audit-readiness

SOX 404 Testing Lifecycle

End-to-End Phases

1. Scoping: Determine which accounts and processes carry enough risk to warrant control coverage
2. Risk evaluation: Assess the probability and magnitude of potential misstatement for each in-scope account
3. Control mapping: Document the specific controls that mitigate each identified risk
4. Effectiveness testing: Evaluate whether controls are properly engineered (design) and consistently executed (operation)
5. Deficiency assessment: Judge the severity of any control gaps uncovered during testing
6. Management reporting: Formalize the overall ICFR assessment and disclose any material weaknesses

Determining Which Accounts Are In Scope

An account enters scope when it carries a non-remote probability of containing a misstatement that is material on its own or in combination with others.

Size-based indicators:

• The balance surpasses the quantitative materiality benchmark (commonly 3-5% of a reference figure such as revenue, assets, or pre-tax income)
• High transaction throughput increases the statistical likelihood of error
• The balance depends heavily on estimates or management judgment