SOX Developments

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SOX Developments

• Laurie Ball, CPA
• Swenson Advisors, LLP (Murrieta)
• Audit Director
• Accounting Day
• May 12, 2008

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Recent Survey of Audit Committees (Center for
Audit Quality)

• More than 75 rated overall audit quality very
  good or excellent
• 82 feel audit quality has improved in recent
  years
• Nearly 90 said the risk of inaccuracies in
  financial statements due to fraud is not very
  high and 60 agreed risk declined following
  implementation of SOX

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New for Management Guidance from the SEC
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SEC Guidance to Management

• Explains how to vary evaluation approaches for
  gathering evidence based on risk assessments
• Explains the use of daily interaction,
  self-assessment, and other on-going monitoring
  activities as evidence in the evaluation
• Explains the purpose of documentation and how
  management has flexibility in approaches to
  documenting support for its assessment
• Provides management significant flexibility in
  making judgments regarding what constitutes
  adequate evidence in low-risk areas
• Allows for management and auditor to have
  different testing approaches

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Identifying Financial Reporting Risks and Controls

• Allows for tailored approach
• Can avoid identifying/documenting controls that
  are not important to ICFR
• Begins with identifying/assessing risks, then
  evaluates whether it has controls in operation
  that are designed to adequately address those
  risks
• Should consider entity-level controls in both
  risk assessment and in identifying controls which
  adequately address the risk

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Subsequent Evaluations

• After initial evaluation, managements efforts in
  subsequent years should be significantly less
• Subsequent evaluations should be focused on
  changes in risks/controls, rather than
  identification of all risks/controls
• Evidence necessary to reasonably support the
  assessment will only need to be updated from
  prior years, not recreated anew

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Material Weakness defined

• A material weakness is a deficiency, or
  combination of deficiencies, in ICFR such that
  there is a reasonable possibility that a material
  misstatement of the companys annual or interim
  financial statements will not be prevented or
  detected on a timely basis by the companys ICFR.

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New Guidance for AuditorsAudit Standard No. 5
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AS No. 5 Streamlines

• Redefines key terms in a simpler way (uses plain
  English)
• AS No. 5 is half the length of AS No. 2
• Clarifies that the auditors evaluation of
  materiality for an internal control audit is the
  same as the financial statement audit
• Alignment of terms between the standard and SECs
  Management Guidance

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Auditors Report

• Auditor expresses only a single opinion on the
  effectiveness of the companys ICFR
• Formerly auditor expressed separate opinions
  directly on the effectiveness of the companys
  ICFR and on managements assessment

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AS No. 5 What Else Has Changed

• Uses top down, risk-based approach
• Emphasizes the importance of a companys control
  environment
• Emphasizes high risk stages of the financial
  statement preparation
• Removes the detailed requirements to evaluate
  managements evaluation process
• Permits consideration of knowledge obtained from
  the auditors previous years audits

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AS No. 5 What has Not Changed

• For Management
• Responsible for designing and maintaining
  effective ICFR
• Requirement to assess and report on the
  effectiveness of ICFR annually
• Requirement to use and appropriate framework in
  evaluating effectiveness of ICFR (such as COSO)
• Requirement to have reasonable evidential matter
  to support assessment
• For Auditors
• One audit standard that the auditors apply to all
  companies
• Underlying concepts regarding sufficient evidence
  to support opinion
• Documentation requirements

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Current SOX Requirements for Non-Accelerated
Filers(Market cap under 75 million)
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SEC Action December 2006

• Managements Assessment of ICFR now required
• first fiscal year ending on or after December 15,
  2007
• Auditors attestation report on managements ICFR
  delayed one year
• first fiscal year ending on or after December 15,
  2008
• Further extensions could be coming

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SEC Proposed Deferral February 2008

• Delay by one more year requirement to include
  auditors attestation
• first fiscal year ending on or after December 15,
  2009
• Necessary to allow SEC to review results from
  study on SOX costs (due this summer)
• More delays to come???

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Audit Standard No. 6 Evaluating Consistency of
Financial Statements
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Overview of AS No. 6

• Adopted by PCAOB January 29,2008 and pending SEC
  approval
• Supersedes AU Section 420, Consistency of
  Application of Generally Accepted Accounting
  Principles
• Includes related amendments to other auditing
  standards

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Objectives of AS No. 6

• Aligns auditing standards with FASB Statement No.
  154, Accounting Changes and Error Corrections
• Clarifies auditor reporting
• Restatements
• Changes in accounting principle
• Misstatements
• Provides additional direction regarding
  evaluation of reclassifications

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Questions?!
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• Contact me at
• laurie.ball_at_swensonadvisors.com