Question

Auditing

In July 2002, Congress passed the Sarbanes-Oxley Act. The provisions of the Act apply mainly to publicly held companies and their audit firms.  Explain briefly how the Act affects audit firms concerning audit reports, audit documentation, internal control, and other services provided by auditors to their clients. ( In a paragraph form if possible, would be great to answer it).

Answer 1

The effects of the act on the working of the audit firms outlined below:

1. Auditors will report to companies audit committee and reports to be seen by the audit committee not management.

2. Audit committees must pre approve all services provided by its auditor.

3. Auditor must report all Information to Audit Committee like critical accounting policies and practices to be used, alternative treatments of financial information within GAAP that have been discussed with management, accounting disagreements between the auditor and management, and other relevant communications between the auditor and management.

4. It prohibits auditors from offering certain non-audit services to audit clients like bookkeeping, information systems design and implementation, actuarial services, internal audits, management and human resources services,investment banking services.

5. The auditor must be rotated every five years.

6. An audit firm will not be able to provide audit services to a public company if one of that company top officials was employed by the firm and worked on the company audit during the previous year.

7. Auditors are required to disclose in their audit reports the description of Internal Controls Testing.

8. Auditors must have a thorough second partner review and approval of every public company audit report.

9. Management must assess and make representations about the effectiveness of the internal control structure and procedures of the issuer for financial reporting.

10. The act specifies penalties for those who destroy records, commit fraud and fail to report fraud