Federal Government Standards For Internal Controls.txt

standards for internal control in the federal government by the comptroller general of the united states september 2014 gao14704g united states government accountability office contents overview 1 foreword 1 how to use the green book 3 section 1 fundamental concepts of internal control 5 definition of internal control 5 definition of an internal control system 5 section 2 establishing an effective internal control system 6 presentation of standards 6 components principles and attributes 7 internal control and the entity 9 roles in an internal control system 11 objectives of an entity 12 section 3 evaluation of an effective internal control system 14 factors of effective internal control 15 evaluation of internal control 15 section 4 additional considerations 17 service organizations 17 large versus small entities 18 benefits and costs of internal control 19 documentation requirements 19 use by other entities 20 control environment 21 principle 1 demonstrate commitment to integrity and ethical values 22 tone at the top 22 standards of conduct 23 adherence to standards of conduct 23 principle 2 exercise oversight responsibility 24 oversight structure 24 oversight for the internal control system 26 input for remediation of deficiencies 27 principle 3 establish structure responsibility and authority 27 organizational structure 27 assignment of responsibility and delegation of authority 28 documentation of the internal control system 29 principle 4 demonstrate commitment to competence 30 expectations of competence 30 recruitment development and retention of individuals 31 succession and contingency plans and preparation 31 principle 5 enforce accountability 32 enforcement of accountability 32 consideration of excessive pressures 33 risk assessment 34 principle 6 define objectives and risk tolerances 35 definitions of objectives 35 definitions of risk tolerances 36 principle 7 identify analyze and respond to risks 37 identification of risks 37 analysis of risks 38 response to risks 39 principle 8 assess fraud risk 40 types of fraud 40 fraud risk factors 41 response to fraud risks 41 principle 9 identify analyze and respond to change 42 identification of change 42 analysis of and response to change 43 control activities 44 principle 10 design control activities 45 response to objectives and risks 45 design of appropriate types of control activities 45 design of control activities at various levels 49 segregation of duties 50 principle 11 design activities for the information system 51 design of the entitys information system 51 design of appropriate types of control activities 53 design of information technology infrastructure 53 design of security management 54 design of information technology acquisition development and maintenance 55 principle 12 implement control activities 56 documentation of responsibilities through policies 56 periodic review of control activities 56 information and communication 58 principle 13 use quality information 59 identification of information requirements 59 relevant data from reliable sources 59 data processed into quality information 59 principle 14 communicate internally 60 communication throughout the entity 60 appropriate methods of communication 61 principle 15 communicate externally 62 communication with external parties 62 appropriate methods of communication 63 monitoring 64 principle 16 perform monitoring activities 65 establishment of a baseline 65 internal control system monitoring 65 evaluation of results 66 principle 17 evaluate issues and remediate deficiencies 67 reporting of issues 67 evaluation of issues 68 corrective actions 68 appendix i requirements 70 appendix ii acknowledgments 73 comptroller generals advisory council on standards for internal control in the federal government (20132015) 73 gao project team 74 staff acknowledgments 74 glossary 75 figures figure 1: green book sample page 4 figure 2: achieving objectives through internal control 5 figure 3: the five components and 17 principles of internal control 9 figure 4: the components objectives and organizational structure of internal control 10 figure 5: the 17 principles supporting the five components of internal control 11 figure 6: examples of common categories of control activities 46 this is a work of the us government and is not subject to copyright protection in the united states the published product may be reproduced and distributed in its entirety without further permission from gao however because this work may contain copyrighted images or other material permission from the copyright holder may be necessary if you wish to reproduce this material separately overview foreword policymakers and program managers are continually seeking ways to improve accountability in achieving an entitys mission a key factor in improving accountability in achieving an entitys mission is to implement an effective internal control system an effective internal control system helps an entity adapt to shifting environments evolving demands changing risks and new priorities as programs change and entities strive to improve operational processes and implement new technology management continually evaluates its internal control system so that it is effective and updated when necessary section 3512 (c) and (d) of title 31 of the united states code (commonly known as the federal managers financial integrity act (fmfia)) requires the comptroller general to issue standards for internal control in the federal government standards for internal control in the federal government (known as the green book) provide the overall framework for establishing and maintaining an effective internal control system office of management and budget (omb) circular no a123 provides specific requirements for assessing and reporting on controls in the federal government the term internal control in this document covers all aspects of an entitys objectives (operations reporting and compliance) the green book may also be adopted by state local and quasigovernmental entities as well as notforprofit organizations as a framework for an internal control system management of an entity determines based on applicable laws and regulations how to appropriately adapt the standards presented in the green book as a framework for the entity the committee of sponsoring organizations of the treadway commission (coso) updated its internal control guidance in 2013 with the issuance of a revised internal control integrated framework1 coso introduced the concept of principles related to the five components of internal control the green book adapts these principles for a government environment 1see committee of sponsoring organizations of the treadway commission internal control integrated framework (new york: american institute of certified public accountants 2013) the standards are effective beginning with fiscal year 2016 and the fmfia reports covering that year management at its discretion may elect early adoption of the green book this revision of the standards has gone through an extensive deliberative process including public comments and input from the comptroller generals advisory council on standards for internal control in the federal government the advisory council consists of about 20 experts in financial and performance management drawn from federal state and local government; the private sector; and academia the views of all parties were thoroughly considered in finalizing the standards i appreciate the efforts of government officials public accounting professionals and other members of the audit and academic communities who provided valuable assistance in developing these standards i extend special thanks to the members of the advisory council on standards for internal control in the federal government for their extensive input and feedback throughout the entire process of developing and finalizing the standards gene l dodaro comptroller general of the united states september 2014 how to use the green book the green book provides managers criteria for designing implementing and operating an effective internal control system the green book defines the standards through components and principles and explains why they are integral to an entitys internal control system the green book clarifies what processes management considers part of internal control in a mature and highly effective internal control system internal control may be indistinguishable from daytoday activities personnel perform the green book is structured as follows: 1 an overview which includes the following sections: section 1: an overview of the fundamental concepts of internal control section 2: a discussion of internal control components principles and attributes; how these relate to an entitys objectives; and the three categories of objectives section 3: a discussion of the evaluation of the entitys internal control systems design implementation and operation section 4: additional considerations that apply to all components in an internal control system 2 a discussion of the requirements for each of the five components and 17 principles as well as discussion of the related attributes including documentation requirements the green book clearly indicates the component and principle requirements through the use of must and should further discussion of these requirements is included in section 2 of the overview documentation requirements are summarized in section 4 of the overview figure 1 depicts a sample page from the green book this illustration identifies the components principles and attributes of the green book which are further discussed in section 2 of the overview figure 1: green book sample page section 1 fundamental concepts of internal control definition of internal control ov101 internal control is a process effected by an entitys oversight body management and other personnel that provides reasonable assurance that the objectives of an entity will be achieved (see fig 2) these objectives and related risks can be broadly classified into one or more of the following three categories: operations effectiveness and efficiency of operations reporting reliability of reporting for internal and external use compliance compliance with applicable laws and regulations figure 2: achieving objectives through internal control ov102 these are distinct but overlapping categories a particular objective can fall under more than one category can address different needs and may be the direct responsibility of different individuals ov103 internal control comprises the plans methods policies and procedures used to fulfill the mission strategic plan goals and objectives of the entity internal control serves as the first line of defense in safeguarding assets in short internal control helps managers achieve desired results through effective stewardship of public resources definition of an internal control system ov104 an internal control system is a continuous builtin component of operations effected by people that provides reasonable assurance not absolute assurance that an entitys objectives will be achieved ov105 internal control is not one event but a series of actions that occur throughout an entitys operations internal control is recognized as an integral part of the operational processes management uses to guide its operations rather than as a separate system within an entity in this sense internal control is built into the entity as a part of the organizational structure to help managers achieve the entitys objectives on an ongoing basis ov106 people are what make internal control work management is responsible for an effective internal control system as part of this responsibility management sets the entitys objectives implements controls and evaluates the internal control system however personnel throughout an entity play important roles in implementing and operating an effective internal control system ov107 an effective internal control system increases the likelihood that an entity will achieve its objectives however no matter how well designed implemented or operated an internal control system cannot provide absolute assurance that all of an organizations objectives will be met factors outside the control or influence of management can affect the entitys ability to achieve all of its objectives for example a natural disaster can affect an organizations ability to achieve its objectives therefore once in place effective internal control provides reasonable not absolute assurance that an organization will achieve its objectives section 2 establishing an effective internal control system presentation of standards ov201 the green book defines the standards for internal control in the federal government fmfia requires federal executive branch entities to establish internal control in accordance with these standards the standards provide criteria for assessing the design implementation and operating effectiveness of internal control in federal government entities to determine if an internal control system is effective nonfederal entities overview may use the green book as a framework to design implement and operate an internal control system2 ov202 the green book applies to all of an entitys objectives: operations reporting and compliance however these standards are not intended to limit or interfere with duly granted authority related to legislation rulemaking or other discretionary policy making in an organization in implementing the green book management is responsible for designing the policies and procedures to fit an entitys circumstances and building them in as an integral part of the entitys operations components principles and attributes ov203 an entity determines its mission sets a strategic plan establishes entity objectives and formulates plans to achieve its objectives management with oversight from the entitys oversight body may set objectives for an entity as a whole or target activities within the entity management uses internal control to help the organization achieve these objectives while there are different ways to present internal control the green book approaches internal control through a hierarchical structure of five components and 17 principles the hierarchy includes requirements for establishing an effective internal control system including specific documentation requirements ov204 the five components represent the highest level of the hierarchy of standards for internal control in the federal government the five components of internal control must be effectively designed implemented and operating and operating together in an integrated manner for an internal control system to be effective the five components of internal control are as follows: control environment the foundation for an internal control system it provides the discipline and structure to help an entity achieve its objectives  risk assessment assesses the risks facing the entity as it seeks to achieve its objectives this assessment provides the basis for developing appropriate risk responses 2see para ov410 for further discussion on use by other entities page 7 gao14704g federal internal control standards control activities the actions management establishes through policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entitys information system  information and communication the quality information management and personnel communicate and use to support the internal control system  monitoring activities management establishes and operates to assess the quality of performance over time and promptly resolve the findings of audits and other reviews ov205 the 17 principles support the effective design implementation and operation of the associated components and represent requirements necessary to establish an effective internal control system ov206 in general all components and principles are relevant for establishing an effective internal control system in rare circumstances there may be an operating or regulatory situation in which management has determined that a principle is not relevant for the entity to achieve its objectives and address related risks if management determines that a principle is not relevant management supports that determination with documentation that includes the rationale of how in the absence of that principle the associated component could be designed implemented and operated effectively in addition to principle requirements the green book contains documentation requirements ov207 the green book contains additional information in the form of attributes these attributes are intended to help organize the application material management may consider when designing implementing and operating the associated principles attributes provide further explanation of the principle and documentation requirements and may explain more precisely what a requirement means and what it is intended to cover or include examples of procedures that may be appropriate for an entity attributes may also provide background information on matters addressed in the green book ov208 attributes are relevant to the proper implementation of the green book management has a responsibility to understand the attributes and exercise judgment in fulfilling the requirements of the standards the green book however does not prescribe how management designs implements and operates an internal control system ov209 figure 3 lists the five components of internal control and 17 related principles figure 3: the five components and 17 principles of internal control internal control and the entity ov210 a direct relationship exists among an entitys objectives the five components of internal control and