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Internal Control Over Financial Reporting

[in-TUR-nl kuhn-TROHL oh-vur fi-NAN-shul ri-POR-ting]

What is the definition of Internal Control Over Financial Reporting?

A process designed by, or under the supervision of, a company's principal executive and principal financial officers, or those performing similar functions, and implemented by the company's board of directors, management, and other personnel. This process is aimed at providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles (GAAP). It includes policies and procedures that ensure the maintenance of records reflecting accurate and fair transactions and dispositions of assets, authorize receipts and expenditures, and prevent or detect in a timely manner unauthorized access to or use of the company's assets that could materially affect the financial statements.

Using Internal Control Over Financial Reporting in an Example

A company implements robust internal controls over financial reporting to ensure that all financial transactions are recorded accurately and in a timely manner, allowing for the reliable preparation of financial statements that comply with GAAP. These controls include regular audits, approval processes for expenditures, and secure information systems that prevent unauthorized access to financial data.

Using Internal Control Over Financial Reporting in a sentence

During the meeting, the CFO emphasized the importance of strengthening our internal control over financial reporting to avoid any potential financial discrepancies.

Related Terms

IASC

The International Accounting Standards Committee (IASC) was an independent private sector body, formed in 1973, with the objective of harmonizing accounting principles used globally in businesses and other organizations for financial reporting. It comprised members from 143 professional accounting bodies across 104 countries.

IMA

IMA, or the Institute of Management Accountants, is a professional organization comprised primarily of management accountants and finance professionals, dedicated to fostering the development of skills, knowledge, and professionalism in the field of management accounting.

IPO

An Initial Public Offering (IPO) is the process by which a private company offers shares to the public in a new stock issuance, allowing it to raise capital from public investors for the first time.

IRA

An Individual Retirement Account (IRA) is a personal savings plan which offers tax advantages to an individual for retirement savings. Contributions to a traditional IRA may be tax-deductible depending on the individual's income, tax filing status, and other factors, and the earnings on the contributions are not taxed until they are withdrawn.

IRS

The Internal Revenue Service (IRS) is a U.S. federal agency responsible for the administration of the Internal Revenue Code and the collection of taxes. It operates under the Department of the Treasury.

ISB

The Independence Standards Board (ISB) is a private sector standard-setting body that governs the independence of auditors from their public company clients, established through collaborations among the AICPA, other accounting representatives, and the SEC.

Improvement

Expenditure directed to a particular asset to enhance its performance, efficiency, or useful life.

Imputed Interest

Imputed interest refers to interest that is considered or assumed to be charged on a loan or financial transaction, even if no interest or an unrealistic amount of interest is actually charged. This concept is used in tax and accounting to ensure that loans or financial transactions reflect a fair market interest rate.

In Arrears

A term used to describe payments that have not been made by their due date and are therefore overdue.

Income

The inflow of revenue during a specific period of time, representing earnings from various sources such as wages, investments, and business operations.

Income Statement

A financial statement that summarizes the revenues, costs, and expenses incurred during a specific period, typically a fiscal quarter or year, reflecting the company's operating performance.

Income Summary

A temporary account used in the accounting closing process that aggregates all revenues and expenses for a period, facilitating the transfer of the resulting net income or loss to the capital account.

Income Tax Basis

Income tax basis is a method of accounting that uses tax rules for reporting and is distinct from generally accepted accounting principles (GAAP). It determines the correct amount of gain or loss to report when an asset is sold, calculated as the cost of the asset plus improvements, minus any depreciation or amortization.

Income from Operation

Income from operation, often referred to as operating income, is the profit realized from a business's core operating activities. It is calculated by subtracting operating expenses from gross margin.

Incorporation

The legal process by which a company receives a state charter, allowing it to operate as a corporation under the laws of the state in which it is incorporated.

Incremental Cash Flow

The net cash inflows and outflows specifically attributable to a corporate investment project, reflecting the additional cash that will be generated or expended as a result of the project.

Indenture

A formal and legally binding agreement, often in the context of bond issuance, between a bond issuer and the bondholders, which specifies the terms of the bond, the obligations of the issuer, and the rights of the bondholders.

