This document provides an overview and summary of the 2009 COSO Monitoring Guidance and its impact on smaller companies. It discusses the purpose and history of COSO, an overview of the 2009 Monitoring Guidance including its three volumes, and how companies can apply the guidance in areas such as establishing a foundation for monitoring, designing and executing monitoring procedures, and assessing and reporting results. It also discusses how the guidance impacts smaller public companies and provides practical steps for using the guidance.

1. 2009 COSO Guidance & Impact
1

2. Agenda
Overview of COSO
Purpose of the Monitoring
Guidance
How COSO’s 2009
Monitoring Guidance
Impacts Smaller Co.
2

3. Quick Overview of COSO
COSO was formed in 1985
Introduced a Framework for internal controls in 1992
COSO is comprised by five professional associations:
 American Accounting Association
 AICPA (American Institute of Certified Public Accountants)
 FEI (Financial Executives International)
 IIA (The Institute of Internal Auditors) and
 IMA (Institute of Management Accountants)
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4. COSO Guidance - Timeline
1987Fraud
report
1987 - 1997 Fraud
report on public
companies – Issued
1999
1997–2007Fraud
reportonpublic
companies–
ComingSoon
(June2009)
Monitoring
Guidance
Issued
Feb. 2009
Guidancefor
SmallerPublic
Companies
IssuedJune2006
Monitoring
Guidance on
Derivatives
Issued 1996
ERM Framework
Issued 2004
2010
1985
Framework
Introduced
in 1992
4

5. How to get COSO Materials
Free download to executive summaries (e.g.
introduction or overview documents) of their
guidance materials located at
http://www.coso.org/guidance.htm
www.cpa2biz.com : site represents AICPA and
COSO related products. Search terms such as
Internal controls, or COSO etc.
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6. 2009 COSO Monitoring Guidance
Introduction
Free Download
Intended for CFO, CEO, BOD
and AC members
Vol. 1 Guidance Overview
Intended for C-Level, BOD
and AC Members, and
Director of Internal Audit
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7. 2009 COSO Monitoring Guidance
Vol.II Application
Discusses How guidance Impacts
And Links to 1992 and 2006 COSO
Guidance materials
Audience: DIA, Internal Audit Staff etc.
Vol. III Examples
Provides templates to leverage
Monitoring Guidance Theory
Audience: DIA, Internal Audit
Staff etc.
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8. Vol. #1 - Overview
• Four Sections
1. Purpose of Guidance
2. Nature & Purpose of Monitoring
3. A Model for Monitoring
4. Summary Considerations
8

9. Purpose of the Guidance
Two Primary Objectives:
1. To help improve the effectiveness & efficiency of their
internal control systems
2. To provide practical guidance that illustrates how
monitoring can be incorporated into an organization’s
internal control process.
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10. Application of Guidance
Designed to meet all three control
objectives of COSO Framework
Due to SOX compliance Guidance
has a primary focus on internal
controls over financial reporting
10

11. Guidance Does Not:
Change COSO framework or its 2006 guidance
Dictate risks or controls that organization must
consider
Mandate the exact monitoring procedures that
organizations must follow
Increase the monitoring effort for organizations in
areas where monitoring is already effective or
Mandate a certain level or formality of monitoring
documentation, including the use of certain terms
11

12. Nature and Purpose of Monitoring
COSO Framework states that “monitoring ensures
that internal controls continues to operate effectively”
by leveraging two related principles:
1. Ongoing and/or separate evaluations enable
management to determine whether the other
components of internal control continue to function
over time.
2. Internal control deficiencies are identified and
communicated in a timely manner to those parties
responsible for taking corrective action and to
management and the board as appropriate.
12

13. Linking the 2 Principles to 2006 COSO guidance
Principle #19: Ongoing
& Separate
Evaluations
Principle #20:
Reporting Deficiencies
Source: 2006 COSO guidance, vol #3
13

14. Establishing a Model for Monitoring
Effective approach to
monitoring involves:
1. Establishing a
Foundation
2. Designing &
Executing Monitoring
procedures
3. Assessing & Reporting
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15. Establishing a Foundation
A tone at the top that stresses
the importance of monitoring
Effective organizational structure that considers the
roles of management and the board regarding
monitoring, and places people with appropriate
capabilities, objectivity, authority and resources in
monitoring roles and
Baseline understanding of internal control
effectiveness
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16. Design & Execute
Prioritize Risks: Evaluate controls in areas of
meaningful risk
ID Controls: select appropriate controls for
evaluation from across any or all of COSO’s 5
components
ID information that will be persuasive in supporting
conclusions about control effectiveness
Implement monitoring procedures: evaluate that
information through a mix of ongoing monitoring and
separate evaluations
16