the organizational structure of an entity objectives are what an entity wants to achieve the five components of internal control are what are required of the entity to achieve the objectives organizational structure encompasses the operating units operational processes and other structures management overview uses to achieve the objectives this relationship is depicted in the form of a cube developed by coso (see fig 4)3 figure 4: the components objectives and organizational structure of internal control ov211 the three categories into which an entitys objectives can be classified are represented by the columns labeled on top of the cube the five components of internal control are represented by the rows the organizational structure is represented by the third dimension of the cube ov212 each component of internal control applies to all three categories of objectives and the organizational structure the principles support the components of internal control (see fig 5) 3see paras 302 through 305 for further discussion of organizational structure page 10 gao14704g federal internal control standards figure 5: the 17 principles supporting the five components of internal control ov213 internal control is a dynamic iterative and integrated process in which components impact the design implementation and operating effectiveness of each other no two entities will have an identical internal control system because of differences in factors such as mission regulatory environment strategic plan entity size risk tolerance and information technology and the judgment needed in responding to these differing factors roles in an internal control system ov214 because internal control is a part of managements overall responsibility the five components are discussed in the context of the management of the entity however everyone in the entity has a responsibility for internal control in general roles in an entitys internal control system can be categorized as follows: oversight body the oversight body is responsible for overseeing the strategic direction of the entity and obligations related to the accountability of the entity this includes overseeing managements design implementation and operation of an internal control system for some entities an oversight body might be one or a few members of senior management for other entities multiple parties may be members of the entitys oversight body for the purpose of the green book oversight by an oversight body is implicit in each component and principle  management management is directly responsible for all activities of an entity including the design implementation and operating effectiveness of an entitys internal control system managers responsibilities vary depending on their functions in the organizational structure  personnel personnel help management design implement and operate an internal control system and are responsible for reporting issues noted in the entitys operations reporting or compliance objectives4 4see paras 1702 through 1704 for further discussion on identifying issues ov215 external auditors and the office of the inspector general (oig) if applicable are not considered a part of an entitys internal control system while management may evaluate and incorporate recommendations by external auditors and the oig responsibility for an entitys internal control system resides with management objectives of an entity ov216 management with oversight by an oversight body sets objectives to meet the entitys mission strategic plan and goals and requirements of applicable laws and regulations management sets objectives before designing an entitys internal control system management may include setting objectives as part of the strategic planning process ov217 management as part of designing an internal control system defines the objectives in specific and measurable terms to enable management to identify analyze and respond to risks related to achieving those objectives categories of objectives ov218 management groups objectives into one or more of the three categories of objectives: operations effectiveness and efficiency of operations reporting reliability of reporting for internal and external use compliance compliance with applicable laws and regulations operations objectives ov219 operations objectives relate to program operations that achieve an entitys mission an entitys mission may be defined in a strategic plan such plans set the goals and objectives for an entity along with the effective and efficient operations necessary to fulfill those objectives effective operations produce the intended results from operational processes while efficient operations do so in a manner that minimizes the waste of resources ov220 management can set from the objectives related subobjectives for units within the organizational structure by linking objectives throughout the entity to the mission management improves the effectiveness and efficiency of program operations in achieving the mission reporting objectives ov221 reporting objectives relate to the preparation of reports for use by the entity its stakeholders or other external parties reporting objectives may be grouped further into the following subcategories: external financial reporting objectives objectives related to the release of the entitys financial performance in accordance with professional standards applicable laws and regulations as well as expectations of stakeholders  external nonfinancial reporting objectives objectives related to the release of nonfinancial information in accordance with appropriate standards applicable laws and regulations as well as expectations of stakeholders  internal financial reporting objectives and nonfinancial reporting objectives objectives related to gathering and communicating information needed by management to support decision making and evaluation of the entitys performance compliance objectives ov222 in the government sector objectives related to compliance with applicable laws and regulations are very significant laws and regulations often prescribe a government entitys objectives structure methods to achieve objectives and reporting of performance relative to achieving objectives management considers objectives in the category of compliance comprehensively for the entity and determines what controls are necessary to design implement and operate for the entity to achieve these objectives effectively ov223 management conducts activities in accordance with applicable laws and regulations as part of specifying compliance objectives the entity determines which laws and regulations apply to the entity management is expected to set objectives that incorporate these requirements some entities may set objectives to a higher level of performance than established by laws and regulations in setting those objectives management is able to exercise discretion relative to the performance of the entity safeguarding of assets ov224 a subset of the three categories of objectives is the safeguarding of assets management designs an internal control system to provide reasonable assurance regarding prevention or prompt detection and correction of unauthorized acquisition use or disposition of an entitys assets setting subobjectives ov225 management can develop from objectives more specific subobjectives throughout the organizational structure management defines subobjectives in specific and measurable terms that can be communicated to the personnel who are assigned responsibility to achieve these subobjectives both management and personnel require an understanding of an objective its subobjectives and defined levels of performance for accountability in an internal control system section 3 evaluation of an effective internal control system ov301 the purpose of this section is to provide management with factors to consider in evaluating the effectiveness of an internal control system for federal entities omb circular no a123 provides specific requirements on how to perform evaluations and report on internal control in the federal government nonfederal entities may refer to applicable laws and regulations as well as input from key external stakeholders when determining how to appropriately evaluate and report on internal control factors of effective internal control ov302 an effective internal control system provides reasonable assurance that the organization will achieve its objectives as stated in section 2 of the overview an effective internal control system has each of the five components of internal control effectively designed implemented and operating and the five components operating together in an integrated manner ov303 to determine if an internal control system is effective management assesses the design implementation and operating effectiveness of the five components and 17 principles if a principle or component is not effective or the components are not operating together in an integrated manner then an internal control system cannot be effective evaluation of internal control ov304 in the federal government fmfia mandates that the head of each executive branch agency annually prepare a statement as to whether the agencys systems of internal accounting and administrative controls comply with the requirements of the act if the systems do not comply the head of the agency will prepare a report in which any material weaknesses in the agencys system of internal accounting and administrative control are identified and the plans and schedule for correcting any such weakness are described omb issues guidance for evaluating these requirements in omb circular no a123 nonfederal entities may refer to applicable laws and regulations for guidance in preparing statements regarding internal control design and implementation ov305 when evaluating design of internal control management determines if controls individually and in combination with other controls are capable of achieving an objective and addressing related risks when evaluating implementation management determines if the control exists and if the entity has placed the control into operation a control cannot be effectively implemented if it was not effectively designed a deficiency in design exists when (1) a control necessary to meet a control objective is missing or (2) an existing control is not properly designed so that even if the control operates as designed the control objective would not be met a deficiency in implementation exists when a properly designed control is not implemented correctly in the internal control system operating effectiveness ov306 in evaluating operating effectiveness management determines if controls were applied at relevant times during the period under evaluation the consistency with which they were applied and by whom or by what means they were applied if substantially different controls were used at different times during the period under evaluation management evaluates operating effectiveness separately for each unique control system a control cannot be effectively operating if it was not effectively designed and implemented a deficiency in operation exists when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or competence to perform the control effectively effect of deficiencies on the internal control system ov307 management evaluates control deficiencies identified by managements ongoing monitoring of the internal control system as well as any separate evaluations performed by both internal and external sources a deficiency in internal control exists when the design implementation or operation of a control does not allow management or personnel in the normal course of performing their assigned functions to achieve control objectives and address related risks ov308 management evaluates the significance of identified deficiencies significance refers to the relative importance of a deficiency to the entitys achieving a defined objective to evaluate the significance of the deficiency management assesses its effect on achieving the defined objectives at both the entity and transaction level management evaluates the significance of a deficiency by considering the magnitude of impact likelihood of occurrence and nature of the deficiency magnitude of impact refers to the likely effect that the deficiency could have on the entity achieving its objectives and is affected by factors such as the size pace and duration of the deficiencys impact a deficiency may be more significant to one objective than another likelihood of occurrence refers to the possibility of a deficiency impacting an entitys ability to achieve its objectives the nature of the deficiency involves factors such as the degree of subjectivity involved with the deficiency and whether the deficiency arises from fraud or misconduct the oversight body oversees managements evaluation of the significance of deficiencies so that deficiencies have been properly considered ov309 deficiencies are evaluated both on an individual basis and in the aggregate management considers the correlation among different deficiencies or groups of deficiencies when evaluating their significance deficiency evaluation varies by entity because of differences in entities objectives ov310 for each principle management makes a summary determination as to whether the principle is designed implemented and operating effectively management considers the impact of deficiencies identified in achieving documentation requirements as part of this summary determination5 management may consider the related attributes as part of this summary determination if a principle is not designed implemented or operating effectively then the respective component cannot be effective 5see paras ov408 through ov409 for further discussion of documentation requirements ov311 based on the results of the summary determination for each principle management concludes on the design implementation and operating effectiveness of each of the five components of internal control management also considers if the five components operate together effectively if one or more of the five components are not effectively designed implemented or operating effectively or if they are not operating together in an integrated manner then an internal control system is ineffective judgment is used in making such determinations which includes exercising reasonable care section 4 additional considerations service organizations ov401 management may engage external parties to perform certain operational processes for the entity such as accounting and payroll processing security services or health care claims processing for the purpose of the green book these external parties are referred to as service organizations management however retains responsibility for the performance of processes assigned to service organizations therefore management needs to understand the controls each service organization has designed has implemented and operates for the assigned operational process and how the service organizations internal control system impacts the entitys internal control system ov402 if controls performed by the service organization are necessary for the entity to achieve its objectives and address risks related to the assigned operational process the entitys internal controls may include complementary user entity controls identified by the service organization or its auditors that are necessary to achieve the service organizations control objectives ov403 management may consider the following when determining the extent of oversight for the operational processes assigned to the service organization: the nature of services outsourced the service organizations standards of conduct the quality and frequency of the service organizations enforcement of adherence to standards of conduct by its personnel the magnitude and level of complexity of the entitys operations and organizational structure the extent to which the entitys internal controls are sufficient so that the entity achieves its objectives and addresses risks related to the assigned operational process large versus small entities ov404 the 17 principles apply to both large and small entities however smaller entities may have different implementation approaches than larger entities smaller entities typically have unique advantages which can contribute to an effective internal control system these may include a higher level of involvement by management in operational processes and direct interaction with personnel smaller entities may find informal staff meetings effective for communicating quality information whereas larger entities may need more formal mechanismssuch as written reports intranet portals or periodic formal meetingsto communicate with the organization ov405 a smaller entity however faces greater challenges in segregating duties because of its concentration of responsibilities and overview authorities in the organizational structure6 management however can respond to this increased risk through the design of the internal control system such as by adding additional levels of review for key operational processes reviewing randomly selected transactions and their supporting documentation taking periodic asset counts or checking supervisor reconciliations benefits and costs of internal control ov406 internal control provides many benefits to an entity it provides management with added confidence regarding the achievement of objectives provides feedback on how effectively an entity is operating and helps reduce risks affecting the achievement of the entitys objectives management considers a variety of cost factors in relation to expected benefits when designing and implementing internal controls the complexity of