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The Audit Market Principles of Auditing: An Introduction to International Standards on Auditing - Ch. 2. Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage. Demand for audit services explained by several different theories:. The Policeman Theory
Rick Stephan Hayes,
Roger Dassen, Arnold Schilder,
Public Company Accounting Oversight Board (PCAOB)
Created by the Sarbanes-Oxley Act of 2002
2. Obtaining an Understanding of Internal Control Over Financial Reporting, Including Performing Walkthroughs
5. Testing Operating Effectiveness
8. Evaluating the Results of Testing
9. Identifying Significant Deficiencies
10. Forming an Opinion and Reporting
11. No Disclosure of Significant Deficiencies
12. Material Weaknesses Result in Adverse Opinion on Internal Control
13. Testing Controls Intended to Prevent or Detect Fraud
auditing rules in the
the Auditing Standards Board
Important determinants of audit fees are:
Nearly all national audit professions have some sort of disciplinary court.
The disciplinary court makes its judgment and determines the sanction. It may be:
An audit failure/neglect has to be proven (negligence issue).
The auditor should owe a duty of care to the plaintiff (due professional care).
The plaintiff has to prove a causal relationship between her losses and the alleged audit failure (causation issue)
The plaintiff must quantify her losses (quantum issue).
Section 404 of the Sarbanes-Oxley Act requires each annual report of a company to contain an “internal control report” which should:
(1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and
(2) contain an assessment, as of the end of the fiscal year, of the effectiveness of the internal control structure and procedures for financial reporting.
(3) Companies must select suitable criteria (COSO-based) against which it may evaluate the effectiveness of internal controls for authorization, safeguarding assets, and properly recording of transactions.
(4) An independent auditor attests to any difference between management’s assertions under 404 and the audit evidence on internal controls
In response to the controversies there have been in two landmark studies (the COSO Report and the Cadbury Report which lead to the Combined Code and the Turnbull Report) and most recently have been legislated into the US
accounting profession by the
Act of 2002.
The COSO report was published by the Committee of Sponsoring Organizations of the Treadway Commission. The COSO report envisaged:
1 harmonizing the definitions regarding internal control and its components;
2 helping management in assessing the quality of internal control;
3 creating internal control benchmarks, enabling management to compare the internal control in their own company to the state-of-the-art; and
4 creating a basis for the external reporting on the adequacy of the internal controls.