Congratulation LBJ Company on your decision to go public; this decision increases your company’s opportunities to raise capital for financing business plans, capital expenditures, and growth. To ensure that corporations and employees conduct business securely and ethically, and to restore public confidence and trust in the financial statements of companies whose stock is traded on public exchanges; the Public Company Accounting Reform and Investor Protection Act of 2002 (SOX) was passed. This document will focus on Sarbanes–Oxley Section 404: Assessment of internal control
Section 404 of the SOX Act, requires management to produce an internal control report as part of each annual Exchange Act. The report must affirm the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. The report must also contain an assessment, as of the end of the most recent fiscal year, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.
Both management and the external auditor are responsible for performing their assessment in the context of a top-down risk assessment, which requires management to base both the scope of its assessment and evidence gathered on risk. This gives management wider discretion in its assessment approach. These two standards together require management to: * Assess both the design and operating effectiveness of selected internal controls related to significant accounts and relevant assertions, in the context of material misstatement risks; * Understand the flow of transactions, including IT aspects, in sufficient detail to identify points at which a misstatement could arise; * Evaluate company-level (entity-level) controls, which correspond to the components of the COSO framework; * Perform a fraud risk