costbenefit determination is compounded by the interrelationship of controls with operational processes where controls are integrated with operational processes it is difficult to isolate either their costs or benefits ov407 management may decide how an entity evaluates the costs versus benefits of various approaches to implementing an effective internal control system however cost alone is not an acceptable reason to avoid implementing internal controls management is responsible for meeting internal control objectives the costs versus benefits considerations support managements ability to effectively design implement and operate an internal control system that balances the allocation of resources in relation to the areas of greatest risk complexity or other factors relevant to achieving the entitys objectives documentation requirements ov408 documentation is a necessary part of an effective internal control system the level and nature of documentation vary based on the size of the entity and the complexity of the operational processes the entity performs management uses judgment in determining the extent of documentation that is needed documentation is required for the effective design implementation and operating effectiveness of an entitys internal control system the green book includes minimum documentation requirements as follows: 6see paras 1012 through 1014 for further discussion of segregation of duties page 19 gao14704g federal internal control standards if management determines that a principle is not relevant management supports that determination with documentation that includes the rationale of how in the absence of that principle the associated component could be designed implemented and operated effectively (paragraph ov206) management develops and maintains documentation of its internal control system (paragraph 309) management documents in policies the internal control responsibilities of the organization (paragraph 1202) management evaluates and documents the results of ongoing monitoring and separate evaluations to identify internal control issues (paragraph 1609) management evaluates and documents internal control issues and determines appropriate corrective actions for internal control deficiencies on a timely basis (paragraph 1705) management completes and documents corrective actions to remediate internal control deficiencies on a timely basis (paragraph 1706) ov409 these requirements represent the minimum level of documentation in an entitys internal control system management exercises judgment in determining what additional documentation may be necessary for an effective internal control system if management identifies deficiencies in achieving these documentation requirements the effect of the identified deficiencies is considered as part of managements summary determination as to whether the related principle is designed implemented and operating effectively use by other entities ov410 the green book may be applied as a framework for an internal control system for state local and quasigovernmental entities as well as notforprofit organizations if management elects to adopt the green book as criteria management follows all relevant requirements presented in these standards control environment overview the control environment is the foundation for an internal control system it provides the discipline and structure which affect the overall quality of internal control it influences how objectives are defined and how control activities are structured the oversight body and management establish and maintain an environment throughout the entity that sets a positive attitude toward internal control principles 1 the oversight body and management should demonstrate a commitment to integrity and ethical values 2 the oversight body should oversee the entitys internal control system 3 management should establish an organizational structure assign responsibility and delegate authority to achieve the entitys objectives 4 management should demonstrate a commitment to recruit develop and retain competent individuals 5 management should evaluate performance and hold individuals accountable for their internal control responsibilities principle 1 demonstrate commitment to integrity and ethical values 101 the oversight body and management should demonstrate a commitment to integrity and ethical values attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: tone at the top standards of conduct adherence to standards of conduct tone at the top 102 the oversight body and management demonstrate the importance of integrity and ethical values through their directives attitudes and behavior 103 the oversight body and management lead by an example that demonstrates the organizations values philosophy and operating style the oversight body and management set the tone at the top and throughout the organization by their example which is fundamental to an effective internal control system in larger entities the various layers of management in the organizational structure may also set tone in the middle 104 the oversight bodys and managements directives attitudes and behaviors reflect the integrity and ethical values expected throughout the entity the oversight body and management reinforce the commitment to doing what is right not just maintaining a minimum level of performance necessary to comply with applicable laws and regulations so that these priorities are understood by all stakeholders such as regulators employees and the general public 105 tone at the top can be either a driver as shown in the preceding paragraphs or a barrier to internal control without a strong tone at the top to support an internal control system the entitys risk identification may be incomplete risk responses may be inappropriate control activities may not be appropriately designed or implemented information and communication may falter and results of monitoring may not be understood or acted upon to remediate deficiencies standards of conduct 106 management establishes standards of conduct to communicate expectations concerning integrity and ethical values the entity uses ethical values to balance the needs and concerns of different stakeholders such as regulators employees and the general public the standards of conduct guide the directives attitudes and behaviors of the organization in achieving the entitys objectives 107 management with oversight from the oversight body defines the organizations expectations of ethical values in the standards of conduct management may consider using policies operating principles or guidelines to communicate the standards of conduct to the organization adherence to standards of conduct 108 management establishes processes to evaluate performance against the entitys expected standards of conduct and address any deviations in a timely manner 109 management uses established standards of conduct as the basis for evaluating adherence to integrity and ethical values across the organization management evaluates the adherence to standards of conduct across all levels of the entity to gain assurance that the entitys standards of conduct are implemented effectively management evaluates the directives attitudes and behaviors of individuals and teams evaluations may consist of ongoing monitoring or separate evaluations7 individual personnel can also report issues through reporting lines such as regular staff meetings upward feedback processes a whistleblowing program or an ethics hotline8 the oversight body evaluates managements adherence to the standards of conduct as well as the overall adherence by the entity 7see paras 1604 through 1608 for further discussion of ongoing monitoring and separate evaluations 8see para 1406 for further discussion of upward and separate reporting lines 110 management determines the tolerance level for deviations management may determine that the entity will have zero tolerance for deviations from certain expected standards of conduct while deviations from others may be addressed with warnings to personnel management establishes a process for evaluations of individual and team adherence to standards of conduct that escalates and remediates deviations management addresses deviations from expected standards of conduct timely and consistently depending on the severity of the deviation determined through the evaluation process management with oversight from the oversight body takes appropriate actions and may also need to consider applicable laws and regulations the standards of conduct to which management holds personnel however remain consistent principle 2 exercise oversight responsibility 201 the oversight body should oversee the entitys internal control system attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: oversight structure oversight for the internal control system input for remediation of deficiencies oversight structure 202 the entity determines an oversight structure to fulfill responsibilities set forth by applicable laws and regulations relevant government guidance and feedback from key stakeholders the entity will select or if mandated by law will have selected for it an oversight body when the oversight body is composed of entity management activities referenced in the green book as performed by management exclude these members of management when in their roles as the oversight body responsibilities of an oversight body 203 when the oversight structure of an entity is led by senior management senior management may distinguish itself from divisional or functional management through the establishment of an oversight body an oversight body oversees the entitys operations; provides constructive criticism to management; and where appropriate makes oversight decisions so that the entity achieves its objectives in alignment with the entitys integrity and ethical values qualifications for an oversight body 204 in selecting members for an oversight body the entity or applicable body defines the entity knowledge relevant expertise number of members and possible independence needed to fulfill the oversight responsibilities for the entity 205 members of an oversight body understand the entitys objectives its related risks and expectations of its stakeholders in addition to an oversight body an organization within the federal government may have several bodies that are key stakeholders for the entity such as the white house congress the office of management and budget and the department of the treasury an oversight body works with key stakeholders to understand their expectations and help the entity fulfill these expectations if appropriate 206 the entity or applicable body also considers the expertise needed by members to oversee question and evaluate management capabilities expected of all members of an oversight body include integrity and ethical values leadership critical thinking and problemsolving abilities 207 further in determining the number of members of an oversight body the entity or applicable body considers the need for members of the oversight body to have specialized skills to enable discussion offer constructive criticism to management and make appropriate oversight decisions some specialized skills may include the following: internal control mindset (eg professional skepticism and perspectives on approaches for identifying and responding to risks and assessing the effectiveness of the system of internal control) programmatic expertise including knowledge of the entitys mission programs and operational processes (eg procurement human capital and functional management expertise) financial expertise including financial reporting (eg accounting standards and financial reporting requirements and budgetary expertise) relevant systems and technology (eg understanding critical systems and technology risks and opportunities) legal and regulatory expertise (eg understanding of applicable laws and regulations) 208 if authorized by applicable laws and regulations the entity may also consider including independent members as part of an oversight body9 9see gao government auditing standards: 2011 revision gao12331g (washington dc: december 2011) para 303 for further discussion of independence members of an oversight body scrutinize and question managements activities present alternative views and act when faced with obvious or suspected wrongdoing independent members with relevant expertise provide value through their impartial evaluation of the entity and its operations in achieving objectives oversight for the internal control system 209 the oversight body oversees managements design implementation and operation of the entitys internal control system the oversight bodys responsibilities for the entitys internal control system include the following: control environment establish integrity and ethical values establish oversight structure develop expectations of competence and maintain accountability to all members of the oversight body and key stakeholders  risk assessment oversee managements assessment of risks to the achievement of objectives including the potential impact of significant changes fraud and management override of internal control  control activities provide oversight to management in the development and performance of control activities  information and communication analyze and discuss information relating to the entitys achievement of objectives  monitoring scrutinize the nature and scope of managements monitoring activities as well as managements evaluation and remediation of identified deficiencies 210 these responsibilities are supported by the organizational structure that management establishes10 the oversight body oversees managements design implementation and operation of the entitys organizational structure so that the processes necessary to enable the oversight body to fulfill its responsibilities exist and are operating effectively 10see paras 302 through 305 for further discussion of organizational structure input for remediation of deficiencies 211 the oversight body provides input to managements plans for remediation of deficiencies in the internal control system as appropriate 212 management reports deficiencies identified in the internal control system to the oversight body the oversight body oversees and provides direction to management on the remediation of these deficiencies the oversight body also provides direction when a deficiency crosses organizational boundaries or units or when the interests of management may conflict with remediation efforts when appropriate and authorized the oversight body may direct the creation of teams to address or oversee specific matters critical to achieving the entitys objectives 213 the oversight body is responsible for overseeing the remediation of deficiencies as appropriate and for providing direction to management on appropriate time frames for correcting these deficiencies11 11see para 1706 for further discussion of timely remediation of findings principle 3 establish structure responsibility and authority 301 management should establish an organizational structure assign responsibility and delegate authority to achieve the entitys objectives attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: organizational structure assignment of responsibility and delegation of authority documentation of the internal control system organizational structure 302 management establishes the organizational structure necessary to enable the entity to plan execute control and assess the organization in achieving its objectives management develops the overall responsibilities from the entitys objectives that enable the entity to achieve its objectives and address related risks 303 management develops an organizational structure with an understanding of the overall responsibilities and assigns these responsibilities to discrete units to enable the organization to operate in control environment an efficient and effective manner comply with applicable laws and regulations and reliably report quality information12 based on the nature of the assigned responsibility management chooses the type and number of discrete units such as divisions offices and related subunits 304 as part of establishing an organizational structure management considers how units interact in order to fulfill their overall responsibilities management establishes reporting lines within an organizational structure so that units can communicate the quality information necessary for each unit to fulfill its overall responsibilities13 reporting lines are defined at all levels of the organization and provide methods of communication that can flow down across up and around the structure14 management also considers the entitys overall responsibilities to external stakeholders and establishes reporting lines that allow the entity to both communicate and receive information from external stakeholders15 305 management periodically evaluates the organizational structure so that it meets the entitys objectives and has adapted to any new objectives for the entity such as a new law or regulation assignment of responsibility and delegation of authority 306 to achieve the entitys objectives management assigns responsibility and delegates authority to key roles throughout the entity a key role is a position in the organizational structure that is assigned an overall responsibility of the entity generally key roles relate to senior management positions within an entity 307 management considers the overall responsibilities assigned to each unit determines what key roles are needed to fulfill the assigned responsibilities and establishes the key roles those in key roles can further assign