Chapter C7, Problem 1DQ

To determine

Explain the way in which the Sarbanes-Oxley (SOX) Act requirements related to the non-audit services would affect the perceptions of the auditor’s independence.

Explanation of Solution

SOX is the act passed by the government to address the corporate scandals. This act regulates and assesses the internal control system of public traded companies.

The provisions of SOX limit the type of non-audit services provided by audit firm. SOX has prohibited the public accounting firms from providing the consultation services and internal auditing services to its clients. This restriction would enhance the perceptions of the auditor’s independence. The auditors should obtain approval of the audit committee for other type of non-audit services like tax services and acquisitions advising to avoid potential conflicts of interest.