Implementation of the Sarbanes-Oxley Act

1
Implementation of the Sarbanes-Oxley Act

• The Securities and Exchange Commission (SEC) has
  issued final rules on audit and review
  documentation
• Mandatory retention of audit and review
  documentation for a period of seven years
• Retention of audit and review documentation that
  either supports or is inconsistent with the
  auditors final conclusions
• Documents generally excluded include
• Superseded drafts of memos and other records
• Previous copies of working papers corrected for
  errors
• Duplicates of documents
• Voice-mail messages

2
Implementation of the Sarbanes-Oxley Act

• SEC final rules address auditor independence
• Definition of the nine categories of prohibited
  non-audit services that if performed for an
  audit client would impair independence however,
  tax compliance, planning, and advising services
  are still permissible when pre-approved by the
  audit committee
• Rotation of lead and concurring partners off
  engagement after five years with a time out
  period of five years
• One-year cooling off period before auditor can
  join client in key financial reporting roles
• Determination that independence is impaired if
  audit partners earn or receive compensation based
  on their procuring non-audit services with an
  audit client
• Disclosure of fees related to audit services,
  audit-related services, tax services, and other
  services

3
Implementation of the Sarbanes-Oxley Act

• SEC final rules make the audit committee the
  client
• Designation of the audit committee as the
  client responsible for pre-approving all audit
  and non-audit services
• Auditors to report the following matters to the
  audit committee
• All critical accounting policies and practices
  used by management
• All material alternative accounting treatments of
  financial information within GAAP that have been
  discussed with management
• Other material written communications between the
  accounting firm and management

4
Public Company Accounting Oversight Board

• The PCAOB was established pursuant to the
  Sarbanes-Oxley Act
• Four of five board members have been appointed
• Charles D. Niemeier, Acting Chairperson 
• Daniel L. Goelzer  
• Kayla J. Gillan  
• Willis D. Gradison, Jr.
• The SEC is conducting a selection process to find
  the Chairperson of the board
• The board recently issue proposed rules regarding
  registration of public accounting firms (domestic
  and foreign) which issue audit reports on U.S.
  public companies

5
Public Company Accounting Oversight Board

• Key responsibilities of the PCAOB include
• Registering public accounting firms that audit
  public company financial statements
• Establishing or adopting auditing, quality
  control, ethics and independence standards
  related to audits of public companies 
• Conducting inspections of registered audit firms
• Conducting investigations and disciplinary
  proceedings related to registered audit firms

6
Computerization of CPA Exam

• Significant changes to the CPA exam include
• A shortened exam from 15 ½ hours to 14 hours
• Exam content will change
• Multiple choice questions will comprise
  approximately 80 of the exam
• Case study simulations will comprise the other
  20
• Case study simulations will contain research
  activities which will require candidates to use
  electronic databases and authoritative literature
  to answer various questions. Candidates will also
  need to be familiar with spreadsheets and word
  processing software.
• Visit the official CPA exam web site for more
  information on simulations

7
Computerization of CPA Exam

• Other significant changes to the exam
• Candidates will be allowed to take the exam at
  any time during four exam windows each year (each
  exam window lasts three months)
• Candidates may retain credit for a passed section
  of the exam for a period of 18 months beginning
  on the date the first section passed is taken
• Candidates may sit for each section of the exam
  individually and in any order
• Total average cost of the new computerized exam
  is estimated to be 533

8
New Statements on Auditing Standards

• The Auditing Standards Board has issued two new
  standards
• SAS No. 100, Interim Financial Information
• SAS No. 101, Auditing Fair Value Measurements and
  Disclosures

• SAS No. 100 provides guidance to auditors on
  their review of interim financial statements
• SAS No. 101 includes expanded guidance on audit
  procedures related to examination of fair value
  measurements and disclosures included in the
  financial statements

9
On the Horizon

• The Auditing Standards Board has several task
  forces addressing issues arising from
  Sarbanes-Oxley including
• Internal Control Reporting Task Force
• The group is drafting a proposed SAS along with
  amendments to existing standards to align them
  with requirements of Sarbanes-Oxley
• Audit Committee Task Force
• This group is also drafting revisions to existing
  standards to align them with Sarbanes-Oxley given
  that the audit committee is now the client not
  management
• More information is available in the January 2003
  issue of In Our Opinion available on the
  AICPAs web site

10
On the Horizon

• In December 2002 the ASB issued an exposure draft
  of several new standards and amendments to
  existing standards to enhance the auditors
  application of the audit risk model
• Significant proposed changes include
• Auditors must obtain an in-depth understanding of
  an entity and its environment focusing on the
  following
• Industry, regulatory, and other factors
• Nature of the entity including the application of
  accounting principles
• Objectives and strategies and the related
  business risks
• Measurement and review of financial performance
• Internal control

11
On the Horizon

• Other significant proposed changes include
• Auditors must make risk assessments of material
  misstatements at the financial statement level
  and the assertion level based on their
  understanding (See previous bullet)
• Auditors may no longer assess control risk at
  maximum as a default without a basis for doing so
• Tests of controls are encouraged by eliminating
  the default to maximum risk
• If the auditor plans to rely on controls that
  have not changed, their operating effectiveness
  must be tested at least every third audit
• If the auditor plans to rely on controls to
  mitigate a significant risk, all evidence about
  the operating effectiveness of the controls must
  be from tests of controls performed in the
  current period
• For significant risks, the auditor is require to
  perform substantive tests
• Greater emphasis is placed on testing disclosures