responsibility for internal control to roles below them in the organizational structure but retain ownership for fulfilling the overall responsibilities assigned to the unit 12see paras 1305 through 1306 for further discussion of quality information 13see paras 1302 through 1306 for further discussion of the use of quality information 14see paras 1402 through 1406 for further discussion of internal reporting lines 15see paras 1502 through 1506 for further discussion of external reporting lines page 28 gao14704g federal internal control standards control environment 308 management determines what level of authority each key role needs to fulfill a responsibility management delegates authority only to the extent required to achieve the entitys objectives as part of delegating authority management evaluates the delegation for proper segregation of duties within the unit and in the organizational structure segregation of duties helps prevent fraud waste and abuse in the entity by considering the need to separate authority custody and accounting in the organizational structure16 as with assigning responsibility those in key roles can delegate their authority for internal control to roles below them in the organizational structure documentation of the internal control system 309 management develops and maintains documentation of its internal control system 310 effective documentation assists in managements design of internal control by establishing and communicating the who what when where and why of internal control execution to personnel documentation also provides a means to retain organizational knowledge and mitigate the risk of having that knowledge limited to a few personnel as well as a means to communicate that knowledge as needed to external parties such as external auditors 311 management documents internal control to meet operational needs documentation of controls including changes to controls is evidence that controls are identified capable of being communicated to those responsible for their performance and capable of being monitored and evaluated by the entity 312 the extent of documentation needed to support the design implementation and operating effectiveness of the five components of internal control is a matter of judgment for management management considers the cost benefit of documentation requirements for the entity as well as the size nature and complexity of the entity and its objectives some level of documentation however is necessary so that the components of internal control can be designed implemented and operating effectively 16see paras 1012 through 1014 for further discussion of segregation of duties page 29 gao14704g federal internal control standards principle 4 demonstrate commitment to competence 401 management should demonstrate a commitment to recruit develop and retain competent individuals attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: expectations of competence recruitment development and retention of individuals succession and contingency plans and preparation expectations of competence 402 management establishes expectations of competence for key roles and other roles at managements discretion to help the entity achieve its objectives competence is the qualification to carry out assigned responsibilities it requires relevant knowledge skills and abilities which are gained largely from professional experience training and certifications it is demonstrated by the behavior of individuals as they carry out their responsibilities 403 management considers standards of conduct assigned responsibility and delegated authority when establishing expectations management establishes expectations of competence for key roles management may also establish expectations of competence for all personnel through policies within the entitys internal control system17 17see paras 1202 through 1204 for further discussion of policies 404 personnel need to possess and maintain a level of competence that allows them to accomplish their assigned responsibilities as well as understand the importance of effective internal control holding individuals accountable to established policies by evaluating personnels competence is integral to attracting developing and retaining individuals management evaluates competence of personnel across the entity in relation to established policies management acts as necessary to address any deviations from the established policies the oversight body evaluates the competence of management as well as the competence overall of entity personnel recruitment development and retention of individuals 405 management recruits develops and retains competent personnel to achieve the entitys objectives management considers the following: recruit conduct procedures to determine whether a particular candidate fits the organizational needs and has the competence for the proposed role  train enable individuals to develop competencies appropriate for key roles reinforce standards of conduct and tailor training based on the needs of the role  mentor provide guidance on the individuals performance based on standards of conduct and expectations of competence align the individuals skills and expertise with the entitys objectives and help personnel adapt to an evolving environment  retain provide incentives to motivate and reinforce expected levels of performance and desired conduct including training and credentialing as appropriate succession and contingency plans and preparation 406 management defines succession and contingency plans for key roles to help the entity continue achieving its objectives succession plans address the entitys need to replace competent personnel over the long term whereas contingency plans address the entitys need to respond to sudden personnel changes that could compromise the internal control system 407 management defines succession plans for key roles chooses succession candidates and trains succession candidates to assume the key roles if management relies on a service organization to fulfill the assigned responsibilities of key roles in the entity management assesses whether the service organization can continue in these key roles identifies other candidate organizations for the roles and implements processes to enable knowledge sharing with the succession candidate organization 408 management defines contingency plans for assigning responsibilities if a key role in the entity is vacated without advance notice the importance of the key role in the internal control system and the impact to the entity of its vacancy dictates the formality and depth of the contingency plan principle 5 enforce accountability 501 management should evaluate performance and hold individuals accountable for their internal control responsibilities attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: enforcement of accountability consideration of excessive pressures enforcement of accountability 502 management enforces accountability of individuals performing their internal control responsibilities accountability is driven by the tone at the top and supported by the commitment to integrity and ethical values organizational structure and expectations of competence which influence the control culture of the entity accountability for performance of internal control responsibility supports daytoday decision making attitudes and behaviors management holds personnel accountable through mechanisms such as performance appraisals and disciplinary actions 503 management holds entity personnel accountable for performing their assigned internal control responsibilities the oversight body in turn holds management accountable as well as the organization as a whole for its internal control responsibilities 504 if management establishes incentives management recognizes that such actions can yield unintended consequences and evaluates incentives so that they align with the entitys standards of conduct 505 management holds service organizations accountable for their assigned internal control responsibilities management may contract with service organizations to perform roles in the organizational structure management communicates to the service organization the objectives of the entity and their related risks the entitys standards of conduct the role of the service organization in the organizational structure the assigned responsibilities and authorities of the role and the expectations of competence for its role that will enable the service organization to perform its internal control responsibilities 506 management with oversight from the oversight body takes corrective action as necessary to enforce accountability for internal control environment control in the entity these actions can range from informal feedback provided by the direct supervisor to disciplinary action taken by the oversight body depending on the significance of the deficiency to the internal control system18 consideration of excessive pressures 507 management adjusts excessive pressures on personnel in the entity pressure can appear in an entity because of goals established by management to meet objectives or cyclical demands of various processes performed by the entity such as yearend financial statement preparation excessive pressure can result in personnel cutting corners to meet the established goals 508 management is responsible for evaluating pressure on personnel to help personnel fulfill their assigned responsibilities in accordance with the entitys standards of conduct management can adjust excessive pressures using many different tools such as rebalancing workloads or increasing resource levels 18see ov308 for further discussion of significance of deficiencies page 33 gao14704g federal internal control standards risk assessment overview having established an effective control environment management assesses the risks facing the entity as it seeks to achieve its objectives this assessment provides the basis for developing appropriate risk responses management assesses the risks the entity faces from both external and internal sources principles 6 management should define objectives clearly to enable the identification of risks and define risk tolerances 7 management should identify analyze and respond to risks related to achieving the defined objectives 8 management should consider the potential for fraud when identifying analyzing and responding to risks 9 management should identify analyze and respond to significant changes that could impact the internal control system principle 6 define objectives and risk tolerances 601 management should define objectives clearly to enable the identification of risks and define risk tolerances attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: definitions of objectives definitions of risk tolerances definitions of objectives 602 management defines objectives in specific and measurable terms to enable the design of internal control for related risks specific terms are fully and clearly set forth so they can be easily understood measurable terms allow for the assessment of performance toward achieving objectives objectives are initially set as part of the objectivesetting process and then refined as they are incorporated into the internal control system when management uses them to establish the control environment 603 management defines objectives in specific terms so they are understood at all levels of the entity this involves clearly defining what is to be achieved who is to achieve it how it will be achieved and the time frames for achievement all objectives can be broadly classified into one or more of three categories: operations reporting or compliance reporting objectives are further categorized as being either internal or external and financial or nonfinancial management defines objectives in alignment with the organizations mission strategic plan and performance goals 604 management defines objectives in measurable terms so that performance toward achieving those objectives can be assessed measurable objectives are generally free of bias and do not require subjective judgments to dominate their measurement measurable objectives are also stated in a quantitative or qualitative form that permits reasonably consistent measurement 605 management considers external requirements and internal expectations when defining objectives to enable the design of internal control legislators regulators and standardsetting bodies set external requirements by establishing the laws regulations and standards with which the entity is required to comply management identifies risk assessment understands and incorporates these requirements into the entitys objectives management sets internal expectations and requirements through the established standards of conduct19 oversight structure20 organizational structure21 and expectations of competence22 as part of the control environment 606 management evaluates and if necessary revises defined objectives so that they are consistent with these requirements and expectations this consistency enables management to identify and analyze risks associated with achieving the defined objectives 607 management determines whether performance measures for the defined objectives are appropriate for evaluating the entitys performance in achieving those objectives for quantitative objectives performance measures may be a targeted percentage or numerical value for qualitative objectives management may need to design performance measures that indicate a level or degree of performance such as milestones definitions of risk tolerances 608 management defines risk tolerances for the defined objectives risk tolerance is the acceptable level of variation in performance relative to the achievement of objectives risk tolerances are initially set as part of the objectivesetting process management defines the risk tolerances for defined objectives by ensuring that the set levels of variation for performance measures are appropriate for the design of an internal control system 609 management defines risk tolerances in specific and measurable terms so they are clearly stated and can be measured risk tolerance is often measured in the same terms as the performance measures for the defined objectives depending on the category of objectives risk tolerances may be expressed as follows: 19see paras 106 through 107 for further discussion of standards of conduct 20see paras 202 through 208 for further discussion of oversight structure 21see paras 302 through 305 for further discussion of organizational structure 22see paras 402 through 404 for further discussion of expectations of competence page 36 gao14704g federal internal control standards operations objectives level of variation in performance in relation to risk  nonfinancial reporting objectives level of precision and accuracy suitable for user needs involving both qualitative and quantitative considerations to meet the needs of the nonfinancial report user  financial reporting objectives judgments about materiality are made in light of surrounding circumstances involve both qualitative and quantitative considerations and are affected by the needs of financial report users and size or nature of a misstatement  compliance objectives concept of risk tolerance does not apply an entity is either compliant or not compliant 610 management also evaluates whether risk tolerances enable the appropriate design of internal control by considering whether they are consistent with requirements and expectations for the defined objectives as in defining objectives management considers the risk tolerances in the context of the entitys applicable laws regulations and standards as well as the entitys standards of conduct oversight structure organizational structure and expectations of competence if risk tolerances for defined objectives are not consistent with these requirements and expectations management revises the risk tolerances to achieve consistency principle 7 identify analyze and respond to risks 701 management should identify analyze and respond to risks related to achieving the defined objectives attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: identification of risks analysis of risks response to risks identification of risks 702 management identifies risks throughout the entity to provide a basis for analyzing risks risk assessment is the identification and analysis of risks related to achieving the defined objectives to form a basis for designing risk responses 703 to identify risks management considers the types of risks that impact the entity this includes both inherent and residual risk inherent risk is the risk to an entity in the absence of managements response to the risk residual risk is the risk that remains after managements response to inherent risk managements lack of response to either risk could cause deficiencies in the internal control system 704 management considers all significant interactions within the entity and with external parties changes within the entitys internal and external environment23 and other internal and external factors to identify risks throughout the entity internal risk factors may include the complex nature of an entitys programs its organizational structure or the use of new technology in operational processes external risk factors may include new or amended laws regulations or professional standards; economic instability; or potential natural disasters management considers these factors at both the entity and transaction levels to comprehensively identify risks that affect defined objectives24 risk identification methods may include qualitative and quantitative ranking activities forecasting and strategic planning