HYP0THETICAL 3 INTERNAL CONTROL OVER FINANCIAL REPORTING

[NOTE: Prior to the adoption of the Sarbanes-Oxley Act (SOX) we would not be discussing a company’s internal control over financial reporting (ICFR) in a going public course, notwithstanding public companies have been required to maintain such controls since 1977. What Sarbanes-Oxley did was to require a company’s management, in accordance with rules adopted by the SEC, to assess and report in the company’s annual report on Form 10-K as to whether or not the company’s ICFR are effective. SOX also requires the auditor auditing the financial statements to attest to and report on management’s assessment. It takes an accountant, and generally one qualified as an internal auditor, to understand what the company must undertake to be in a position to evaluate by observation and testing whether it’s ICFR are effective. It requires an experienced auditor to audit and attest to the effectiveness of the company’s ICFR. Some minimal understanding is necessary, however, as Section 404 has to be taken into account at an early stage if a company contemplates going public. If you can answer the following questions, you have that minimal understanding; at least for this course.]

1.       What are we referring to when we refer to a company’s ICFR. See Rule 13a-15(f).

2.       What does Section 404(a) of Sarbanes-Oxley require?

3.       What does Section 404(b) of Sarbanes-Oxley require?

4.       By whom must the financial statements of a public company or a company going public be audited?

5.       Which public companies are accelerated filers?

6.       What public companies are not accelerated filers?

7.       Are accelerated filers presently required to comply with Section 404 of SOX?

8.       Are non-accelerated filers required to comply with Section 404 of SOX?

9.       When must newly public companies comply with Section 404 of SOX?

10.   What is a material weakness in a company’s ICFR?

11.   How many material weaknesses in a company’s ICFR does it take for a company’s ICFR to be ineffective?

12.   If a company’s management follows the SEC Guidance in determining the effectiveness of the company’s ICFR what does that assure?

13.   Does it assure that the company’s ICFR are effective?

14.   What are some indications of a material weakness in a company’s ICFR?

15.   Is Auditing Standard No. 2 in effect?

16.   In very general terms what is Auditing Standard No. 5? By whom was it adopted?

17.   What role does a “prudent official” play in determining whether a deficiency in a company’s ICFR is a material weakness?

18.   As to what does the auditor opine after completing an audit in accordance with AS-5?