Acct 301 Hw2

ACCT301

Week 2 Homework

1. In two to three paragraphs, describe the Sarbanes-Oxley Act and why it is important to the accounting profession. (15 points)

The SOX Act of 2002 was passed to regulate auditors and the services provided to clients, increase the accountability of executives, and provide more assurance and reliability against violators of fraud. The oversight board has the authority to establish standards dealing with audits, quality control, ethics, etc. Prior to the act, AICPA set the auditing standards and the SEC had oversight.

The act makes the executives verify financial statements and calls for severe punishment and possible prison time for fraud. The act makes it illegal for auditors to provide non-audit services to clients. Auditors of public companies are also required to keep work papers for up to 7 years. Audit rotation also became mandatory with this act every five years. Audit firms are also not allowed to audit public companies whose executives worked for the audit firm in the past. The act also requires that management document and assesses the effectiveness of all internal control processes that could affect financial reporting.

2. Name and briefly describe the five components of COSO’s internal control framework. (10 points)

The five components of COSO’s internal control framework include monitoring, control activities, risk assessment, information and communication systems, and control environment. Control environment is the set of factors in an organizations operating environment that separately and together set the tone of the organization. Information and communication systems enable the people to capture and exchange the information needed to conduct, manage, and control its operations. Risk assessment is the processes to establish objectives for financial reporting, operations, and compliance, and to identify and manage risks of not reaching them. Control activities are the policies and procedures designed and...