and consideration of deficiencies identified through audits and other assessments 23see paras 902 through 903 for further discussion of changes in the internal control system 24see paras 1007 through 1011 for further discussion of level of controls analysis of risks 705 management analyzes the identified risks to estimate their significance which provides a basis for responding to the risks significance refers to the effect on achieving a defined objective 706 management estimates the significance of the identified risks to assess their effect on achieving the defined objectives at both the entity and transaction levels management estimates the significance of a risk by considering the magnitude of impact likelihood of occurrence and nature of the risk magnitude of impact refers to the likely magnitude of deficiency that could result from the risk and is affected by factors such as the size pace and duration of the risks impact likelihood of occurrence refers to the level of possibility that a risk will occur the nature of the risk involves factors such as the degree of subjectivity involved with the risk and whether the risk arises from fraud or from complex or unusual transactions the oversight body may oversee managements estimates of significance so that risk tolerances have been properly defined 707 risks may be analyzed on an individual basis or grouped into categories with related risks and analyzed collectively regardless of whether risks are analyzed individually or collectively management considers the correlation among different risks or groups of risks when estimating their significance the specific risk analysis methodology used can vary by entity because of differences in entities missions and the difficulty in qualitatively and quantitatively defining risk tolerances response to risks 708 management designs responses to the analyzed risks so that risks are within the defined risk tolerance for the defined objective management designs overall risk responses for the analyzed risks based on the significance of the risk and defined risk tolerance these risk responses may include the following: acceptance no action is taken to respond to the risk based on the insignificance of the risk  avoidance action is taken to stop the operational process or the part of the operational process causing the risk  reduction action is taken to reduce the likelihood or magnitude of the risk  sharing action is taken to transfer or share risks across the entity or with external parties such as insuring against losses 709 based on the selected risk response management designs the specific actions to respond to the analyzed risks the nature and extent of risk response actions depend on the defined risk tolerance operating within the defined risk tolerance provides greater assurance that the entity will achieve its objectives performance measures are used to assess whether risk response actions enable the entity to operate within the defined risk tolerances when risk response actions do not enable the entity to operate within the defined risk tolerances management may need to revise risk responses or reconsider defined risk tolerances management may need to conduct periodic risk assessments to evaluate the effectiveness of the risk response actions principle 8 assess fraud risk 801 management should consider the potential for fraud when identifying analyzing and responding to risks attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: types of fraud fraud risk factors response to fraud risks types of fraud 802 management considers the types of fraud that can occur within the entity to provide a basis for identifying fraud risks25 types of fraud are as follows: 25fraud involves obtaining something of value through willful misrepresentation whether an act is in fact fraud is a determination to be made through the judicial or other adjudicative system and is beyond managements professional responsibility for assessing risk  fraudulent financial reporting intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users this could include intentional alteration of accounting records misrepresentation of transactions or intentional misapplication of accounting principles  misappropriation of assets theft of an entitys assets this could include theft of property embezzlement of receipts or fraudulent payments  corruption bribery and other illegal acts 803 in addition to fraud management considers other forms of misconduct that can occur such as waste and abuse waste is the act of using or expending resources carelessly extravagantly or to no purpose abuse involves behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary operational practice given the facts and circumstances this includes the misuse of authority or position for personal gain or for the benefit of another waste and abuse do not necessarily involve fraud or illegal acts however they may be an indication of potential fraud or illegal acts and may still impact the achievement of defined objectives fraud risk factors 804 management considers fraud risk factors fraud risk factors do not necessarily indicate that fraud exists but are often present when fraud occurs fraud risk factors include the following: incentivepressure management or other personnel have an incentive or are under pressure which provides a motive to commit fraud26 opportunity circumstances exist such as the absence of controls ineffective controls or the ability of management to override controls that provide an opportunity to commit fraud  attituderationalization individuals involved are able to rationalize committing fraud some individuals possess an attitude character or ethical values that allow them to knowingly and intentionally commit a dishonest act 26see paras 507 through 508 for further discussion of pressure 27see paras 705 through 707 for further discussion of analyzing risks 28see para 1013 for further discussion of management override 805 management uses the fraud risk factors to identify fraud risks while fraud risk may be greatest when all three risk factors are present one or more of these factors may indicate a fraud risk other information provided by internal and external parties can also be used to identify fraud risks this may include allegations of fraud or suspected fraud reported by the office of the inspector general or internal auditors personnel or external parties that interact with the entity response to fraud risks 806 management analyzes and responds to identified fraud risks so that they are effectively mitigated fraud risks are analyzed through the same risk analysis process performed for all identified risks27 management analyzes the identified fraud risks by estimating their significance both individually and in the aggregate to assess their effect on achieving the defined objectives as part of analyzing fraud risk management also assesses the risk of management override of controls28 the oversight body oversees managements assessments of fraud risk and the risk of management override of controls so that they are appropriate 807 management responds to fraud risks through the same risk response process performed for all analyzed risks29 management designs an overall risk response and specific actions for responding to fraud risks it may be possible to reduce or eliminate certain fraud risks by making changes to the entitys activities and processes these changes may include stopping or reorganizing certain operations and reallocating roles among personnel to enhance segregation of duties in addition to responding to fraud risks management may need to develop further responses to address the risk of management override of controls further when fraud has been detected the risk assessment process may need to be revised 29see paras 708 through 709 for further discussion of responding to risks principle 9 identify analyze and respond to change 901 management should identify analyze and respond to significant changes that could impact the internal control system attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: identification of change analysis of and response to change identification of change 902 as part of risk assessment or a similar process management identifies changes that could significantly impact the entitys internal control system identifying analyzing and responding to change is similar to if not part of the entitys regular risk assessment process however change is discussed separately because it is critical to an effective internal control system and can often be overlooked or inadequately addressed in the normal course of operations 903 conditions affecting the entity and its environment continually change management can anticipate and plan for significant changes by using a forwardlooking process for identifying change management risk assessment identifies on a timely basis significant changes to internal and external conditions that have already occurred or are expected to occur changes in internal conditions include changes to the entitys programs or activities oversight structure organizational structure personnel and technology changes in external conditions include changes in the governmental economic technological legal regulatory and physical environments identified significant changes are communicated across the entity through established reporting lines to appropriate personnel30 analysis of and response to change 904 as part of risk assessment or a similar process management analyzes and responds to identified changes and related risks in order to maintain an effective internal control system changes in conditions affecting the entity and its environment often require changes to the entitys internal control system as existing controls may not be effective for meeting objectives or addressing risks under changed conditions management analyzes the effect of identified changes on the internal control system and responds by revising the internal control system on a timely basis when necessary to maintain its effectiveness 905 further changing conditions often prompt new risks or changes to existing risks that need to be assessed as part of analyzing and responding to change management performs a risk assessment to identify analyze and respond to any new risks prompted by the changes additionally existing risks may require further assessment to determine whether the defined risk tolerances and risk responses need to be revised 30see paras 1402 through 1406 for further discussion of internal reporting lines page 43 gao14704g federal internal control standards control activities overview control activities are the actions management establishes through policies and procedures to achieve objectives and respond to risks in the internal control system which includes the entitys information system principles 10 management should design control activities to achieve objectives and respond to risks 11 management should design the entitys information system and related control activities to achieve objectives and respond to risks 12 management should implement control activities through policies principle 10 design control activities 1001 management should design control activities to achieve objectives and respond to risks attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: response to objectives and risks design of appropriate types of control activities design of control activities at various levels segregation of duties response to objectives and risks 1002 management designs control activities in response to the entitys objectives and risks to achieve an effective internal control system control activities are the policies procedures techniques and mechanisms that enforce managements directives to achieve the entitys objectives and address related risks as part of the control environment component management defines responsibilities assigns them to key roles and delegates authority to achieve the entitys objectives as part of the risk assessment component management identifies the risks related to the entity and its objectives including its service organizations; the entitys risk tolerance; and risk responses management designs control activities to fulfill defined responsibilities and address identified risk responses design of appropriate types of control activities 1003 management designs appropriate types of control activities for the entitys internal control system control activities help management fulfill responsibilities and address identified risk responses in the internal control system the common control activity categories listed in figure 6 are meant only to illustrate the range and variety of control activities that may be useful to management the list is not all inclusive and may not include particular control activities that an entity may need figure 6: examples of common categories of control activities toplevel reviews of actual performance management tracks major entity achievements and compares these to the plans goals and objectives set by the entity reviews by management at the functional or activity level management compares actual performance to planned or expected results throughout the organization and analyzes significant differences management of human capital effective management of an entitys workforce its human capital is essential to achieving results and an important part of internal control only when the right personnel for the job are on board and are provided the right training tools structure incentives and responsibilities is operational success possible management continually assesses the knowledge skills and ability needs of the entity so that the entity is able to obtain a workforce that has the required knowledge skills and abilities to achieve organizational goals training is aimed at developing and retaining employee knowledge skills and abilities to meet changing organizational needs management provides qualified and continuous supervision so that internal control objectives are achieved management designs a performance evaluation and feedback system supplemented by an effective rewards system to help employees understand the connection between their performance and the entitys success as part of its human capital planning management also considers how best to retain valuable employees plan for their eventual departure and maintain a continuity of needed skills and abilities controls over information processing a variety of control activities are used in information processing examples include edit checks of data entered; accounting for transactions in numerical sequences; comparing file totals with control accounts; and controlling access to data files and programs31 31see paras 1102 through 1117 for further discussion of controls over information processing physical control over vulnerable assets management establishes physical control to secure and safeguard vulnerable assets examples include security for and limited access to assets such as cash securities inventories and equipment that might be vulnerable to risk of loss or unauthorized use management periodically counts and compares such assets to control records establishment and review of performance measures and indicators management establishes activities to monitor performance measures and indicators these may include comparisons and assessments relating different sets of data to one another so that analyses of the relationships can be made and appropriate actions taken management designs controls aimed at validating the propriety and integrity of both entity and individual performance measures and indicators segregation of duties management divides or segregates key duties and responsibilities among different people to reduce the risk of error misuse or fraud this includes separating the responsibilities for authorizing transactions processing and recording them reviewing the transactions and handling any related assets so that no one individual controls all key aspects of a transaction or event proper execution of transactions transactions are authorized and executed only by persons acting within the scope of their authority this is the principal means of assuring that only valid transactions to exchange transfer use or commit resources are initiated or entered into management clearly communicates authorizations to personnel accurate and timely recording of transactions transactions are promptly recorded to maintain their relevance and value to management in controlling operations and making decisions this applies to the entire process or life cycle of a transaction or event from its initiation and authorization through its final classification in summary records in addition management designs control activities so that all transactions are completely and accurately recorded access restrictions to and accountability for resources and records management limits access to resources and records to authorized individuals and assigns and maintains accountability for their custody and use management may periodically compare resources with the recorded accountability to help reduce the risk of errors fraud misuse or unauthorized alteration appropriate documentation of transactions and internal control management clearly documents internal control and all transactions and other significant events in a manner that allows the documentation to be readily available for examination the documentation may appear in management directives administrative policies or operating manuals in either paper or electronic form documentation and records are properly managed and maintained an entitys internal control is flexible to allow management to tailor control activities to meet the entitys