectively and efficiently when external events may have a significant impact on the achievement of objectives and the impact cannot be mitigated to an acceptable level
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Reporting—the organization prepares reports in conformity with applicable laws, rules, regulations, and standards established by legislators, regulators, and standard setters, or with the entity's specified objectives and related policies
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Compliance—the organization complies with applicable laws, rules, and regulations
The Framework sets forth that components and relevant principles are requisite to an effective system of internal control. It does not prescribe the process for how management assesses its effectiveness.
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