Question

CO C: Given the Sarbanes Oxley Act’s impact and the Securities and Exchange Commission’s mandate to the Public Company Accounting Oversight Board, explain the ethical responsibilities of auditors under various business situations, including fraud auditing.

Answer 1

The public Company Accounting Reform and Investor Protection Act 2002, is commonly known as SOX or Sarbanes- Oxley Act. It is a United States federal law passed in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International & world com which lead to the loss of public trust in accounting & reporting practices.

Under this act new & enhanced standards were established for all U.S public company boards, management, public accounting firms. In the globalized environment of Financial reporting , Auditing and corporate Governance , this Act has played a very vital & prominent Role.

the Act imposed various  ethical responsibilities of auditors under various business situations, including fraud auditing as explained below.

Auditors of the business concern should not be too closely involved with the assessing  of its controls or their objectivity gets risk impaired. The auditor of the company  cannot accept or perform responsibility of the management to reach conclusions on the effectiveness of the entity’s controls ,for this is the sole responsibility of the management nor can management design the controls and operating effectiveness of these controls on basis of the results of the auditor’s tests.

Auditors responsibility in regard to internal control of the company :Under SOX the public companies were required to obtain audit firm attestation in regard to there internal control system. The former now will be required to certify a company’s internal controls and will no longer be able to use certain common audit strategies. .Sox Sec 404 aimed to disclose the Internal Control weaknesses , and make Companies to improve their system. the significant evidences produced by the internal contro reports as per sec 404 ,the investors & stakeholders are able to make managerial & overall governance improvements. With the improvement in the financial reporting quality that can be attributed with sec 404 , the truistworthiness has increased to a great extent.

FRAUD AUDITING : generally Frauds arise because there are opportunities to do so or the people committing the fraud are under pressure and have a rationalization for such  activities. Fraud is a critical problem that cannot be legislated away. there is a professional responsibility on auditors to detect fraud . Substantive internal controls specifically designed for the reduction and elimination of fraud are the most important. Hence under Sox, the auditor evaluates  the work of the independent auditor  and attestation in regard to there internal control system is done in order to verify the work done internally, hence there are more chances of detecting the frauds as all material internal control weaknesses and fraud are disclosed to the auditor

Advising the Company for initiation of Assessment of Controls: Under SOX the public companies will be advised by the Auditors to start the   assessing the effectiveness of controls. SInce the task will be time-consuming, Therefore Auditor should advise the company to start such process as soon as possible.