Audit Enron Study - 2 The Sarbanes-Oxley Act lists nine...

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2. The Sarbanes-Oxley Act lists nine services that are prohibited for an independent auditor to provide. The nine services include 1) Bookkeeping or other services related to accounting records or financial statements, 2) financial information systems design and implementation, 3) appraisal or valuation services, 4) actuarial services, 5) internal audit outsourcing services, 6) management functions or human resources, 7) broker or dealer, investment adviser, or investment banking services, 8) legal services and expert services unrelated to the audit, and 9) any other service that the Board determines impermissible. These nine services are prohibited from being carried out by the independent auditor primarily because they violate the general GAAS standard of independence. In order to provide an audit opinion that is genuine, the auditor must be completely independent of the company being audited. If independence is broken, there could be a conflict of interest that could incentivize passing on material misstatements and issuing a clean report. These independence conflicts can arise when a consulting company plays an integral role in carrying out bookkeeping, designing internal controls, and providing appraisal services. All of these services bias the audit firm and undermine the legitimacy of the audit opinion. Sarbanes Oxley prevents auditors from providing bookkeeping services because it is in clear violation of independence; you never want an auditor to audit his own work. In order to be thorough in double checking that the correct methods were used and the numbers were recorded accurately, it is in the audit’s best interest to have someone not involved in the creation of the numbers to double check the soundness of the statements. A second service that compromises an audit firm’s independence is when the firm is involved in creating another company’s internal controls. The second layer of testing that occurs during an audit is the test of controls, which checks to see if the controls in place are sound enough to detect material misstatements. Much like why the independent auditor should not also
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