Independence Standard Board (ISB)

A private sector standard-setting body that governed the independence of auditors from their public company clients, established through collaboration among the AICPA, other accounting representatives, and the SEC.

Independent Broker

A member of the New York Stock Exchange who executes orders for other floor brokers who have more volume than they can handle, or for firms whose exchange members are not present on the floor.

Index

A statistical composite that measures changes in the economy or financial markets, often expressed in percentage changes from a base year or from the previous month. Indexes track the performance and fluctuations of various sectors such as stock, bond, and commodities markets, using market prices and the weighting of components within the index.

Indirect Cost

Any cost that cannot be directly attributed to the production of specific goods or services and must be allocated to the cost objects using an appropriate method. These costs are not directly traceable to a specific department, product, or activity without effort or cost.

Indirect Labor Costs

Labor costs associated with production-related activities that cannot be directly attributed or economically traced to a specific end product.

Indirect Manufacturing Costs

Costs in the production process that cannot be directly attributed to a specific product but are necessary for the manufacturing process. These costs include utilities, depreciation, and maintenance of equipment, among others.

Indirect Materials

Minor materials and other production supplies that are used in the manufacturing process but cannot be conveniently or economically traced to specific products.

Indirect Method

The indirect method is a procedure used in financial reporting to convert the income statement from an accrual basis of accounting to a cash basis, focusing on the changes in cash flows from operating activities.

Individual Retirement Account (IRA)

A personal savings plan that allows an individual to make cash contributions, which may be tax-deductible depending on the individual's adjusted gross income and participation in an employer's retirement plan. The earnings in the account are tax-deferred, meaning they are not taxable until withdrawal.

Inflation

The rate at which the general level of prices for goods and services is rising, often measured as an annual percentage increase. This typically occurs when spending increases relative to the supply of goods on the market, leading to a decrease in the purchasing power of money.

Inflation Rate

The rate at which the general level of prices for goods and services is rising, and subsequently, eroding purchasing power.

Inheritance

Inheritance refers to property or assets acquired through the laws of descent and distribution when a person dies without a will. The value of the inherited property itself is excluded from the taxpayer's gross income, but any income generated from the property is included. The basis of the inherited property for tax purposes is its fair market value at the time of the original owner's death.

Initial Public Offering (IPO)

The process by which a private company offers shares to the public in a new stock issuance, allowing it to raise capital from public investors for the first time.

Inquiry

A procedure that involves seeking both financial and non-financial information from knowledgeable individuals within or associated with a company, often used in auditing to complement other procedures. Inquiries can range from formal written requests to informal oral questions.

Inside Information

Confidential knowledge about the internal affairs or operations of a corporation that has not yet been made public and could influence an investor's decision to buy or sell stock.

Insolvency

The condition where an entity cannot meet its financial obligations as they come due because its liabilities exceed its assets.

Insolvent

A state where an entity's liabilities exceed its assets, rendering it unable to meet its debt obligations.

Installment Method

A tax accounting method where the gain on the sale of an asset exchanged for a receivable is reported as payments are received.

Institute of Management Accounts (IMA)

A professional organization comprised of individuals working in the field of management accounting, dedicated to fostering the professional development of its members and promoting best practices in financial and management accounting.

Instrument

A legal document or financial tool used for a specific purpose, such as executing transactions, paying for goods or services received, or fulfilling other contractual obligations.

Insurance

A financial system in which individuals or entities pay premiums to an insurance company that compensates them in the event of a specified loss, damage, illness, or death, under the terms of an insurance policy.

Insured Account

An account held at a financial institution such as a bank, credit union, or brokerage firm that is covered by a federal or private insurance organization to protect the funds against the institution's failure.

Intangible Asset

An asset that lacks physical substance and is identifiable as a non-monetary asset without physical substance. This includes assets such as patents, trademarks, copyrights, goodwill, and brand recognition.

Interest

The price paid for borrowing money, typically expressed as a percentage rate over a period of time, which compensates the lender for the use of their money and reflects the rate of exchange of present consumption for future consumption.

