Sarbanes-SAS No. 99 Presentation


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Sarbanes-SAS No. 99 Presentation

  1. 1. Sarbanes-Oxley Act of 2002 Selected Issues SAS No. 99 - Consideration of Fraud in a Financial Statement Audit
  2. 2. Sarbanes-Oxley Act of 2002 Selected Issues <ul><li>Establishment; Duties of the Board (PCAOB) </li></ul><ul><li>Register public accounting firms </li></ul><ul><li>Establish, or adopt, by rule, &quot;auditing, quality control, ethics, independence, and other standards” </li></ul><ul><li>Conduct inspections of accounting firms </li></ul><ul><li>Conduct investigations and impose appropriate sanctions </li></ul><ul><li>Enforce compliance with the Act </li></ul>
  3. 3. Sarbanes-Oxley Act of 2002 Selected Issues <ul><li>Auditors’ Prohibited Activities </li></ul><ul><li>Bookkeeping or other services related to the accounting records or financial statements of the audit client </li></ul><ul><li>Financial information systems design and implementation </li></ul><ul><li>Appraisal or valuation services, fairness opinions, or contribution-in-kind reports </li></ul><ul><li>Actuarial services </li></ul><ul><li>Internal audit outsourcing services </li></ul><ul><li>Management functions or human resources </li></ul><ul><li>Broker or dealer, investment adviser, or investment banking services </li></ul><ul><li>Legal services and expert services unrelated to the audit </li></ul>
  4. 4. Sarbanes-Oxley Act of 2002 Selected Issues <ul><li>Other Issues </li></ul><ul><li>The lead auditor or coordinating partner and the reviewing partner must rotate off of the audit every 5 years </li></ul><ul><li>The accounting firm must report to the audit committee all &quot;critical accounting policies and practices to be used </li></ul><ul><li>The CEO, Controller, CFO, Chief Accounting Officer or person in an equivalent position cannot have been employed by the company's audit firm during the 1-year period preceding the audit </li></ul><ul><li>The GAO will do a study on the potential effects of requiring the mandatory rotation of audit firms </li></ul><ul><li>The CEO and CFO of each issuer shall certify the “appropriateness of the financial statements and disclosures” </li></ul>
  5. 5. Sarbanes-Oxley Act of 2002 Selected Issues Requires each annual report of an issuer to contain an &quot;internal control report&quot;, which shall (1) State the responsibility of management for establishing and maintaining an adequate internal control and procedures for financial reporting (2) Contain an assessment, as of the end of the issuer's fiscal year, of the effectiveness of the internal control and procedures of the issuer for financial reporting
  6. 6. Sarbanes-Oxley Act of 2002 Selected Issues Relative to the internal control report, each issuer's auditor shall attest to, and report on, the assessment made by the management of the issuer Does not intend that the auditor's evaluation be the subject of a separate engagement or the basis for increased charges or fees
  7. 7. Sarbanes-Oxley Act of 2002 Selected Issues <ul><li>The SEC shall conduct a study to determine </li></ul><ul><li>The extent to which principles-based accounting and financial reporting exists in the United States </li></ul><ul><li>The length of time required for change from a rules-based to a principles-based financial reporting system </li></ul><ul><li>The feasibility of and proposed methods by which a principles-based system may be implemented </li></ul><ul><li>A thorough economic analysis of the implementation of a principles-based system </li></ul>
  8. 8. SAS No. 99 Consideration of Fraud in a Financial Statement Audit <ul><li>Supersedes SAS No. 82 </li></ul><ul><li>Does not change the auditor’s responsibility to plan and perform the audit concerning whether the financial statements are free of material misstatement </li></ul>
  9. 9. Fraud - Current Considerations <ul><li>Two types of misstatements </li></ul><ul><ul><li>Misstatements arising from fraudulent financial reporting </li></ul></ul><ul><ul><li>Misstatements arising from misappropriation of assets </li></ul></ul><ul><li>Auditor considers “Red Flags” </li></ul><ul><li>Auditor documents findings </li></ul>
  10. 10. Fraud - Significant Changes <ul><li>Discussions among engagement personnel are required in the planning stage </li></ul><ul><li>Expands inquiries of management and others </li></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Audit committee </li></ul></ul>
  11. 11. Fraud - Significant Changes <ul><li>Evaluate the entity’s response to identified fraud risks </li></ul><ul><ul><li>Expands guidance dealing with the evaluation of an entity’s response to identified fraud risks and requires an auditor to assess the risks of material misstatement after giving weight to the entity’s controls and programs </li></ul></ul>
  12. 12. Fraud - Significant Changes <ul><li>Expanded fraud risk assessment approach </li></ul><ul><ul><li>Requires auditors to gather a broader range of information as input for fraud risk assessment. Identify risks of material misstatement due to fraud including consideration of: </li></ul></ul><ul><ul><ul><li>Type of risk - Fraudulent Reporting or misappropriation </li></ul></ul></ul><ul><ul><ul><li>Significance of the risk - Amount of misstatement </li></ul></ul></ul><ul><ul><ul><li>Likelihood of the risk - Probability </li></ul></ul></ul><ul><ul><ul><li>Pervasiveness of the risk - Potential effect </li></ul></ul></ul>
  13. 13. Fraud - Significant Changes <ul><li>Reorganization and modification of fraud risk factors </li></ul><ul><ul><li>Consider the fraud risk model </li></ul></ul><ul><ul><ul><li>Incentive/pressure </li></ul></ul></ul><ul><ul><ul><li>Opportunity </li></ul></ul></ul><ul><ul><ul><li>Attitude/rationalization </li></ul></ul></ul>
  14. 14. Employee Fraud Risk Model Attitude/ rationalization Opportunity Incentive/ pressure High Risk Medium Risk
  15. 15. Fraud - Significant Changes <ul><li>Documentation </li></ul><ul><ul><li>Extends documentation requirements by mandating documentation showing compliance with the major provisions of the new fraud SAS </li></ul></ul><ul><li>Professional skepticism </li></ul><ul><ul><li>Increases the focus on being skeptical </li></ul></ul>
  16. 16. Fraud - Significant Changes <ul><li>Expanded guidance on revenue recognition as a likely risk </li></ul><ul><ul><li>Requires a conscious effort by the auditor to determine whether there is a risk of material misstatement from improper revenue recognition </li></ul></ul>