17. Assessing and Reporting
Results
Prioritize findings
Provide support at the
appropriate organization level
for conclusions regarding the
effectiveness of internal
controls and
Follow up on corrective action:
Facilitate prompt corrective
actions and documentation as
necessary
17

18. Vol. II – Application Overview
18

19. Vol. II – Application
“Quick Tip”
Concept and it’s
application in
Grey area
Tips on How to Read
Vol.II: Grey areas are
only suggestions.
Application may vary
Co. by Co.
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20. Application of
“Tone at the Top”
Management’s tone influences the way employees conduct and react
to monitoring.
Examples of documenting the monitoring of “Tone at the Top”
include:
Communicating expectations to employees (via employee manual,
performance evaluation, sign-off on risk/control matrices, or other
SOX related documents).
Taking action for control problems by documenting control
failures and including remediation plan or compensating control
for each gap.
Documentation of follow-up procedures for any control failures
identified (via ____________ or ______________)
20Action Item: Update Performance Evaluations

21. Application of “Organizational Structure”
 Role of Management & the BOD
 Senior Management evaluates the day-to-day control and monitoring activities
(Evidenced in SOX or other related document sign-off)
 BOD has an oversight role, in which they are responsible for
 Understanding risks to organizational objectives
 Controls that management has put in place to mitigate those risks
 How management monitors to help ensure that the internal system continues to
operate effectively
 NOTE: Evidence should be documented in the BOD/AC minutes
 Guidance offers four suggestions for the BOD to perform it’s oversight
responsibilities (1) Inquiries & Observation of management, (2) Internal audit
function (if present) (3) Hired resources or specialists when necessary and (4)
external auditors.
21
Action Item: Principle #19 and #2 of COSO can leverage evidence of
Monitoring Risks

22. Application of “Organizational Structure” (continued)
22
 Characteristics of Evaluators
 Self-review: evaluation of one’s own work
 Benefit: usually affords the 1st
opportunity to ID control deficiencies
 Peer Review: evaluation of co-worker’s or peer’s work
 Benefit: the individual is close to the control and maybe in the best position
to ID and correct control deficiencies
 Supervisory Review: evaluation of subordinate’s work
 Benefit: same as above Peer Review
 Impartial Review: often includes internal audit function, people from other
departments or external parties
 Benefit: Most objective concerning results and can place more reliance on the
effectiveness of ICFR
Source: Vol.2: Figure 5, pg13

23. Monitoring Changes
COSO offers a high-level overview of an internal
control change continuum as follows:
23

24. Change Continuum Evidence
24
Risk/Control
matrices
Narrative/Flowcharts ELC - Assessment

25. Change Continuum Evidence
25
Test Scripts with
supporting
documents
Sub-certifications
on Controls

26. Change Continuum Evidence
26
Policy &
Procedure for
changes
Change Mgmt
Form
Documentation
Authorization with
Changes (1)
(1) See Appendix B-Chg Mgmt Narrative Form

27. Vol. II Application of Design & Execute
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Source: Vol.2 Figure 7
COSO 2009 Monitoring
Guidance

28. Risk Assessment
28
•COSO’s monitoring guidance does not state
to create a separate risk assessment just for
monitoring
•Prioritizing risks will allow management to
decide on the type, timing and extent of
monitoring of controls
•Risk Factors to consider:
1. Nature of Operations
2. Changes in Operations
3. Environmental Factors
4. Susceptibility to Theft or Fraud

29. COSO’s Risk Assessment Examples
29
Revenue
Example without
score detail and
objective = Vol.2
Inventory
Example with
score detail
without objective
= Vol.3

30. 30

31. ID Key Controls
31
• Key-Controls determination can occur at various levels within an
organization (e.g. supervisor of a plant has different key
monitoring controls than the CFO).
• Key-Control Analysis can be facilitated by considering factors
that increase the risk that the internal control system will fail to
properly manage or mitigate a given risk, these factors are:
1. Complexity
2. Judgment
3. Manual vs. Automated
4. Known Control Failures
5. Competence/experience of personnel
6. Risk of management override
7. Likelihood of control failure detection

32. ID Persuasive Information
32
•Persuasive information is both suitable AND
sufficient in the circumstances and give the
evaluator reasonable, but not necessarily
absolute, support for the conclusion regarding
the continued effectiveness of the internal
control system in a given risk area.
•Suitable information MUST be relevant,
reliable and timely.
•Sufficiency is a measure of the quantity of
information (i.e., whether the evaluator has
enough suitable information)