special needs the specific control activities used by a given entity may be different from those used by others based on a number of factors these factors could include specific threats the entity faces and risks it incurs; differences in objectives; managerial judgment; size and complexity of the entity; operational environment; sensitivity and value of data; and requirements for system reliability availability and performance 1004 control activities can be either preventive or detective the main difference between preventive and detective control activities is the timing of a control activity within an entitys operations a preventive control activity prevents an entity from failing to achieve an objective or address a risk a detective control activity discovers when an entity is not achieving an objective or addressing a risk before the entitys operation has concluded and corrects the actions so that the entity achieves the objective or addresses the risk 1005 management evaluates the purpose of the control activity as well as the effect a deficiency would have on the entity in achieving its objectives if the control activity is for a significant purpose or the impact of a deficiency would be significant to achieving the entitys objectives management may design both preventive and detective control activities 1006 control activities can be implemented in either an automated or a manual manner automated control activities are either wholly or partially automated through the entitys information technology manual control activities are performed by individuals with minor use of the entitys information technology automated control activities tend to be more reliable because they are less susceptible to human error and are typically more efficient32 if the entity relies on information technology in its operations management designs control activities so that the information technology continues to operate properly 32see paras 1106 through 1108 for further discussion of information system control activities design of control activities at various levels 1007 management designs control activities at the appropriate levels in the organizational structure 1008 management designs control activities for appropriate coverage of objectives and risks in the operations operational processes transform inputs into outputs to achieve the organizations objectives management designs entitylevel control activities transaction control activities or both depending on the level of precision needed so that the entity meets its objectives and addresses related risks 1009 entitylevel controls are controls that have a pervasive effect on an entitys internal control system and may pertain to multiple components entitylevel controls may include controls related to the entitys risk assessment process control environment service organizations management override and monitoring 1010 transaction control activities are actions built directly into operational processes to support the entity in achieving its objectives and addressing related risks transactions tends to be associated with financial processes (eg payables transactions) while activities is more generally applied to operational or compliance processes for the purposes of this standard transactions covers both definitions management may design a variety of transaction control activities for operational processes which may include verifications reconciliations authorizations and approvals physical control activities and supervisory control activities 1011 when choosing between entitylevel and transaction control activities management evaluates the level of precision needed for the operational processes to meet the entitys objectives and address related risks in determining the necessary level of precision for a control activity management evaluates the following: purpose of the control activity a control activity that functions to prevent or detect generally is more precise than a control activity that merely identifies and explains differences  level of aggregation a control activity that is performed at a more granular level generally is more precise than one performed at a higher level for example an analysis of obligations by budget object class normally is more precise than an analysis of total obligations for the entity  consistency of performance a control activity that is performed routinely and consistently generally is more precise than one performed sporadically  correlation to relevant operational processes a control activity that is directly related to an operational process generally is more likely to prevent or detect than a control activity that is only indirectly related segregation of duties 1012 management considers segregation of duties in designing control activity responsibilities so that incompatible duties are segregated and where such segregation is not practical designs alternative control activities to address the risk control activities 1013 segregation of duties helps prevent fraud waste and abuse in the internal control system33 management considers the need to separate control activities related to authority custody and accounting of operations to achieve adequate segregation of duties in particular segregation of duties can address the risk of management override management override circumvents existing control activities and increases fraud risk management addresses this risk through segregation of duties but cannot absolutely prevent it because of the risk of collusion where two or more employees act together to commit fraud 1014 if segregation of duties is not practical within an operational process because of limited personnel or other factors management designs alternative control activities to address the risk of fraud waste or abuse in the operational process principle 11 design activities for the information system 1101 management should design the entitys information system and related control activities to achieve objectives and respond to risks attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: design of the entitys information system design of appropriate types of control activities design of information technology infrastructure design of security management design of information technology acquisition development and maintenance design of the entitys information system 1102 management designs the entitys information system to respond to the entitys objectives and risks 1103 management designs the entitys information system to obtain and process information to meet each operational processs information requirements and to respond to the entitys objectives and risks an information system is the people processes data and technology that 33see paras 802 through 803 for further discussion of fraud waste and abuse page 51 gao14704g federal internal control standards control activities management organizes to obtain communicate or dispose of information an information system represents the life cycle of information used for the entitys operational processes that enables the entity to obtain store and process quality information34 an information system includes both manual and technologyenabled information processes technologyenabled information processes are commonly referred to as information technology as part of the control environment component management defines responsibilities assigns them to key roles and delegates authority to achieve the entitys objectives as part of the risk assessment component management identifies the risks related to the entity and its objectives including its service organizations; the entitys risk tolerance; and risk responses management designs control activities to fulfill defined responsibilities and address the identified risk responses for the entitys information system 1104 management designs the entitys information system and the use of information technology by considering the defined information requirements for each of the entitys operational processes35 information technology enables information related to operational processes to become available to the entity on a timelier basis additionally information technology may enhance internal control over security and confidentiality of information by appropriately restricting access although information technology implies specific types of control activities information technology is not a standalone control consideration it is an integral part of most control activities 1105 management also evaluates information processing objectives to meet the defined information requirements information processing objectives may include the following: completeness transactions that occur are recorded and not understated  accuracy transactions are recorded at the correct amount in the right account (and on a timely basis) at each stage of processing 34see paras 1302 through 1306 for further discussion of the use of quality information 35see paras 1302 through 1304 for further discussion of defined information requirements page 52 gao14704g federal internal control standards validity recorded transactions represent economic events that actually occurred and were executed according to prescribed procedures design of appropriate types of control activities 1106 management designs appropriate types of control activities in the entitys information system for coverage of information processing objectives for operational processes for information systems there are two main types of control activities: general and application control activities 1107 information system general controls (at the entitywide system and application levels) are the policies and procedures that apply to all or a large segment of an entitys information systems general controls facilitate the proper operation of information systems by creating the environment for proper operation of application controls general controls include security management logical and physical access configuration management segregation of duties and contingency planning 1108 application controls sometimes referred to as business process controls are those controls that are incorporated directly into computer applications to achieve validity completeness accuracy and confidentiality of transactions and data during application processing application controls include controls over input processing output master file interface and data management system controls design of information technology infrastructure 1109 management designs control activities over the information technology infrastructure to support the completeness accuracy and validity of information processing by information technology information technology requires an infrastructure in which to operate including communication networks for linking information technologies computing resources for applications to operate and electricity to power the information technology an entitys information technology infrastructure can be complex it may be shared by different units within the entity or outsourced either to service organizations or to locationindependent technology services management evaluates the objectives of the entity and related risks in designing control activities for the information technology infrastructure 1110 management continues to evaluate changes in the use of information technology and designs new control activities when these changes are incorporated into the entitys information technology infrastructure management also designs control activities needed to maintain the information technology infrastructure maintaining technology often includes backup and recovery procedures as well as continuity of operations plans depending on the risks and consequences of a full or partial power systems outage design of security management 1111 management designs control activities for security management of the entitys information system for appropriate access by internal and external sources to protect the entitys information system objectives for security management include confidentiality integrity and availability confidentiality means that data reports and other outputs are safeguarded against unauthorized access integrity means that information is safeguarded against improper modification or destruction which includes ensuring informations nonrepudiation and authenticity availability means that data reports and other relevant information are readily available to users when needed 1112 security management includes the information processes and control activities related to access rights in an entitys information technology including who has the ability to execute transactions security management includes access rights across various levels of data operating system (system software) network application and physical layers management designs control activities over access to protect an entity from inappropriate access and unauthorized use of the system these control activities support appropriate segregation of duties by preventing unauthorized use of and changes to the system data and program integrity are protected from malicious intent (eg someone breaking into the technology to commit fraud vandalism or terrorism) or error 1113 management evaluates security threats to information technology which can be from both internal and external sources external threats are particularly important for entities that depend on telecommunications networks and the internet external threats have become prevalent in todays highly interconnected business environments and continual effort is required to address these risks internal threats may come from former or disgruntled employees they pose unique risks because they may be both motivated to work against the entity and better equipped to succeed in carrying out a malicious act as they have greater access to and knowledge of the entitys security management systems and processes 1114 management designs control activities to limit user access to information technology through authorization control activities such as providing a unique user identification or token to authorized users these control activities may restrict authorized users to the applications or functions commensurate with their assigned responsibilities supporting an appropriate segregation of duties management designs other control activities to promptly update access rights when employees change job functions or leave the entity management also designs control activities for access rights when different information technology elements are connected to each other design of information technology acquisition development and maintenance 1115 management designs control activities over the acquisition development and maintenance of information technology management may use a systems development life cycle (sdlc) framework in designing control activities an sdlc provides a structure for a new information technology design by outlining specific phases and documenting requirements approvals and checkpoints within control activities over the acquisition development and maintenance of technology through an sdlc management designs control activities over changes to technology this may involve requiring authorization of change requests; reviewing the changes approvals and testing results; and designing protocols to determine whether changes are made properly depending on the size and complexity of the entity development of information technology and changes to the information technology may be included in one sdlc or two separate methodologies management evaluates the objectives and risks of the new technology in designing control activities over its sdlc 1116 management may acquire information technology through packaged software from vendors management incorporates methodologies for the acquisition of vendor packages into its information technology development and designs control activities over their selection ongoing development and maintenance control activities for the development maintenance and change of application software prevent unauthorized programs or modifications to existing programs 1117 another alternative is outsourcing the development of information technology to service organizations as for an sdlc developed internally management designs control activities to meet objectives and address related risks management also evaluates the unique risks that using a service organization presents for the completeness accuracy and validity of information submitted to and received from the service organization principle 12 implement control activities 1201 management should implement control activities through policies attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: documentation of responsibilities through policies periodic review of control activities documentation of responsibilities through policies 1202 management documents in policies the internal control responsibilities of the organization 1203 management documents in policies for each unit its responsibility for an operational processs objectives and related risks and control activity design implementation and operating effectiveness36 each unit with guidance from management determines the policies necessary to operate the process based on the objectives and related risks for the operational process each unit also documents policies in the appropriate level of detail to allow management to effectively monitor the control activity 36see paras 302 through 305 for further discussion of units 37see para 1706 for further discussion of corrective actions 1204 those in key roles for the unit may further define policies through daytoday procedures depending on the rate of change in the operating environment and complexity of the