In response to the many scandals in corporate financial reporting, the United States Congress passed legislature in 2002 that required publicly traded companies to contain within each annual report an internal control report. The internal control report requires companies to state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. The internal control report must also contain an assessment of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. These rules are referred to as and contained in Section 404 of the Sarbanes Oxley Act (“SOX”).
This paper will touch upon an introduction to the SOX Act, …show more content…
Management’s assessment of the effectiveness of the company’s internal control over financial reporting as of the end of the company’s most recent fiscal year, including a statement as to whether or not the company’s internal control over financial reporting is effective;
3. A statement identifying the framework used by management to conduct the required evaluation of the effectiveness of the company’s internal control over financial reporting; and
4. A statement that the registered public accounting firm that audited the financial statements included in the annual report has issued an attestation on management’s assessment of the internal control over financial reporting.
The final rule also states that a suitable framework for internal control evaluation must be free from bias, permits reasonably consistent qualitative and quantitative measurements of a company’s internal control, to be sufficiently complete so that those relevant factors that would alter a conclusion about the effectiveness of a company’s internal controls are not omitted, and be relevant to an evaluation of internal control over financial reporting (Cenker and Nagy, 2004).
Auditor’s role in …show more content…
Evaluate management’s assessment process;
3. Understand the company’s internal control over financial reporting;
4. Test and evaluate the design effectiveness of the company’s internal control over financial reporting;
5. Test and evaluate the operating effectiveness of the company’s internal control over financial reporting;
6. Form an opinion on the effectiveness of internal control over financial reporting.
Generally, Auditing Standard No. 2 also requires auditors to perform a walkthrough for each major class of transaction. This is to ensure the auditor will acquire a better understanding of the company’s internal control over financial reporting (Pierre-Marie and Spruce, 2005). Also, SOX increased the roles of boards of directors in overseeing the outside auditors who review the accuracy of corporate financial statements.
Auditor’s opinion
Consideration of a variety of issues, including senior management’s competence and ethical tone, is a must for auditors issuing opinions on and assessing internal control effectiveness. As Hermanson, Ivancevich and Ivancevich write, “Given these evaluations, the Section 404 audit reports provide an opportunity to examine the following