33. ID Persuasive Information (Cont.)
Relevance of Information
Direct vs. Indirect Information
Information that directly confirms the operations of the control is
more relevant than indirect
Direct: substantiates the operation of controls and obtained by:
1. Observing controls in operation
2. Reperformance or
3. Otherwise evaluating their operation directly and can be useful in
both ongoing monitoring and separate evaluations
Indirect: is all other information that may indicate a change or failure
in the operation of controls such as:
1. Operating statistics
2. Key risk indicators
3. Key performance indicators and
4. Comparative industry metrics
33

34. ID Persuasive Information (Cont.)
Reliability of Information
Reliable information: is accurate, verifiable and comes from an
objective source.
 Accurate information: represents the degree to which information can
reasonably be expected to be free from error and/or to communicate
results that reflect reality.
 Verifiable: represents information that can be established, confirmed or
substantiated as true.
 Objectivity: is the degree to which the information source is unbiased
when evaluated
34

35. ID Persuasive Information (Cont.)
Sufficient Information
Management is required to maintain sufficient
suitable information to support its conclusion
on the effectiveness of internal controls.
SEC has provided smaller public companies
with a general guideline dependent upon risks
to determine the sufficient level of support.
35

36. SEC’s Guidance on Information
36
http://www.sec.gov/info/s
mallbus/404guide.pdf

37. Companies Should Consider New Sampling Guidance
37
•May 2008: AICPA issued new Sampling
guidelines to align better with their risk
based auditing standards (i.e. SAS 101 to
SAS 112).
•Management should consider multi-
location issues as documented in this
new guidance as PCAOB and SEC do
not provide best practices on how to
make sample selections on a risk-based
approach for multi-locations.

38. Implementing Monitoring
38
COSO Provides in
Vol.3 Example of
Implementing
Monitoring Processes
for Inventory, which
the template can be
applied to any
business cycle,
including IT.
Can add columns for
1)Evidence to Collect
2)Qty of Evidence (is it all stores
and all months, if so what
periods)

39. Assess & Report
Prioritize Findings by Risk
39
Risk Examples
provided by Vol.
2, have one
example of
each type of
Risk Rating
Type (by
Significance
and Likelihood)

40. Vol. 2 – Applying Concepts of Monitoring
Prioritized Risks
40
Extends the concept in
prior slide, in how to
prioritize monitoring
efforts by rating as well
(i.e. High, Med. Low)

41. IT Guidance to Help Prioritize Findings
41
2006 SOX IT Guidance
helps users to assess the
prioritization based upon
risks
Site: www.isaca.org

42. Internal Reporting: protocol must be established.
Typically includes senior management and the board.
External Reporting: a properly designed & executed
monitoring program helps support external
certifications or assertions because it provides
persuasive information that internal controls
operated effectively at a point in time or during a
particular period.
42
Reporting Results

43. COSO’s suggested documentation should include
evidence of:
Reporting items agrees to source scoping documents
Evidence collected support that the control has been
adequately corrected/remediated
Management approval of corrective action and related
evidence
43
Follow-up Corrective
Action

44. Impact to Smaller Public Companies
Linking Monitoring Principles (i.e. Principal #19 and
20) to actual business processes (i.e. Financial
Statement Close Process, Inventory etc.) will reduce
the number of key controls required to assess for
SOX
Providing more detailed monitoring reports
substantiates management’s evidence of reviewing
key controls
Guidance provides management more information on
how to leverage key controls for more than one type
of risk
44

45. Practical Steps Using 2009 Guidance
Step 1: Entity-Level Control Assessment, use color coding offered by
2006 COSO Guidance
Step2: Risk Assessment exercise should include IT to prevent any
miscommunication of prioritizing risks for the organization
Step 3: Evaluate Monitoring guidance issued 2009 by COSO, especially
considering three top templates from the guidance:
1. Quarterly and Annual Management Representations (vol.3 –
Appendix B)
2. Enterprise Wide Risk Matrix (vol.3 – Appendix C)
3. Prioritize Risk and Controls (vol.2 – pg. 51 to pg. 55)
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46. Segregation of Duties (SOD)
2009 Due to economy less staff and more work
allocated to others.
Leveraging too smaller staff size may cause a lack of
SOD.
2009 & 2006 COSO Guidance have stated
compensating controls are the critical factor to avoid
a material weakness.
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47. SOD Case Study
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48. Q & A
My Contact info:
Sonia Luna email: sluna@sox-solutions.com
Phone: (323) 828-5862
Blog: www.sox-blog.com
Twitter: http://twitter.com/Sox_Solutions
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