Auditing Theory - Sarbanes Oxley Act (USA)

1. The Sarbanes-Oxley Act of 2002 was passed largely in response to:
A)	The corporate accounting scandals of the previous couple of years.
B)	The rise in the trade deficit.
C)	The fact that with the drop in the stock market, many corporations no longer had sufficient reserves to cover their obligations to retirees.
D)	None of the above.

2. The Sarbanes-Oxley Act sets out the general principles of the law. It gives which of the following agencies primary responsibility for writing specific rules to implement the law:
A)	The Financial Accounting Standards Board.
B)	The New York Stock Exchange.
C)	The Securities and Exchange Commission.
D)	The Public Company Accounting Oversight Board.

3. Sarbanes-Oxley applies to:
A)	All companies that do business in the United States, whether publicly or privately held.
B)	All companies that are required to file reports with the Securities and Exchange Commission.
C)	Only publicly-held companies that have their primary headquarters in the U.S.
D)	Only privately-held companies that are headquartered in the U.S.

4. Only public accounting firms that are registered with the new Public Company Accounting Oversight Board will be able to participate in the preparation or issuance of an audit report for a public company under Sarbanes-Oxley.
A)	True
B)	False

5. The Sarbanes-Oxley Act of 2002 requires the Securities and Exchange Commission to prescribe minimum standards of professional conduct for attorneys appearing and practicing before it in the representation of companies that must report to the Commission. The standards require an attorney to:
A)	Immediately inform the Commission of any violation of securities laws or breach of fiduciary duty the he or she finds on the part of any employee of the firm in question.
B)	Immediately inform the Commission of any violation of securities laws or breach of fiduciary duty by senior management (as defined in the law) that he or she uncovers.
C)	Immediately inform the chief legal counsel or the chief executive officer of the company of any evidence of a material violation of securities laws or breach of fiduciary duty or similar violation that he or she finds by anyone within the company.
D)	Maintain complete confidentiality even if there is a material violation of securities laws or a breach of fiduciary duty is discovered, but try to convince the offending party to cease the behavior and to correct the situation.

6. A major section of Sarbanes-Oxley relates to the audit function. Among other things, the law requires that the audit committee of a board of directors of a public corporation:
A)	Be comprised entirely of independent directors.
B)	Approve the hiring and compensation of auditors.
C)	Provide procedures to receive confidential, anonymous submission by employees of the company about possibly-questionably accounting or auditing matters.
D)	Pre-approve any non-audit services provided by the auditor.
E)	All of the above

7. A primary goal of the law as it relates to audit committees and auditors is to:
A)	Ensure the independence of the auditor.
B)	Be sure that auditors are fairly compensated – neither overpaid nor underpaid.
C)	Increase the number of auditing firms and thereby increase competition for audit business.
D)	Expedite the audit process.

8. Under the new rules, an accounting firm that does an audit is prohibited from providing many other accounting services. Which of the following is specifically permitted under Sarbanes-Oxley?
A)	Broker or dealer, investment adviser, or investment banking services.
B)	Financial Information Systems Design and Implementation.
C)	Appraisal or Valuation Services.
D)	Tax services.

9. Not all possible services that might be provided by the auditing firm are expressly prohibited by Sarbanes-Oxley. If a non-audit service is not expressly prohibited, the auditing firm may provide that service:
A)	If no one on the board objects.
B)	If the audit committee gives its prior approval.
C)	Only in an emergency and only if the company being audited has not been able to find another accounting firm to provide this service after making a good-faith effort.
D)	Without any prohibitions or pre-conditions whatsoever.

10. To help make certain that auditors remain independent of the company they are auditing, Sarbanes-Oxley requires that auditors rotate off a given company's audit after a specified time. As interpreted by the regulations this means:
A)	No audit firm can provide audit services to the same company for more than five consecutive years.
B)	No individual may work on the audit of a given company for more than five years without rotating off for at least five years.
C)	The lead and concurring partners on an audit must rotate off after five years and stay off at least five years before returning to that company, although rules for other audit team members are less stringent.
D)	The lead and concurring partners on an audit must rotate off after seven years and may never return to audit the same company.

Sarbanes-Oxley Quiz
Graziadio Business Report, 2003, Volume 6, Number 1
Your Quiz Results:

Your answer for question 1, A, is CORRECT!
The correct answer is A. Sarbanes-Oxley was a response to the scandals such as Enron, WorldCom and Adelphia. (See Bumgardner's article on Sarbanes-Oxley in this issue of GBR.)

Your answer for question 2, C, is CORRECT!
The correct answer is C. The Securities and Exchange Commission. The Public Company Accounting Oversight Board is a new board mandated by the Sarbanes-Oxley Act to monitor audits of public companies. The New York Stock Exchange is a non-profit organization with its own board of directors. Although its members must abide by the regulations of the SEC, it may place additional requirements on companies that trade on its exchange. FASB (The Financial Accounting Standards Board) is a private-sector organization empowered to establish financial accounting and reporting standards.

Your answer for question 3, B, is CORRECT!
The correct answer is B. The Sarbanes-Oxley Act applies to all public companies that are required to file reports with the Securities and Exchange Commission under the 1934 law.

Your answer for question 4, A, is CORRECT!
True. "It shall be unlawful for any person that is not a registered public accounting firm to prepare or issue, or to participate in the preparation or issuance of, any audit report with respect to any issuer." See Title 1: Public Company Accounting Oversight Board, Sec. 102: Registration with the Board of the law.

Your answer for question 5, D, is INCORRECT!
The correct answer is C. The attorney must report "up the ladder" to higher management. The SEC had originally proposed that if management did not deal satisfactorily with the situation the attorney would be required to resign from representing the company and to inform the SEC that he or she had done so for "professional reasons." (This is the so-called "noisy withdrawal" provision.) Because of extensive concern voiced by attorneys, that part of the rule has not been finalized and as of this writing is still pending. Go to the SEC discussion of this issue.

Your answer for question 6, C, is INCORRECT!
The correct answer is E. All of the above. See Titles II and III of the law.

Your answer for question 7, A, is CORRECT!
The correct answer is A. A major goal of the law is to ensure that auditors are independent of the companies they are auditing. This is more likely to be the case if they do not have other business that is dependent upon maintaining the good will of the company and if personal relationships – or potential jobs with the company -- do not create pressure to downplay problems. Independent auditors are more likely to provide an honest and fair audit.

Your answer for question 8, B, is INCORRECT!
The correct answer is D. The law still permits the auditing firm to provide tax services, although many critics believe this can involve a conflict of interest. See the SEC Discussion of this topic at Section II. B (11)

Your answer for question 9, C, is INCORRECT!
The correct answer is B. If the audit committee gives its prior approval. In some cases the audit committee may set up rules and procedures for approval without actually reviewing each individual action. "The rules we are adopting are intended to clarify that, to the extent permitted by the Sarbanes-Oxley Act, the audit committee may pre-approve audit and non-audit services based on policies and procedures and that explicit approval and approval based on policies and procedures are equally acceptable." (See SEC Final Rules Section II: Discussion of the Rules, Subsection D. Audit Committee Administration of the Engagement.)

Your answer for question 10, C, is CORRECT!
The correct answer is C. The lead and concurring partners on an audit must rotate off after five years and stay off at least five years before returning to that company. Other members of the audit team have less-stringent terms. (See the SEC Discussion of the Rules, Section II; C (1) (2) and (3).)