Interest Coverage Ratio

A financial metric used to determine how easily a company can pay interest on its outstanding debt, calculated by dividing the company’s earnings before interest and taxes (EBIT) by its interest expenses.

Interest Rate

The percentage at which interest is charged or paid on the use of money, typically expressed as an annual percentage rate.

Interim Dividend

A dividend declared and paid by a company before its annual earnings have been calculated, typically distributed on a quarterly basis.

Interim Financial Statements

Financial statements that report the operations of an entity for a period shorter than one fiscal year, typically to provide an update on the company's financial status between annual reports.

Internal Audit

An audit conducted by a company's own staff to assess and improve the effectiveness of risk management, control, and governance processes within the organization.

Internal Control

A process designed by an organization's management to provide reasonable assurance regarding the achievement of objectives in the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.

Internal Rate of Return

The discount rate at which the present value of future cash flows equals the initial investment outlay, used to evaluate the profitability of potential investments.

Internal Revenue Code

The comprehensive set of tax laws and regulations enacted by the federal government, codified as Title 26 of the United States Code, governing federal tax obligations and procedures.

Internal Revenue Service (IRS)

The federal agency within the United States Treasury Department responsible for the administration and enforcement of the federal tax laws, including the collection of personal and corporate income taxes, Social Security taxes, excise, and gift taxes.

International Accounting Standards Committee (IASC)

An independent private sector organization established in 1973, aimed at harmonizing accounting principles used globally in businesses and other organizations for financial reporting. It comprises members from 143 professional accounting bodies across 104 countries.

International Mutual Fund

A mutual fund that invests in securities markets across various countries, allowing investors to diversify their portfolio internationally and potentially gain returns from different markets.

Intrinsic Value

Intrinsic value refers to the inherent, true value of an asset, determined by fundamental analysis without reference to its market value. It is often calculated using data inputs in a valuation model.

Inventory

Inventory refers to tangible property held by a company for sale or the materials used in the production process to create products. This includes raw materials, work-in-progress, and finished goods that are valued by various methods such as FIFO (First in, First out) or LIFO (Last in, First out) to accurately reflect their cost or market value on financial statements.

Inventory Financing

A financial arrangement where loans are provided to businesses secured by their inventory, often in anticipation of future sales. This type of financing is used to increase liquidity for operations or to fund additional inventory purchases.

Inventory Turnover

A financial ratio that measures the number of times a company's inventory is sold and replaced over a specific accounting period, indicating the efficiency of inventory management.

Invest

To allocate money or capital to an asset, project, company, or financial product with the expectation of earning a positive financial return or profit over time.

Investing

The practice of allocating resources, usually money, with the expectation of generating an income or profit. This can include purchasing assets like stocks, bonds, real estate, or other investments that are expected to provide returns through income or price appreciation.

Investment

The allocation of capital or expenditure on resources with the expectation of generating a return, profit, or benefit over time.

Investment Banker

A professional or firm that acts as an intermediary between securities issuers and the investing public, often serving as an underwriter or agent in the issuance of securities.

Investment Income

Income derived from various non-business investments, including dividends, interest, and other earnings from securities.

Investment Tax Credit

A credit that reduces a company's tax liability, associated with specific investments such as the energy credit, rehabilitation credit, and reforestation credit, as part of the general business credit.

Invoice

A document prepared by a seller of goods or services and issued to the purchaser, detailing the items sold or services provided, their prices, and the total amount due for payment.

Involuntary Conversions

Involuntary conversions occur when property is destroyed, stolen, seized, requisitioned, condemned, or threatened with such actions, leading to a forced change in the property's status or ownership.

Issue

A financial asset such as stocks or bonds that is sold by a corporation or government entity at a particular time.

Issued and Outstanding

Shares of a corporation that have been officially issued to shareholders and are currently held by them, not repurchased by the corporation or otherwise retired.

Issuer

An entity that releases financial instruments into the marketplace, which can include securities registered under relevant financial regulatory laws, or has filed registration statements for its securities with the Securities and Exchange Commission (SEC).

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