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Many organizations do far too much work on these areas, primarily because they scope the work in isolation from their top-down approach to the identification of key controls. They base their scope on good business practice, and/or a list of ‘rules’ from a consultant or software vendor, rather than focusing on the access limitations necessary to prevent an action that might lead to a material misstatement of the financials.

The following discussion is taken from my book, Minimize Costs and Increase the Value of Your Sarbanes-Oxley 404 Program: Management’s Guide to Effective Internal Controls, published by and available from the Institute of Internal Auditors (just $35 for members in hard copy, $25 as a PDF download).

Segregation of duties and restricted access controls must be identified, assessed, and tested where they are key controls. (A key control is one that is relied upon to either prevent of detect a material misstatement of the financials.) Key SOD and RA controls include those that:

  • Are required for an authorization control to be effective. For example, if the business control requires that all purchase orders be approved in the system by the purchasing manager, it is critical to ensure that only the purchasing manager has that capability.
  • Reduce the risk of a material fraud that could be reported incorrectly in the financial statements.

With restricted access and segregation of duties, there is a risk of doing more work than is required for Sarbanes-Oxley. While there are excellent business reasons for restricting access to only those functions individuals need to perform their assigned tasks, it is important to remember that only fraud risk that is both material and also misstated in the financials is within scope for Sarbanes-Oxley.

This last point is important. Many companies test SOD using a standard set of “rules” (combinations of access privileges deemed inappropriate) that have been provided by a consultant or vendor. While they may represent a risk to the business (at least in theory), they may not represent a risk of material misstatement for your organization. The rules used to drive SOD testing should be based on the top-down, risk-based approach described above, to support a key control or reduce the risk of a material fraud.

As an example, at a company where I was responsible for the Sarbanes-Oxley program, both the external auditor and the internal auditor (at that point, the internal audit activity was outsourced) had tested user access consistently for several years. They each used a standard set of more than 150 rules to identify (a) access to important ERP transactions, and (b) SOD conflicts where one individual would have the ability, using a combination of ERP transactions, to commit a fraud. When the Sarbanes-Oxley team changed to a risk-based approach, concentrating on testing access rights that represented a risk of material misstatement, the number of rules was cut to about 20.

Is your SOX scope based on a top-down, risk-based assessment when it comes to SOD and RA?

Please share how many rules you test (tests of SOD and/or RA).

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