Chapter 18, Problem 1RQ

To determine

Explain the two sections of the Sarbanes-Oxley Act of 2002.

Explanation of Solution

Explain the two sections of the Sarbanes-Oxley Act of 2002:

Sarbanes-Oxley Act of 2002:

Sarbanes-Oxley Act of 2002 states that public companies should provide a report on their internal control process. This report should be prepared by the management of the company and the auditor. Section 404 of the Sarbanes-Oxley Act of 2002 deals with internal control reporting.

Section 404(a) states that the annual report of the company should include the following two requirements:

• The annual report should include the report which includes the acknowledgment by the management of the company regarding the responsibility for preparing and maintaining enough internal control over the financial records of the company.
• The annual report should provide a review of the effectiveness of the internal control system of the company. Management must accept their responsibility for the internal control effectiveness, assess the internal control effectiveness and provide the evidence of the assessment.

Section 404(b) states that the auditor of the company should attest and provide a report on the internal control system for the financial reporting of the company. This provision applies to the public companies which have a market capitalization of $75 million or over. Public Company Accounting Oversight Board (PCAOB) has provided conditions for the audit of internal control. PCAOB has issued a standard that describes the integrated audit for the financial statement and the internal control system.

Thus, the Sarbanes-Oxley Act of 2002 has two subsections 404(a) and 404(b).