Question

- DuyuunL UUUUU will be asking you additional questions about the audit of the Lakeside Company. THE IMPACT OF SARBANES-OXLEY The case states that the firm of Abernethy and Chapman is considering the acceptance of clients that are publicly traded. What specific steps would the firm have to take before they could accept an audit client that is publicly traded? Discussion question #2 above addresses audit engagement management, consulting partners and rotation. Discuss how Sarbanes-Oxley has affected these issues. xiii

Answer 1

Definition:

Sarbans oxley act of 2002 also known as public company accounting reform and investor protection act of 2002 and commonly called SOX OR sarbox is an United states federal law passed in response to a number of major corporate and accounting scandals including those affecting Enron and worldcom.
These scandles resulted in decline of public trust in accounting and reporting practices.
The act establishes a new quasi-public authority, the public company accounting oversight board for overseeing, regulating, inspecting and discipling accounting firms in their roles as auditors of public companies.
The act covers issue issues such as auditor independence, corporate governance and enhanced financial disclosure.

Explanation 1

The auditor has to keep in mind certain things before accepting audit of publicly traded companies such as

1. The auditor is not impaired from and no restrictions has been placed on his independence and is capable of exercising objective and impartial judgement on all issues discovered during audit.
2. There should be no pre-existing relationship with auditor to be appointed.
3. The auditor is prohibited for providing non audit services to the firms such as bookkeeping

• actuarial services
• internal audit
• broker-dealer
• management functions.

4.The permitted service as such as (tax services, comfort letters, statutory auditors or others ) must be pre approved by the audit committee.

5.The appointing auditor must also keep in mind the prohibited relationship before being appointed as auditor such as

• employment relationship
• contigent fees
• material business relationships
• others

Explanation 2.

The auditor shall be found guilty of an all lawful act, if he performs audit services for a period of more than five years of a company as per sarbanes oxley act, 2002.