Sarbanes-Oxley Act Understanding

Sarbanes-Oxley Act is a law passed on July 2002. President George W Bush enacted it in order to harmonize us security towards US giant corporate firms. The act establishes pertinent legislation that affects the auditing profession. In addition, auditors ought to attest to the management report and financial statement. Similarly, this act coincides with the revised SEC rules that govern auditors’ independence. It was then published by public companies accounting oversight board because of many irregularities in accounting, auditing, bankruptcy etc. in public companies such as Enron, Global Crossing, and WorldCom. The outcome of this law has led to enhanced auditing, new auditing standards such as prohibition against providing many non-audit services. The provisions in this act affect both American and non-American companies.

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Accounting and Auditing

Accounting is identifying, computing and communicating economic data to a number of users. A robust accounting process outlays the status of liabilities and assets in the company. When handling accounting always bear in mind the resources and financial stability of the company how they relocate internally. Moreover, they account for profitability and understand the cash flow in the company. Audit is the appraisal done by an expert of an event. They are usually of many types financial, technical, ecological etc. auditors have a task to analyze compare confirm and verify accounting reports.

Importance of auditing

It assists to conduct efficient and effective company evaluation giving a significant information risk. It provides an audit to the users hence it is a communication tool between the auditor and users. It is a powerful business processes that ensures clients comprehend how risks arising from technology can influence their financial statements.

Role of the SEC in accounting and auditing

SEC provide reliable information for investors in terms of where and how to invest. Another major role of SEC is to strengthen the auditors in order to have control over the whole process of analyzing and evaluation of the company. It gives an inquiry on the general auditing procedures like adequacy in assuring accurate financial statements. They assist to outlay proper public accounting standards.

Role of AICPA

It is the abbreviation of American institute of Certified Public Accountant. Its leading role is to set accounting standards for various companies. They produce audit and accounting guides, statements and bulletins. It is their responsibility to ensure that the laid out standards are updated and have no loopholes. It is also the role of AICPA to set and administer CPA exams to accounting students. AICPA offer loans to their research students as well as support other research institutions. They are the founder of CPA vision project that defines a vision for CPA career beyond 2011.Finally, AICPA are involved in providing seminars in various disciplines.


GAAS is an acronym for Generally Accepted Auditing Standards. These are set standards by AICPA to auditing professionals. They portray the quality of auditing and at some times judged. They are guiding principles that help auditors in doing their auditing responsibility. Professional attributes of financial statements are highlighted by these standards. The GAAS defines 10 standards that are generally accepted by auditing clients.

Types of the audit report

The four types of the report are the unmodified opinion report, qualified opinion report, an adverse report and disclaimer of opinion. In the unmodified report, the auditor accesses all needed information to perform the audit. It is the purest and easier for the accountant to handle the audit. In the qualified opinion report, auditors are limited to all aspects of the company’s status. Small records are missing; hence, the auditor is unable to access the data. All limitations are documented. In adverse opinion report, the auditor finds the resource and information uninformative hence negative response. In the disclaimer opinion, report is available at the disclaimer opinion issued and only issued when the auditor is unable to do so.

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When an unqualified report requires wording

They are appropriate when emphasizing on a specific issues. This is because some CPAs want to emphasize on matters in accounting reports. They are appropriate when general standards are followed and accumulated sufficient evidence towards fieldwork. They are also appropriate presentation of financial statement. Nevertheless, when no circumstances requiring this report.

Levels of Materiality

If there exist an erratic statement in the financial statements that is not likely to change decisions of a sound user, then the level is immaterial. There is no call for alarm if there is an unqualified opinion. A reasonable example is management recording a prepaid insurance as an asset in one financial year, then goes ahead to expense it in the following year, to lessen ledger costs. In this scenario, management has not followed GAAP. The figures are minimal. Erratic statement is immaterial, and a typical audit is necessary. The other level of materiality is if an erratic statement in the financial statement affects the decisions made by a user, but overall statements are well stated and constructive. The amounts are material, but they do not overshadow financial statement as a whole. A reasonable example is if the user knows that there is a misstatement in a fixed asset entry that directly hinders the will to give a loan, given that the asset is collateral for the loan. The last level of materiality is an amount being so material that fairness of overall statements is in doubt. In this case, the user will make incorrect decisions if the base of the decisions is the overall statements.

