When should management reassess the effectiveness of internal controls?

Management should reassess the effectiveness of internal controls when significant changes occur because such changes can impact the risk landscape and the efficacy of existing controls. Significant changes might include organizational restructuring, technological advancements, changes in key personnel, shifts in regulatory requirements, or modifications in business processes.

Reassessing internal controls in response to these significant changes ensures that they remain relevant and effective in mitigating risks. It allows management to identify any vulnerabilities that may arise from such changes and implement necessary adjustments to the controls. This proactive approach helps organizations maintain a strong control environment and better safeguard against potential risks or failures.

In contrast, focusing on reassessment only at year-end, after a fraud is detected, or adhering to a fixed five-year schedule does not adequately account for the dynamic nature of business operations and risks. It may lead to gaps in control effectiveness if changes occur more frequently than these schedules recommend.