Question

Which of the following is true regarding management's documentation of internal controls?

1) Some documentation should focus on controls management has placed in operation to adequately address identified financial reporting risks.
2) Documentation should focus on controls over the interim financial reporting process.
3) Documentation must be done on paper.
4) Inadequate documentation is usually considered an insignificant deficiency in internal control.

Answer 1

Regarding management's documentation of internal controls, there are several important aspects to consider, including the focus on controls for financial reporting risks, the need to document controls beyond just interim financial reporting, and the flexibility of documentation formats. Inadequate documentation is considered a significant deficiency in internal control.

Step-by-step explanation:

Regarding management's documentation of internal controls, the following is true:

1. Some documentation should focus on controls management has placed in operation to adequately address identified financial reporting risks. This means that management should document the controls they have implemented to manage and mitigate risks related to financial reporting.
2. Documentation should not specifically focus on controls over the interim financial reporting process. While it may be important to document controls over interim financial reporting, this should not be the sole focus of the documentation.
3. Adequate documentation does not have to be done on paper. Documentation can be done electronically as well, as long as it provides sufficient evidence and support for the internal controls.
4. Inadequate documentation is usually considered a significant deficiency in internal control, not an insignificant one. Adequate documentation is crucial for effective internal control and lack of documentation can indicate weaknesses in the control environment.