operational process procedures may include the timing of when a control activity occurs and any followup corrective actions to be performed by competent personnel if deficiencies are identified37 management communicates to personnel the policies and procedures so that personnel can implement the control activities for their assigned responsibilities periodic review of control activities 1205 management periodically reviews policies procedures and related control activities for continued relevance and effectiveness in achieving the entitys objectives or addressing related risks if there is a significant change in an entitys process management reviews this process in a timely manner after the change to determine that the control activities are designed and implemented appropriately changes may occur in personnel operational processes or information technology regulators; legislators; and in the federal environment the office of management and budget and the department of the treasury may also change either an entitys objectives or how an entity is to achieve an objective management considers these changes in its periodic review overview management uses quality information to support the internal control system effective information and communication are vital for an entity to achieve its objectives entity management needs access to relevant and reliable communication related to internal as well as external events principles 13 management should use quality information to achieve the entitys objectives 14 management should internally communicate the necessary quality information to achieve the entitys objectives 15 management should externally communicate the necessary quality information to achieve the entitys objectives principle 13 use quality information 1301 management should use quality information to achieve the entitys objectives attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: identification of information requirements relevant data from reliable sources data processed into quality information identification of information requirements 1302 management designs a process that uses the entitys objectives and related risks to identify the information requirements needed to achieve the objectives and address the risks information requirements consider the expectations of both internal and external users management defines the identified information requirements at the relevant level and requisite specificity for appropriate personnel 1303 management identifies information requirements in an iterative and ongoing process that occurs throughout an effective internal control system as change in the entity and its objectives and risks occurs management changes information requirements as needed to meet these modified objectives and address these modified risks relevant data from reliable sources 1304 management obtains relevant data from reliable internal and external sources in a timely manner based on the identified information requirements relevant data have a logical connection with or bearing upon the identified information requirements reliable internal and external sources provide data that are reasonably free from error and bias and faithfully represent what they purport to represent management evaluates both internal and external sources of data for reliability sources of data can be operational financial or compliance related management obtains data on a timely basis so that they can be used for effective monitoring data processed into quality information 1305 management processes the obtained data into quality information that supports the internal control system this involves processing data into information and then evaluating the processed information so that it is quality information quality information meets the identified information information and communication requirements when relevant data from reliable sources are used quality information is appropriate current complete accurate accessible and provided on a timely basis management considers these characteristics as well as the information processing objectives in evaluating processed information and makes revisions when necessary so that the information is quality information38 management uses the quality information to make informed decisions and evaluate the entitys performance in achieving key objectives and addressing risks 1306 management processes relevant data from reliable sources into quality information within the entitys information system an information system is the people processes data and technology that management organizes to obtain communicate or dispose of information39 principle 14 communicate internally 1401 management should internally communicate the necessary quality information to achieve the entitys objectives attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: communication throughout the entity appropriate methods of communication communication throughout the entity 1402 management communicates quality information throughout the entity using established reporting lines quality information is communicated down across up and around reporting lines to all levels of the entity 1403 management communicates quality information down and across reporting lines to enable personnel to perform key roles in achieving objectives addressing risks and supporting the internal control system in these communications management assigns the internal control responsibilities for key roles 38see paras 1102 through 1105 for further discussion of information processing objectives 39see paras 1102 through 1105 for further discussion of information systems page 60 gao14704g federal internal control standards 1404 management receives quality information about the entitys operational processes that flows up the reporting lines from personnel to help management achieve the entitys objectives 1405 the oversight body receives quality information that flows up the reporting lines from management and personnel information relating to internal control communicated to the oversight body includes significant matters about adherence to changes in or issues arising from the internal control system this upward communication is necessary for the effective oversight of internal control 1406 personnel use separate reporting lines to go around upward reporting lines when these lines are compromised laws and regulations may require entities to establish separate lines of communication such as whistleblower and ethics hotlines for communicating confidential information management informs employees of these separate reporting lines how they operate how they are to be used and how the information will remain confidential appropriate methods of communication 1407 management selects appropriate methods to communicate internally management considers a variety of factors in selecting an appropriate method of communication some factors to consider follow: audience the intended recipients of the communication nature of information the purpose and type of information being communicated availability information readily available to the audience when needed cost the resources used to communicate the information legal or regulatory requirements requirements in laws and regulations that may impact communication 1408 based on consideration of the factors management selects appropriate methods of communication such as a written documentin hard copy or electronic formator a facetoface meeting management periodically evaluates the entitys methods of communication so that the organization has the appropriate tools to communicate quality information throughout the entity on a timely basis principle 15 communicate externally 1501 management should externally communicate the necessary quality information to achieve the entitys objectives attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: communication with external parties appropriate methods of communication communication with external parties 1502 management communicates with and obtains quality information from external parties using established reporting lines open twoway external reporting lines allow for this communication external parties include suppliers contractors service organizations regulators external auditors government entities and the general public 1503 management communicates quality information externally through reporting lines so that external parties can help the entity achieve its objectives and address related risks management includes in these communications information relating to the entitys events and activities that impact the internal control system 1504 management receives information through reporting lines from external parties information communicated to management includes significant matters relating to risks changes or issues that impact the entitys internal control system this communication is necessary for the effective operation of internal control management evaluates external information received against the characteristics of quality information and information processing objectives and takes any necessary actions so that the information is quality information40 40see paras 1102 through 1105 for further discussion of information processing objectives 1505 the oversight body receives information through reporting lines from external parties information communicated to the oversight body includes significant matters relating to risks changes or issues that impact the entitys internal control system this communication is necessary for the effective oversight of internal control 1506 external parties use separate reporting lines when external reporting lines are compromised laws and regulations may require entities to establish separate lines of communication such as whistleblower and ethics hotlines for communicating confidential information management informs external parties of these separate reporting lines how they operate how they are to be used and how the information will remain confidential appropriate methods of communication 1507 management selects appropriate methods to communicate externally management considers a variety of factors in selecting an appropriate method of communication some factors to consider follow: audience the intended recipients of the communication nature of information the purpose and type of information being communicated availability information readily available to the audience when needed cost the resources used to communicate the information legal or regulatory requirements requirements in laws and regulations that may impact communication 1508 based on consideration of the factors management selects appropriate methods of communication such as a written documentin hard copy or electronic formator a facetoface meeting management periodically evaluates the entitys methods of communication so that the organization has the appropriate tools to communicate quality information throughout and outside of the entity on a timely basis 1509 government entities not only report to the head of the government legislators and regulators but to the general public as well in the federal government entities not only report to the president and congress but also to the general public entities consider appropriate methods when communicating with such a broad audience monitoring overview finally since internal control is a dynamic process that has to be adapted continually to the risks and changes an entity faces monitoring of the internal control system is essential in helping internal control remain aligned with changing objectives environment laws resources and risks internal control monitoring assesses the quality of performance over time and promptly resolves the findings of audits and other reviews corrective actions are a necessary complement to control activities in order to achieve objectives principles 16 management should establish and operate monitoring activities to monitor the internal control system and evaluate the results 17 management should remediate identified internal control deficiencies on a timely basis principle 16 perform monitoring activities 1601 management should establish and operate monitoring activities to monitor the internal control system and evaluate the results attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: establishment of a baseline internal control system monitoring evaluation of results establishment of a baseline 1602 management establishes a baseline to monitor the internal control system the baseline is the current state of the internal control system compared against managements design of the internal control system the baseline represents the difference between the criteria of the design of the internal control system and condition of the internal control system at a specific point in time in other words the baseline consists of issues and deficiencies identified in an entitys internal control system 1603 once established management can use the baseline as criteria in evaluating the internal control system and make changes to reduce the difference between the criteria and condition management reduces this difference in one of two ways management either changes the design of the internal control system to better address the objectives and risks of the entity or improves the operating effectiveness of the internal control system as part of monitoring management determines when to revise the baseline to reflect changes in the internal control system internal control system monitoring 1604 management monitors the internal control system through ongoing monitoring and separate evaluations ongoing monitoring is built into the entitys operations performed continually and responsive to change separate evaluations are used periodically and may provide feedback on the effectiveness of ongoing monitoring 1605 management performs ongoing monitoring of the design and operating effectiveness of the internal control system as part of the normal course of operations ongoing monitoring includes regular management and supervisory activities comparisons reconciliations and other routine actions ongoing monitoring may include automated tools which can increase objectivity and efficiency by electronically compiling evaluations of controls and transactions 1606 management uses separate evaluations to monitor the design and operating effectiveness of the internal control system at a specific time or of a specific function or process the scope and frequency of separate evaluations depend primarily on the assessment of risks effectiveness of ongoing monitoring and rate of change within the entity and its environment separate evaluations may take the form of selfassessments which include cross operating unit or cross functional evaluations 1607 separate evaluations also include audits and other evaluations that may involve the review of control design and direct testing of internal control these audits and other evaluations may be mandated by law and are performed by internal auditors external auditors the inspectors general and other external reviewers separate evaluations provide greater objectivity when performed by reviewers who do not have responsibility for the activities being evaluated 1608 management retains responsibility for monitoring the effectiveness of internal control over the assigned processes performed by service organizations management uses ongoing monitoring separate evaluations or a combination of the two to obtain reasonable assurance of the operating effectiveness of the service organizations internal controls over the assigned process41 monitoring activities related to service organizations may include the use of work performed by external parties such as service auditors and reviewed by management 41see paras ov401 through ov403 for further discussion of service organizations evaluation of results 1609 management evaluates and documents the results of ongoing monitoring and separate evaluations to identify internal control issues management uses this evaluation to determine the effectiveness of the internal control system differences between the results of monitoring activities and the previously established baseline may indicate internal control issues including undocumented changes in the internal control system or potential internal control deficiencies 1610 management identifies changes in the internal control system that either have occurred or are needed because of changes in the entity and its environment external parties can also help management identify issues in the internal control system for example complaints from the general public and regulator comments may indicate areas in the internal control system that need improvement management considers whether current controls address the identified issues and modifies controls if necessary principle 17 evaluate issues and remediate deficiencies 1701 management should remediate identified internal control deficiencies on a timely basis attributes the following attributes contribute to the design implementation and operating effectiveness of this principle: reporting of issues evaluation of issues corrective actions reporting of issues 1702 personnel report internal control issues through established reporting lines to the appropriate internal and external parties on a timely basis to enable the entity to promptly evaluate those issues42 42see paras 1402 through 1406 for further discussion of internal reporting lines and paras 1502 through 1506 for further discussion of external reporting lines 1703 personnel may identify internal control issues while performing their assigned internal control responsibilities personnel communicate these issues internally to the person