How to Comply With Sarbanes-Oxley Section 404: Assessing the Effectiveness of Internal Control

2.3. INFORMATION AND COMMUNICATION

Every entity must identify, capture, and communicate pertinent information in a form and time frame that allows people to carry out their control and other responsibilities. The COSO Report provides a rather broad description of the characteristics of an effective information and communication system. The most relevant of these characteristics for the purposes of assessing the effectiveness of controls related specifically to financial reporting objectives are listed next.

• Consider all information sources. The information needed to prepare reliable financial reports is not limited to financial information; non-financial information also is important. For example, the information needed to determine an allowance for inventory obsolescence includes an assessment of current and future market conditions. Frequently, the assumptions underlying significant accounting estimates rely to some degree or another on nonfinancial information.

  Additionally, the preparation of financial statements requires that information be gathered from both internal and external sources. In the inventory obsolescence example, the information needed to make the estimate is not limited to internally generated information such as the amount of inventory on hand. Preparing the estimate will also require management to consider externally generated information, such as consumer demand and the level of supply for the industry as a whole.

• Integration with control activities. The ...