Page 220 - COSO Guidance Book

 Considers the required level of precision and reflects entity activities — Management reflects
the required level of precision and accuracy suitable for user needs and as based on criteria
established by third parties in nonfinancial reporting. External reporting reflects the underlying
transactions and events within a range of acceptable limits.

The framework notes the following with regard to precision and the entity’s activities (these
characteristics of precision and the entity’s activities are appropriate for both nonfinancial and
financial reporting objectives):

□ Classifies and summarizes information in a reasonable manner and at the appropriate
level of detail so that it is neither too detailed nor too condensed
□ Reflects underlying entity activities
□ Presents transactions and events within the required level of precision and accuracy
suitable for user needs
□ Uses criteria established by the third parties and as set out in external standards or
frameworks, as appropriate

– Internal reporting objectives:

Like the nonfinancial reporting objectives discussed previously, internal reporting objectives also
have the following similar points of focus:

 Reflects management’s choices — Internal reporting provides management with accurate and
complete information regarding management’s choices and information needed in managing
the entity.

For example, corporate management at a local community bank with five branches might
develop a formula to allocate corporate overhead costs to each branch. Each location is
required to use this formula in the preparation of monthly financial performance reports.

 Considers the required level of precision and reflects entity activities — Management reflects
the required level of precision and accuracy suitable for user needs in nonfinancial reporting
objectives and materiality within financial reporting objectives. Internal reporting reflects
underlying transactions and events within a range of acceptable limits.

To continue the community bank example, each location is allowed to estimate the amount of
interest income on loans originated at the location in preparing its monthly financial reports.
For variable-interest-rate loans, the branch might use average loans outstanding each month
(using the month’s beginning and ending loan balances) multiplied by the average interest
rate for a particular month (using the month’s beginning and ending interest rates) to
determine interest income on loans. The interest income estimate could be more precise
(and perhaps more costly to compute) if, instead of using the beginning and ending monthly
amounts for loan balances and interest rates, the beginning and ending daily amounts
were used.

 Points of focus: Compliance objectives
– Reflects external laws and regulations — Laws and regulations establish standards of conduct
that the entity integrates into compliance objectives.

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