in the key role responsible for the internal control or associated process and when appropriate to at least one level of management above that individual depending on the nature of the issues personnel may consider reporting certain issues to the oversight body such issues may include issues that cut across the organizational structure or extend outside the entity to service organizations contractors or suppliers and monitoring issues that may not be remediated because of the interests of management such as sensitive information regarding fraud or other illegal acts43 1704 depending on the entitys regulatory or compliance requirements the entity may also be required to report issues externally to appropriate external parties such as the legislators regulators and standardsetting bodies that establish laws rules regulations and standards to which the entity is subject evaluation of issues 1705 management evaluates and documents internal control issues and determines appropriate corrective actions for internal control deficiencies on a timely basis management evaluates issues identified through monitoring activities or reported by personnel to determine whether any of the issues rise to the level of an internal control deficiency internal control deficiencies require further evaluation and remediation by management an internal control deficiency can be in the design implementation or operating effectiveness of the internal control and its related process44 management determines from the type of internal control deficiency the appropriate corrective actions to remediate the internal control deficiency on a timely basis management assigns responsibility and delegates authority to remediate the internal control deficiency corrective actions 1706 management completes and documents corrective actions to remediate internal control deficiencies on a timely basis these corrective actions include resolution of audit findings depending on the nature of the deficiency either the oversight body or management oversees the prompt remediation of deficiencies by communicating the corrective actions to the appropriate level of the organizational structure and delegating authority for completing corrective actions to appropriate personnel the audit resolution process begins when audit or other review results are reported to management and is completed only after action has been taken that (1) corrects identified deficiencies 43see paras 802 through 803 for further discussion of fraud 44see paras ov307 through ov311 for further discussion of evaluation of internal control deficiencies page 68 gao14704g federal internal control standards (2) produces improvements or (3) demonstrates that the findings and recommendations do not warrant management action management with oversight from the oversight body monitors the status of remediation efforts so that they are completed on a timely basis the following is a list of the requirements included in the green book the five components of internal control must be effectively designed implemented and operating and operating together in an integrated manner for an internal control system to be effective (paragraph ov204) the 17 principles support the effective design implementation and operation of the associated components and represent requirements necessary to establish an effective internal control system the 17 principle requirements of the green book are as follows: 1 the oversight body and management should demonstrate a commitment to integrity and ethical values 2 the oversight body should oversee the entitys internal control system 3 management should establish an organizational structure assign responsibility and delegate authority to achieve the entitys objectives 4 management should demonstrate a commitment to recruit develop and retain competent individuals 5 management should evaluate performance and hold individuals accountable for their internal control responsibilities 6 management should define objectives clearly to enable the identification of risks and define risk tolerances 7 management should identify analyze and respond to risks related to achieving the defined objectives 8 management should consider the potential for fraud when identifying analyzing and responding to risks 9 management should identify analyze and respond to significant changes that could impact the internal control system 10 management should design control activities to achieve objectives and respond to risks 11 management should design the entitys information system and related control activities to achieve objectives and respond to risks 12 management should implement control activities through policies 13 management should use quality information to achieve the entitys objectives 14 management should internally communicate the necessary quality information to achieve the entitys objectives 15 management should externally communicate the necessary quality information to achieve the entitys objectives 16 management should establish and operate monitoring activities to monitor the internal control system and evaluate the results 17 management should remediate identified internal control deficiencies on a timely basis documentation is a necessary part of an effective internal control system the level and nature of documentation vary based on the size of the entity and the complexity of the operational processes the entity performs management uses judgment in determining the extent of documentation that is needed documentation is required to demonstrate the design implementation and operating effectiveness of an entitys internal control system the green book includes minimum documentation requirements as follows: if management determines that a principle is not relevant management supports that determination with documentation that includes the rationale of how in the absence of that principle the associated component could be designed implemented and operated effectively (paragraph ov206) management develops and maintains documentation of its internal control system (paragraph 309) management documents in policies the internal control responsibilities of the organization (paragraph 1202) management evaluates and documents the results of ongoing monitoring and separate evaluations to identify internal control issues (paragraph 1609) management evaluates and documents internal control issues and determines appropriate corrective actions for internal control deficiencies on a timely basis (paragraph 1705) management completes and documents corrective actions to remediate internal control deficiencies on a timely basis (paragraph 1706) comptroller generals advisory council on standards for internal control in the federal government (20132015) the honorable jon rymer chair us department of defense office of the inspector general dr brett baker national science foundation office of the inspector general lisa casias us department of commerce carole clay us department of state melinda decorte crowe horwath llp stephen m eells new jersey office of legislative services office of the state auditor dr carol m eyermann national science foundation bill hughes morganfranklin consulting llc scot janssen kpmg llp john kaschak pennsylvania office of the budget bureau of audits david l landsittel committee of sponsoring organizations of the treadway commission the honorable samuel t mok condor international advisors llc kenneth j mory city of austin texas dan murrin ernst young dr annette k pridgen jackson state university dr sandra b richtermeyer xavier university neil ryder us department of justice peggy sherry us department of the treasury internal revenue service f michael taylor hanover county government virginia david a von moll commonwealth of virginia office of the state comptroller david m zavada kearney company gao project team steven j sebastian managing director james r dalkin director robert f dacey chief accountant jacquelyn n hamilton deputy assistant general counsel kristen a kociolek assistant director grant l simmons senior auditor christie a pugnetti senior auditor staff acknowledgments in addition to the project team named above also contributing were francine m delvecchio lee evans marci l goasdone peter b grinnell brian s harechmak debra l hoffman heather i keister jason m kelly judy lee william s lowrey alan s macmullin mary arnold mohiyuddin mary o osorno doris g yanger and kimberly y young glossary the following terms are provided to assist in clarifying the standards for internal control in the federal government the most relevant paragraph numbers are provided for reference application controls controls that are incorporated directly into computer applications for the purposes of validity completeness accuracy and confidentiality of transactions and data during application processing; application controls include controls over input processing output master file interface and data management system controls (paragraph 1108) attributes additional information that provides further explanation of the principles and documentation requirements for effective internal control (paragraph ov207) baseline the difference between the criteria of the design of the internal control system and condition of the internal control system at a specific point in time (paragraph 1602) competence the qualification to carry out assigned responsibilities (paragraph 402) complementary user entity controls controls that management of the service organization assumes in the design of its service will be implemented by user entities and if necessary to achieve the control objectives stated in managements description of the service organizations system are identified as such in that description (paragraph ov402) component one of the five required elements of internal control the internal control components are control environment risk assessment control activities information and communication and monitoring (paragraph ov204) contingency plans the processes defined to address an entitys need to respond to sudden personnel changes that could compromise the internal control system (paragraph 406) control activities the policies procedures techniques and mechanisms that enforce managements directives to achieve the entitys objectives and address related risks (paragraph 1002) control objective the aim or purpose of specified controls; control objectives address the risks related to achieving an entitys objectives (paragraph ov305) deficiency when the design implementation or operation of a control does not allow management or personnel in the normal course of performing their assigned functions to achieve control objectives and address related risks (paragraph ov307) detective control an activity that is designed to discover when an entity is not achieving an objective or addressing a risk before the entitys operation has concluded and corrects the actions so that the entity achieves the objective or addresses the risk (paragraph 1004) entitylevel control controls that have a pervasive effect on an entitys internal control system; entitylevel controls may include controls related to the entitys risk assessment process control environment service organizations management override and monitoring (paragraph 1009) fraud involves obtaining something of value through willful misrepresentation (paragraph 802) general controls the policies and procedures that apply to all or a large segment of an entitys information systems; general controls include security management logical and physical access configuration management segregation of duties and contingency planning (paragraph 1107) green book the commonly used name for standards for internal control in the federal government (overview: foreword) information system the people processes data and technology management organizes to obtain communicate or dispose of information (paragraph 1103) information technology technologyenabled information processes (paragraph 1103) inherent risk the risk to an entity prior to considering managements response to the risk (paragraph 703) internal control a process effected by an entitys oversight body management and other personnel that provides reasonable assurance that the objectives of an entity will be achieved (paragraph ov101) internal control system a continuous builtin component of operations effected by people that provides reasonable assurancenot absolute assurancethat an entitys objectives will be achieved (paragraph ov104) key role a position in an organizational structure that is assigned an overall responsibility of an entity (paragraph 306) likelihood of occurrence the level of possibility that a risk will occur (paragraph 706) magnitude of impact severity of deficiency that could result from a risk and is affected by factors such as the size pace and duration of the risks impact (paragraph 706) management personnel who are directly responsible for all activities of an entity including the design implementation and operating effectiveness of an entitys internal control system (paragraph ov214) must denotes a requirement that management must comply with in all cases; these requirements are the components of internal control (paragraph ov204) organizational structure the operating units operational processes and other structures management uses to achieve objectives (paragraph ov210) oversight body those responsible for overseeing managements design implementation and operation of an internal control system (paragraph ov214) performance measure a means of evaluating the entitys performance in achieving objectives (paragraph 607) policies statements of responsibility for an operational processs objectives and related risks and control activity design implementation and operating effectiveness (paragraph 1203) preventive control an activity that is designed to prevent an entity from failing to achieve an objective or addressing a risk (paragraph 1004) principle fundamental concept that is integral to the design implementation and operating effectiveness of the associated component (paragraph ov205) qualitative objectives objectives where management may need to design performance measures that indicate a level or degree of performance such as milestones (paragraph 607) quality information information from relevant and reliable data that is appropriate current complete accurate accessible and provided on a timely basis and meets identified information requirements (paragraph 1305) quantitative objectives objectives where performance measures may be a targeted percentage or numerical value (paragraph 607) reasonable assurance a high degree of confidence but not absolute confidence (paragraph ov104) reporting lines communication lines both internal and external at all levels of the organization that provide methods of communication that can flow down across up and around the organizational structure (paragraph 304) residual risk the risk that remains after managements response to inherent risk (paragraph 703) risk the possibility that an event will occur and adversely affect the achievement of objectives (paragraph 702) risk tolerance the acceptable level of variation in performance relative to the achievement of objectives (paragraph 608) security management the information processes and control activities related to access rights in an entitys information technology (paragraph 1112) segregation of duties the separation of the authority custody and accounting of an operation (paragraph 1013) service organization an external party that performs operational process(es) for an entity (paragraph ov401) should denotes a principle requirement management must comply with except in rare circumstances where the requirement is not relevant for the entity (paragraph ov209) succession plans the processes that address an entitys need to replace competent personnel over the long term (paragraph 406) transaction an event that may occur in operational compliance or financial processes (paragraph 1010) transaction control activities actions built directly into operational processes to support the entity in achieving its objectives and addressing related risks (paragraph 1010) (194915) recyclepleaseprintrecycledpaper please print on recycled paper the government accountability office the audit evaluation and investigative arm of congress exists to support congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the american people gao examines the use of public funds; evaluates federal programs and policies; and provides analyses recommendations and other assistance to help congress make informed oversight policy and funding decisions gaos commitment to good government is reflected in its core values of accountability integrity and reliability the fastest and easiest way to obtain copies of gao documents at no cost is through gaos website (http:wwwgaogov) each weekday afternoon gao posts on its website newly released reports testimony and correspondence to have gao email you a list of newly posted products go to http:wwwgaogov and select email updates the printed version of the 2014 standards for internal control in the federal government can be ordered through the government printing office (gpo) online http:bookstoregpogov or by calling 2025121800 or 18665121800 toll free connect with gao on facebook flickr twitter and youtube subscribe to our rss feeds or email updates listen to our podcasts visit gao on the web at wwwgaogov contact: website: http:wwwgaogovfraudnetfraudnethtm email: fraudnetgaogov automated answering system: (800) 4245454 or (202) 5127470 katherine siggerud managing director siggerudkgaogov (202) 512 4400 us government 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