Professional Documents
Culture Documents
Corporate
Governanceand
Audits
Requirescompaniestocertifycorrectnessoffinancial
statementsqualityofitsinternalcontrols
AuditCommitteesgivenexpandedpowersasthe
auditclientandmustpreapproveanynonaudit
servicesbyitsexternalauditors
AuditCommitteesmustreporttheiractivitiestothe
public
AuditCommitteesmusthaveatleastonepersonwho
isafinancialexpert.Othermembersmustbe
knowledgeableinfinancialaccountingandcontrol
TheSarbanes/OxleyActof2002
(continued)
Auditengagementpartners,aswellasotherpartnersand
managerswithsignificantrolesintheaudit,mustbe
rotatedofftheengagementeveryfiveyears
Acoolingoffperiodbeforeanauditpartneror
managercantakeahighlevelpositionwithanaudit
clientwithoutjeopardizingtheindependenceofthe
publicaccountingfirm
Increaseddisclosureofoffbalancesheettransactions
oragreementsthatmayhaveamaterialeffectRequires
theGAOtostudyanumberofissuesincludingtheeffect
ofconsolidationoncompetitionwiththeaccounting
profession,andananalysisofmandatoryauditfirm
rotation
ThePCAOB
Sarbanes/OxleygrantedthePCAOBbroad
authorityincludingthepowersto
SetauditingstandardsthePCAOBhaschosento
setauditingstandards
SetfinancialaccountingstandardsthePCAOBhas
chosentolettheFASBcontinuetosetaccounting
standards
Setstandardsforthereportsoninternalcontroland
riskmanagement
Performqualityreviewsofpublicaccountingfirms
andrecommendpenaltiesifthefirmsfailtoperform
ThePCAOB(continued)
Establishqualitycontrolstandardsfortheauditsof
publiccompanies
Requireallpublicaccountingfirmsthataudit
publiccompaniestoregisterwiththePCAOBand
becomelicensedtoperformsuchaudits
StockExchangeListing
Requirements
Boardsneedtoconsistofamajorityofindependentdirectors
Boardsneedtoholdregularexecutivesessionsofindependent
directorswithoutmanagementdirectorspresent
Certaincommitteesoftheboard(nominating/governance,
compensation,audit)needtopublishcharters
CEOsneedtoprovideanannualcertificationofcompliance
withcorporategovernancestandards
Websitedisclosureofspecificcorporategovernanceissues
DoddFrankWallStreetReformand
ConsumerProtectionActof2010
Mandatesenhancedstockexchangelistingstandardson
compensationcommitteeindependence
Requiresadditionaldisclosureoftherelationshipbetween
executivecompensationandfinancialperformance,aswellas
internalpayequity
Mandatescorporatepoliciesontheforfeitureofexecutive
compensationincertaincircumstances
LO5:RoleofAuditCommittees
AsindicatedintheSarbanesOxleyAct,acommitteeofthe
boardofdirectorsthathasimportantsignificancetothe
auditoristheauditcommittee
Theauditcommitteeisastandingcommitteeoftheboardof
directorswhosepurposeistooverseetheaccountingand
financialreportingprocessesofthecompanyandthefinancial
statementaudits
Thatcommitteeisdesignatedastheauditclienttowhomthe
externalauditorshouldreport
RoleofAuditCommittees
Forpubliccompanies,theauditcommitteemustbecomposed
ofoutsidedirectors,i.e.,directorswhoarenotmembersof
managementanddonothaveotherrelationshipswiththefirm
(e.g.,asvendor,consultant,orgeneralcounsel)
Theauditcommitteeshouldincludeatleastonefinancial
expertwhohasanunderstandingofGAAPandhasrelevant
accountingandauditexperience
RoleofAuditCommittees
Theauditcommitteehasthreeprimaryresponsibilitiesrelated
tothefinancialreportingprocess:
Provideoversightoftheaccountingandfinancialreportingprocesses
andofthefinancialstatementaudits
Appoint,compensate,andoverseetheexternalauditor,
includingapprovinganynonauditservicestobeprovided
