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SOX Developments

SOX Developments. Laurie Ball, CPA Swenson Advisors, LLP (Murrieta) Audit Director Accounting Day May 12, 2008. Recent Survey of Audit Committees (Center for Audit Quality). More than 75% rated overall audit quality “ very good ” or “ excellent ”

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SOX Developments

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  1. SOX Developments Laurie Ball, CPA Swenson Advisors, LLP (Murrieta) Audit Director Accounting Day May 12, 2008

  2. 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” and60% agreed risk declined following implementation of SOX

  3. New for Management: Guidance from the SEC

  4. 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 differenttesting approaches

  5. 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

  6. Subsequent Evaluations • After initial evaluation, management’s 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

  7. “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 company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s ICFR.”

  8. New Guidance for Auditors:Audit Standard No. 5

  9. 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 auditor’s evaluation of materiality for an internal control audit is the same as the financial statement audit • Alignment of terms between the standard and SEC’s Management Guidance

  10. Auditor’s Report • Auditor expresses only a single opinion on the effectiveness of the company’s ICFR • Formerly auditor expressed separate opinions directly on the effectiveness of the company’s ICFR and on management’s assessment

  11. AS No. 5: What Else Has Changed • Uses top down, risk-based approach • Emphasizes the importance of a company’s control environment • Emphasizes high risk stages of the financial statement preparation • Removes the detailed requirements to evaluate management’s evaluation process • Permits consideration of knowledge obtained from the auditor’s previous years audits

  12. 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

  13. Current SOX Requirements for Non-Accelerated Filers(Market cap under $75 million)

  14. SEC Action December 2006 • Management’s Assessment of ICFR now required • first fiscal year ending on or after December 15, 2007 • Auditor’s attestation report on management’s ICFR delayed one year • first fiscal year ending on or after December 15, 2008 • Further extensions could be coming…

  15. SEC Proposed Deferral February 2008 • Delay by one more year requirement to include auditor’s 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???

  16. Audit Standard No. 6 Evaluating Consistency of Financial Statements

  17. 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

  18. 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

  19. Questions?!

  20. Contact me at laurie.ball@swensonadvisors.com

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