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16 Nov 2018

In July 2002, Congress passed the Sarbanes-Oxley Act. Theprovisions of the Act apply mainly to publicly held companies andtheir audit firms. Explain briefly how the Act affectsaudit firms concerning audit reports, audit documentation, internalcontrol, and other services provided by auditors to theirclients.

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Jean Keeling
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17 Nov 2018

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1–28. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following best describes the relationship between assurance services and
attest services?
(1) While attest services involve fi nancial data, assurance services involve nonfi nancial data.
(2) While attest services require objectivity, assurance services do not require objectivity.
(3) Both attest and assurance services require independence.
(4) Attest and assurance services are different terms referring to the same types of services.
b. Which of the following has primary responsibility for the fairness of the representations
made in fi nancial statements?
(1) Client’s management.
(2) Independent auditor.
(3) Audit committee.
(4) AICPA.
c. The most important benefi t of having an annual audit by a public accounting fi rm is to:
(1) Provide assurance to investors and other outsiders that the fi nancial statements are reliable.
(2) Enable offi cers and directors to avoid personal responsibility for any misstatements in
the fi nancial statements.
(3) Meet the requirements of government agencies.
(4) Provide assurance that illegal acts, if any exist, will be brought to light.
d. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board
(PCAOB). Which of the following is not one of the responsibilities of that board?
(1) Establish independence standards for auditors of public companies.
(2) Review fi nancial reports fi led with the SEC.
(3) Establish auditing standards for audits of public companies.
(4) Sanction registered audit fi rms.
e. Which of these organizations has the responsibility to perform inspections of auditors of
public companies?
(1) American Institute of Certifi ed Public Accountants.
(2) Securities and Exchange Commission.
(3) Financial Accounting Standards Board.
(4) Public Company Accounting Oversight Board.
f. Governmental auditing, in addition to including audits of fi nancial statements, often
includes audits of effi ciency, effectiveness, and:
(1) Adequacy.
(2) Evaluation.
(3) Accuracy.
(4) Compliance.
g. In general, internal auditors’ independence will be greatest when they report directly to the:
(1) Financial vice president.
(2) Corporate controller.
(3) Audit committee of the board of directors.
(4) Chief executive offi cer.
h. Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002
to regulate public accounting fi rms:
(1) Disclosures related to accounting irregularities at Enron and WorldCom.
(2) Restatements of fi nancial statements by a number of public companies.

(3) Conviction of the accounting fi rm of Arthur Andersen LLP.
(4) Ethical scandals at the AICPA.
i. Which of the following organizations establishes accounting standards for U.S. government
agencies?
(1) The Financial Accounting Standards Board.
(2) The Governmental Accounting Standards Board.
(3) The Federal Accounting Standards Advisory Board.
(4) The Public Company Accounting Oversight Board.
j. Which of the following is correct about forensic audits?
(1) All audit engagements are forensic in nature.
(2) Forensic audits are performed by law fi rms; they are not performed by CPA fi rms.
(3) Forensic audits are equivalent to compliance audits.
(4) Forensic audits are usually performed in situations in which fraud has been found or is
suspected.
k. What best describes the purpose of the auditors’ consideration of internal control in a
fi nancial statement audit for a nonpublic company?
(1) To determine the nature, timing, and extent of audit testing.
(2) To make recommendations to the client regarding improvements in internal control.
(3) To train new auditors on accounting and control systems.
(4) To identify opportunities for fraud within the client’s operations.
l. Which of the following is an example of a compliance audit?
(1) An audit of fi nancial statements.
(2) An audit of a company’s policies and procedures for adhering to environmental laws
and regulations.
(3) An audit of a company’s internal control over fi nancial reporting.
(4) An audit of the effi ciency and effectiveness of a company’s legal department.

1. Davis, Inc., a music gorup, entertained at a black-tie dinnerdance on April 26, and collected its fee in full at the end of theevening. This transaction:

A. Causes an increase in Cash and Revenue

B. Causes an increase in Accounts Receivable and Revenue

C. Causes an increase in Unearned Revenue and Revenue

D. Causes an increase in Cash and Unearned Revenue

2. Tony's Market, which uses a perpetual inventory system,recorded the following chronological events involving a recentpurchase of inventory:

Received goods for $30000, terms 2/10, n/30

Returned $800 of the shipment for credit

Paid the invoice within the discount period

As a result of these events, the company's inventory

A. Increased by $29200

B. Increased by $30000

C.Increased by $28616

D. Increased by $29400

3. The Sarbanes - Oxley Act of 2002 (SOX) had the followingimpact:

A. Senior executive management must certify financialstatements

B. Senior management must certify that a system of internalcontrol is in place and is constantly reviewed

C. Outside auditors needed to decrease their dependency on theirclients

D. All of the Above

4. On March 31, Mayweather Corporation issued 120000 shares of$5 par common stock for $50 per share. On August 15, Mayweather'sBalance Sheet showed 120000 shares issued and 100000 sharesoutstanding of the common stock. Mayweather declared a $0.20 pershare dividend on Auguest 15. The total dividend declared byMayweather would be:

A. $24000

B. $20000

C. $4000

D. Not enough information to answer the question

Required: After reading the Bye, Bye SOX? Article comment on the issue of small business compliance with Section 404 of SOX

Bye, Bye, SOX?
The Sarbanes-Oxley Act (SOX) SOX compliance has been extended
may be declawed by upcoming four times, but they won’t need to
U.S. Congress and comply at all if the Garrett-Adler
Supreme Court decisions. amendment makes it to the Senate
The House of Representatives floor as a standalone bill.
recently voted to approve the SOX also established the
Garrett-Adler amendment, which PCAOB to oversee and regulate
would exempt small companies audit firms. PCAOB operates under
from SOX Section 404 provisions, the supervision of the Securities
while the Supreme Court is considering and Exchange Commission (SEC),
the constitutionality of the which also appoints PCAOB members.
Public Company Accounting Oversight It is funded by fees charged to
Board (PCAOB). audited firms. When it was established,
These developments may have Congress wanted the board
long-term implications for SOX, the to be separate, with its own funding
2002 legislation passed in the wake stream, and outside normal civil
of the Enron, WorldCom, and Tyco service laws so it could attract
scandals. The outcomes may also highly qualified specialists. PCAOB
have implications for records managers, members’ salaries are more than
information technology specialists, $500,000 and are reviewed by the
and compliance officers SEC.
who devise and implement company Pro-business advocates, represented
controls. by the Free Enterprise
Section 404 of SOX requires Fund, argue that the PCAOB’s governance
company auditors to attest to the structure is unconstitutional
soundness of the firm’s internal because it is an independent
controls and financial statements. agency that does not allow for the
Internal controls may include anything president to appoint members. Additionally,
from transaction approval authorizations because only the president
to records retention can remove SEC commissioners
programs. This provision is widely for cause, and because
blamed for an increase in auditors’ the SEC can only remove PCAOB
fees, as well as increased expenditures members for cause, some court
to ensure that proper internal members believe this is a formerly
controls are in place. unrecognized limit of the president’s
Small firms – those with powers that may contradict
less than $75 million in the constitution.
market capitalization The Supreme Court will take up
– have protested that the issue soon, and some legal experts
compliance with SOX 404 would believe that SOX could be
cost them a disproportionate share abolished completely if the court
of their earnings. The complaint is rules the PCAOB unconstitutional.
supported by an independent study
conducted at Pennsylvania State
University, which showed that
firms just over the $75 million
mark paid nearly $700,000 more in
audit fees and had average earnings
of negative $1.4 million in 2004

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