Enforcement mechanisms

If the rules of conduct are not followed, the defaulter faces the risk of expulsion from the AICPA. All defaulters expelled from the AICPA have their name published in the CPA newsletter. This publication is forwarded to all members of the AICPA Newsletter, and a copy is sent to The Wall Street Journal. There exists a professional ethics division in the AICPA. Its responsibility is to investigate violations of the code. There are two categories of disciplinary action. The first one is for minor violations. When the violation is less serious, a remedial action is suggested. An example is a violation of rule 23, which requires that audit clients include all disclosures in their financial statements. The regulations require that all organizations must submit all disclosures in their financial statements. This violation is not that significant in terms of solidarity of overall financial statement, but it an offence anyway. Here, the ethics division will rule that the defaulter be forced to attend a number of hours of education on competence. The other category of disciplinary action is in front of the Joint Trial Board. This board has the mandate to banish or defer members from the AICPA. Any judgment by The Joint Trial Board is published in the CPA Newsletter. Having one’s name published in this newsletter creates a bad image and shame to the defaulters. They may also end up losing their CPA certificates should the board decide so.

Prohibited Services addressing auditor independence

Audit clients are restricted to non-audit services that SEC defines. The SEC rules on independence have a section that prohibits these services. The prohibited services are legal and expert services not related to the audit, appraisal services, bookkeeping services, human resource functions, financial information system design, internal audit outsourcing, investment banker services, actuarial services and any other service that PCAOB determines by regulations. Private and public companies, that are not auditing clients, can get these services from CPA firms.

Purpose and content of the AICPA code of Professional conduct

The AICPA Code of professional conduct lays out broad standards of acceptable conduct and rules of conduct that are enforceable. The code of conduct is divided into four parts. These are principles, rules of conduct, interpretations of the rule of conduct and ethical rulings. The principles lay out the required standards of conduct and are not enforceable. Rules of conduct are stated in terms of definite rules and are enforceable. They are small standards of ethical conduct. Interpretations of the rules of conduct are by the AICPA division of professional ethics. A practitioner must give a convincing reason for their departure and are enforceable. Lastly, ethical rulings are published answers and explanations regarding rules of conduct handed to the AICPA. They are not enforceable, even though there must be a legitimate reason for their exit.

Reasons for lawsuits

Professionals in accounting agree that, when an audit fails to reveal erratic statements and incorrect audit opinion issued, it is necessary to doubt the care taken by auditors in auditing. If there occurs audit failure due to confusion of the above terminologies, the law allows the affected to recover the losses. The law is also not clear on which side (auditor or audit client) to get the benefit of an audit. This makes it easy for clients to sue audit firms.

Describe accountants’ liability to clients and related defenses.

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Accountants’ liability to clients

Clients are the most common party to file lawsuits against CPAs. These lawsuits include failure to discover thefts, failure to complete the audit by the deadline, breach of confidentiality etc. In auditing, failure by the auditor to carry out any agreed task or to achieve the objective is translated into negligence. CPA firms usually use one or a combination of four defenses upon lawsuit by a client. These are non-negligent performance, absence of causal performance, contributory negligence and lack of duty to perform the service.

Accountants’ liability to third party

Third parties are likely to sue CPAs under common law. Third party includes stockholders, bankers, employees, vendors and customers. Third parties may sue CPAs if the losses they incur are due to misleading financial statements. An example is if a bank fails to collect a loan from a client due to misleading financial statements from an audit report. The bank employee will blame the audit firm for negligence in their work. The possible defenses include nononegligent performance, absence of causal connection and lack of duty to perform the service.

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