bytheexternalauditor
Ensurethattheboardestablishesawhistleblowerprogram
RoleofAuditCommittees
Additionalresponsibilitiesoftheauditcommitteemay
include:
Theauthoritytohireandfiretheheadoftheinternalauditfunction
Setthebudgetfortheinternalauditactivity,andreviewtheinternal
auditplananddiscussallsignificantinternalauditresults
Performingorsupervisingspecialinvestigations,reviewingpolicieson
sensitivepayments,maintainingcommunicationbetweentheboard,
management,theexternalauditors,andtheinternalauditors,and
coordinatingperiodicreviewsofcompliancewithcompanypolicies
suchascorporategovernancepolicies
RoleofAuditCommittees
Theauditcommitteemustmakeinformedchoicesaboutthe
qualityofworkitreceivesfromtheauditors:
Theauditcommitteemustmonitorandassesstheindependenceand
competenceofallauditfunctions
Itshouldreviewqualitycontrolreportsonboththeexternalauditfirm
andtheinternalauditfunction,anditshouldevaluatethequalityof
reportsitreceivesfromtheauditorsandthequalityoffinancial
reportingandcontroldiscussions
Theauditcommitteewillreceivefeedbackfromboththe
internalandexternalauditorsonanumberofissuesincluding
thequalityofinternalcontrolsoverfinancialreporting
RoleofAuditCommittees
Aspartofitsoversightresponsibility,theauditcommittee
expectstheexternalauditortoreporttotheauditcommittee:
Allcriticalaccountingpoliciesandpracticesusedbymanagement
AllmaterialalternativeGAAPtreatmentsthathavebeendiscussed
withmanagement
Othermaterialwrittencommunicationsbetweentheauditorand
management
Theauditcommitteeshouldreviewallregulatoryaudit
findings,whereapplicable,todetermineiftheyprovide
importantfeedbackonthequalityofcontrols,operational
problems,orfinancialissues
RoleofAuditCommittees
OneprimaryroleoftheAuditCommitteeistoensure
theindependenceoftheexternalauditfirm
MakestheAuditCommitteetheauditorsclient
RequirestheAuditCommitteetopreapproveall
nonauditservicesbytheauditfirm
Requiringtheauditcommitteetopreapproveany
nonauditservicesprovidedbythepublicaccounting
firm
LO6:PrinciplesofEffectiveAudit
Committees
CommitteePurpose
CommitteeResponsibilities
Interaction
Independence
ExpertiseandIntegrity
PhilosophyandCulture
InternalControl
RiskAssessment
MeetingsandInformation
ExternalAuditor
InternalAudit
OversightofWhistleblowerProcedures
CompensationandStockOwnership
ServiceandTermLimits
Disclosure
LO7:ExternalAuditorCommunication
totheAuditCommittee
AuditorsResponsibilityunderGenerallyAcceptedAuditingStandards
SignificantAccountingPolicies
ManagementJudgmentsandAccountingEstimates
SignificantAuditAdjustments
JudgmentsabouttheQualityoftheCompanysAccountingPrinciples
OtherInformationinAnnualReports
DisagreementswithManagement
ConsultationwithOtherAccountants
MajorIssuesDiscussedwithManagementBeforeRetention
OverviewandPlannedScopeoftheAudit
DifficultiesinPerformingtheAudit
RepresentationsRequestedfromManagement
LO8:CorporateGovernanceand
theAudit
Goodgovernanceisimportanttotheconductofanauditfor
oneverysimplereason:companieswithgoodcorporate
governancearelessriskytoaudit
Thesecompaniesgenerallyhavethefollowingcharacteristics:
Arelesslikelytoengageinfinancialengineering
Haveacodeofconductthatisreinforcedbyactionsoftop
management
Haveindependentboardmemberswhotaketheirjobsseriouslyand
havesufficienttimeandresourcestoperformtheirwork
Taketherequirementsofgoodinternalcontroloverfinancialreporting
seriously
Makeacommitmenttofinancialcompetenciesneeded