February 10, 2015
Assignment 3: 2-42, 48, 49, 50
The PCAOB is a nonprofit organization that has the authority to set standards
related to audit reports. Because they set audit standards and are independent of
the government they help ensure quality in external audits. The PCAOB also has the
authority to conducts inspections of registered public accounting firms. The fact that
the PCAOB inspects and investigates audit firms provides for a quality audit because
it encourages audit firms to perform a quality audit.
To address auditor independence concerns, Sections 201-203 require that
accounting firms not perform services outside of the scope of practice of auditors
for their clients, all audit and nonaudit services be preapproved by the audit
committee, and that the lead partners and reviewing partner for the audit rotate at
least every five years.
Registered accounting firms may not perform audits for an issuer whose CEO, CFO,
controller, or chief accounting office was employed by the accounting firm during
the one-year period preceding the audit. This is known as the ‘cooling off period’.
If this section were not in place, a threat to independence may be created where a
member of an audit firm joins an audit client and is able to exert significant
influence over the preparation of subsequent financial statements and/or otherwise
influences the outcome of the audit.
Audit committee requirements ensure that the committee is independent of the
firm, that audit committees establish ‘whistleblowing’ mechanisms, and that audit
committees are properly funded by the company. The audit committees role is to
enhance confidence in the integrity of an organization’s processes and procedures
relating to internal control and corporate reporting including financial reporting.
The committee provides an ‘independent’ reassurance through its oversight and
monitoring role of corporate...
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