How detailed do internal testers go? 2854

  • In general, I do agree that when a significant misstatement is found, that the related internal controls automatically becomes a significant deficiency because the purposes of controls are to prevent or detect these misstatements on a timely manner.
    However, how far does an internal SOX tester go? If our control framework consists of layers of review of a certain complicated calculation, and the internal SOX tester has tested that control aspect (that the review took place timely), and yet we had a misstatement of that calculation because an error escaped all the reviewers over a long period of time - would you consider the SOX tester not have done his job?
    In this case, the SOX tester would have done some basic tie-out of the schedules used in that calculation, but are they also supposed to do detailed audits on the calculation? Without a detailed audit of the calculation, how is a SOX tester supposed to catch an error in the calculation? And this error existed over a few years so a flux analysis might not have revealed any error. Is the testing of controls mainly to ensure that a review is done, or does it include other aspects?
    I am trying to see how we can improve our SOX test on this complicated calculation. Because right now, just the sheer fact that it was reviewed does not mean anything since it contains errors.
    Any thoughts?

  • Great question. We have struggled with that same issue and have yet to reach a good conclusion. For certain controls, our SOX testers do some diligence in testing to ensure that a proper review was performed. They tie out balances to supporting documents, review the calculations in a spreadsheet to ensure that there are no formula errors and ensure that reconciling items are properly aged.
    What testers cannot always do is ensure that the proper rules are being applied in a complex calculation. The best example of this is in the income tax area where income is subject to multiple jurisdictions with different tax rules. An error in interpretation of the rules many years ago may continue to be reflected in tax reserves until a balance is settled. The best answer that we can come up with for this is to have our tax staff challenge what has been done in the past and review all support for reserves or tax positions on a regular basis. We have also created cross-functional teams within our tax department to help in internal communication of known tax issues or transactions that could impact our current reserves. We have hired more experienced tax professionals as well.
    We are open to other ideas as there is always the risk that we missed something in the past that will eventually come to light.

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