Audit Committee

Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . Evaluation of Audit Differences

In the Sarbanes-Oxley Act of 2002, the audit committee is responsible for adequate supervision and reporting and for responding to:

In 2015, the Legislative Joint Auditing Committee audited Hector School District. In the Summary of Auditor’s Results and Financial Statement Findings, the auditors did indicate a material weakness in internal control. Here, the specific requirement noted that management is where the responsibility falls for implementing sound accounting policies and maintaining internal control over financial procedures that are consistent with their own assertions found in the financial statements. The stated condition for this material weakness was that the district failed to segregate financial duties among qualified employees. Instead, one sole employee was in charge of all of the financial accounting duties. Thus, the school

After the accounting scandals that took place in 2001 and 2002, Congress passed the SOX which requires companies to be held more accountable for financial statement reporting. SOX was established as a corporate responsibility law, which applies to all companies who are registered with the SEC (Mundy & Owen, 2013, p. 183). Mundy and Owen explains that SOX’s intention is to enhance the quality of financial statement reporting among all companies, to help investors feel confident with their investments (p. 183). Additionally, Mundy and Owen note that SOX looks to increase the reliability and accuracy of financial statements by implementing regulations and requirements on internal controls over financial reporting (p.183).

Preceding the implementation of SOX, “auditors were subject only to state licensing and lightly enforced self-regulation” (Coates and Srinivasan 629). The only regulation in a preSOX economy was a “part time Public Oversight Board” that “oversaw auditors, but was dominated by audit firms and had little authority” (Coates and Srinivasan 629). This meant there was very little corporate governance and transparency in public firms. The rules that SOX instigated were designed to put an end to the unregulated auditing process.

     The second standard requires public accounting firms to audit internal controls in conjunction with an audit of financial statements. The second standard requires public accounting firms to attest that the internal controls documented and set forth by the company audited are sufficient to ensure the integrity of the financial statements (Griggs). This second standard is a real breakthrough in ensuring the financial statements of a company are sound. It is impossible for a public accounting firm to audit every detail of large multi-national company. Strong internal controls reduce the risk of material misstatements to a company’s financials caused by negligence or fraud. Maintaining internal controls is no longer enough. Companies must now analyze and document their internal processes (Calabro). When a public accounting firm issues an unqualified opinion on the internal controls of a company, which will be required starting November 15, they are stating that the internal checks set forth adequately protect the assets of a company from negligence or fraud.

The Sarbanes-Oxley Act of 2002 significantly increased the authority of audit committees in overseeing their companies’ financial reporting processes. One of the audit committee’s responsibilities is that they oversee the financial reporting process. Audit committees are required to review and discuss the annual audited financial statements with management and the external auditors. They also monitor control processes. Monitoring internal controls directly affects the reliability of financial statements is generally understood to be a function of audit committees. SOX section 301 directed the SEC to require audit committees to establish procedures to handle complaints on accounting, internal accounting controls, or auditing matters and to provide confidentiality to employees who submit complaints. Section 301 also states that audit committees are solely responsible for all the aspects relating to selecting, hiring, and replacing external auditors, whom report to the audit committee. An audit committee approves the compensation to external auditors. It also states that audit committees must discuss and resolve disagreements between management and external auditors.

Sarbanes Oxley mandates requires all public companies to establish internal controls and procedures for financial reporting. In addition they must document, test and maintain those controls and procedures to ensure their effectiveness. The purposes of SOX are to emphasis on corporate governance and to reduce the possibilities of corporate fraud by increasing the stringency of procedures and requirements for financial reporting.

The Sarbanes-Oxley Act (SOX) was enacted in July 30, 2002, by Congress to protect shareholders and the general public from fraudulent corporate practices and accounting errors and to maintain auditor independence.   In protecting the shareholders and the general public the SOX Act is intended to improve the transparency of the financial reporting.   Financial reports are to be certified by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) creating increased responsibility and independence with auditing by independent audit firms. In discussing the SOX Act, we will focus on how this act affects the CEOs; CFOs; outside independent audit firms; the advantages and a

Professional trends, particularly the demand for faster reporting of financial information as suggested by Securities Exchange Commission’s (SEC) recent reporting period change[2], put pressure on auditors to rely on internal rather than more persuasive external evidence items (CICA, 1999; Bierstaker et al., 2001; Helms, 2002; Hunton et al., 2003; LeGrand, 2002; SEC, 2002, 2005).

As the wide-ranging business environment goes down, the rate of auditor litigation has increased. Lawsuits are a continuous threat to the auditing line of work. In this paper, we present evidence on lawsuits having a positive effect on auditors audit liabilities. It is the auditors’ responsibility to plan and complete the audit to obtain practical guarantee about if the financial statements are free of material misstatement or if they are caused by error or fraud. A mixture of court decisions and economic state of affairs has shaped the legal setting for the auditing line of work and the resulting lawsuits. Even though auditors are potentially legally responsible for both criminal and civil offenses; lawsuits have encouraged auditors to reduce their risks of legal action by instituting sound quality control and look at procedures. The majority of the time, for litigation to arise, the auditor must have given an unqualified audit opinion to a set of financial statements that are afterward revealed to have material misstatements or material omissions. According to the ACCA an auditor liability is increasingly concerning, both in terms of audit quality and the reputation of the profession but also in terms of the cost to the industry and the barriers this creates to competition within the audit market.

Does the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control?

The Auditing Concepts Committee (American Accounting Association [AAA] 1972) defined auditing as “a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.” This definition clearly shows that the focus of auditing is verification of assertions made by managements, including the proposed financial reports (Alles et al. 2004). Continuous auditing (CA) broadens this concept by proposing timelier assurance, generally with less aggregated (or transactional) data than traditional auditing.

These changes were outlined in the Sarbanes Oxley Act of 2002 (SOX). SOX completely revolutionized financial reporting, requiring senior management of firms to sign off on each financial statement that the company issues. It also stipulated that wrongful doing can result in not only termination but also imprisonment. SOX amplified the requirement for companies, requiring firms to maintain proper levels of internal controls when it comes to operating activities. SOX also established the creation of the Public Company Accounting Oversight Board (PCAOB) which implemented stricter auditing standards for public accounting firms. Not only were accounting firms required to consider internal controls, but they were also required report any significant deficiency directly to the board of directors. SOX stressed the importance of internal controls, and within internal controls it established the need for segregation of duties. Since this time, there have been many additions to accounting policies regards segregations of duties, and many functions of the business process dedicated to it.

Since reliable financial information is essential for investors and other stakeholders to take adequate decisions, this reliability must be backed by independent review performed by independent and certified auditing firms, which are supposed to verify and certify financial statements issued by a company’s management. If the auditor is not competent and independent from management, the audit of the financial statements loses its credibility (Schelker, 2013, p.295). According to Impastato (2003), because of audit failures, accountants are to blame for investors losing billions of dollars in earnings in addition to market capitalization (as cited in Grubbs & Ethridge 2007).