Question

LO 5-5 5.64 Impact of Sarbanes-Oxley Act. Your long-time client, Central Office Supply, has been rapidly expanding, and the board of directors is considering taking the company public. CEO Terry Puckett has heard that costs of operating a public company have increased significantly as a result of the Sarbanes-Oxley Act. Puckett is particularly concerned with reports that audit fees have doubled because of internal control provisions of the act and PCAOB Auditing Standard No. 2201. Puckett has asked you to explain the possible effects on the audit of complying with the requirements of Sarbanes-Oxley. Required: Draft a letter to Puckett outlining the changes in the company's responsibilities for internal control and changes in the audit due to Sarbanes-Oxley and PCAOB Auditing Standard No. 2201.

Answer 1

Terry Puckett

CEO, Central Office Supply Inc.

Dear Mr., Terry

The Sarbanes-Oxley Act and the PCAOB auditing standard will have an effect of increasing the company costs when the board decides to go public. Specifications related to internal control will have an effect on both management and auditing.
CEO is responsible for the firm's documentation, testing and implementation of internal controls for financial reporting. This is a costly process but will ensure that the firm is sound with the controls. As a CEO, you must write the assessment under which management will implement controls and evaluate them. The evaluation will be supported by concrete and sufficient for evidence.

The auditors will be gathering evidence on the effectiveness of firm's internal control. Auditors will perform some tests for reporting but the most important evidence will be based on their own work. It means auditor will be conducting a lot of process during the audit to check internal control.

Thanking You,

Yours truly,

Nidhi Bathwal