Which of the following best describes the five components of a company's internal control system as defined by the COSO framework?

• A. Asset management, liability management, equity management, revenue recognition, and expense recognition
• B. Control environment, risk assessment, control activities, information and communication, and monitoring activities
• C. Segregation of duties, authorization, documentation, reconciliation, and physical controls
• D. Planning, organizing, leading, controlling, and evaluating

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the context of the question, which is asking about the five components of a company's internal control system as defined by the COSO framework. COSO stands for the Committee of Sponsoring Organizations of the Treadway Commission, which developed a widely accepted framework for internal control.
2. Step 2: Recognize that the COSO framework identifies five key components of internal control. These components are designed to help organizations achieve their objectives related to operations, reporting, and compliance.
3. Step 3: Learn the five components of the COSO framework: (1) Control Environment, which sets the tone of the organization and influences the control consciousness of its people; (2) Risk Assessment, which involves identifying and analyzing risks to achieving objectives; (3) Control Activities, which are the policies and procedures that help ensure management directives are carried out; (4) Information and Communication, which involves the flow of information necessary to support internal control; and (5) Monitoring Activities, which involve ongoing evaluations to ensure controls are functioning effectively.
4. Step 4: Compare the options provided in the question to the five components of the COSO framework. The correct answer should align with the COSO framework components: Control environment, risk assessment, control activities, information and communication, and monitoring activities.
5. Step 5: Eliminate the incorrect options by identifying terms that do not match the COSO framework components. For example, terms like 'asset management' or 'segregation of duties' are not part of the COSO framework's five components, even though they may relate to broader accounting or control concepts.