Sarbanes-Oxley Act quiz #1 Flashcards
Sarbanes-Oxley Act quiz #1
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What was the primary reason for the enactment of the Sarbanes-Oxley Act (SOX)?
SOX was enacted in response to major accounting scandals, such as Enron and WorldCom, where companies falsified financial statements. What is the role of the Public Company Accounting Oversight Board (PCAOB) created by SOX?
The PCAOB sets standards for auditors and oversees their work to ensure the reliability of financial reporting. How does SOX increase executive accountability in public companies?
SOX requires CEOs and CFOs to personally certify the accuracy of financial statements, with severe penalties for false certifications. Why does SOX prohibit auditors from providing non-audit services to their audit clients?
To prevent conflicts of interest and ensure auditor independence, auditors cannot provide non-audit services like consulting to their audit clients. How long must auditors retain their work papers under SOX regulations?
Auditors must retain their work papers for seven years. What is the purpose of auditor rotation as required by SOX?
Auditor rotation, required every five years, prevents overly familiar relationships between auditors and company executives and brings a fresh perspective to audits. How does SOX address conflicts of interest involving audit firms and company executives?
Audit firms are prohibited from auditing companies where their former employees work as executives to avoid conflicts of interest. Who is responsible for hiring auditors in a public company under SOX?
An audit committee, formed from the board of directors, is responsible for hiring auditors, not company management. What are internal controls, and why are they important under SOX?
Internal controls are safeguards and procedures to protect assets and ensure reliable financial reporting; SOX requires management to assess and report on their effectiveness. What must management do regarding internal controls according to SOX?
Management must assess and report on the effectiveness of internal controls in the financial statements. What is the auditor’s responsibility regarding internal controls under SOX?
Auditors must test and verify the effectiveness of a company’s internal controls. What penalties can executives face for falsely certifying financial statements under SOX?
Executives can face severe penalties, including prison, for falsely certifying financial statements. How did SOX change the relationship between auditors and company management?
SOX removed the power to hire auditors from company management and gave it to the audit committee to ensure auditor independence. What is the main goal of the Sarbanes-Oxley Act?
The main goal is to improve the reliability of financial reporting and restore investor confidence. Why is auditor independence important, as emphasized by SOX?
Auditor independence ensures objective and unbiased audits, reducing the risk of financial statement manipulation. What types of non-audit services are auditors prohibited from providing to their audit clients under SOX?
Auditors are prohibited from providing services like consulting to their audit clients. How does SOX help prevent future accounting scandals?
SOX introduces stricter regulations, oversight, and accountability to deter and detect fraudulent financial reporting. What is the significance of requiring auditor work paper retention for seven years?
It allows for review and verification of audit quality, especially during PCAOB inspections. How does the PCAOB contribute to the reliability of financial reporting?
The PCAOB oversees auditors, sets auditing standards, and inspects audit firms to ensure compliance. What is the function of an audit committee under SOX?
The audit committee hires and oversees the auditors, ensuring independence from company management. How does SOX address the issue of auditors becoming too familiar with company executives?
By requiring auditor rotation every five years, SOX reduces the risk of overly familiar relationships. What are the consequences for audit firms that violate SOX regulations?
Audit firms can face penalties, loss of license, or other disciplinary actions for violating SOX. Why must management provide a written statement about internal controls in the financial statements?
To assure investors and regulators that controls are effective and financial information is reliable. What is the relationship between SOX and investor confidence?
SOX aims to restore and maintain investor confidence by ensuring accurate and reliable financial reporting. How did the Enron and WorldCom scandals influence the creation of SOX?
These scandals exposed weaknesses in financial reporting and auditing, prompting the creation of SOX to address these issues. What is meant by 'auditor independence' in the context of SOX?
Auditor independence means auditors must remain objective and free from conflicts of interest with their clients. How does SOX ensure that auditors are not influenced by company management?
By requiring the audit committee, not management, to hire and oversee auditors. What is the impact of SOX on the responsibilities of CEOs and CFOs?
CEOs and CFOs are now personally responsible for certifying the accuracy of financial statements. Why is it important for auditors to test internal controls?
Testing internal controls helps ensure that financial reporting is accurate and assets are safeguarded. What is the purpose of prohibiting audit firms from auditing companies where their former employees are executives?
To prevent conflicts of interest and maintain the objectivity of the audit. How does SOX affect the documentation practices of audit firms?
SOX requires audit firms to retain audit documentation for seven years to allow for future review. What is the significance of the audit committee being formed from the board of directors?
It ensures that the selection and oversight of auditors is independent from company management. How does SOX promote transparency in financial reporting?
By requiring executive certification, independent audits, and effective internal controls. What are internal controls, and how do they relate to SOX compliance?
Internal controls are procedures and safeguards to protect assets and ensure accurate reporting; SOX requires their assessment and verification.
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