back to results for ""
Below is a cache of http://www.ignet.gov/pande/audit/pwcsox404.pdf. It's a snapshot of the page taken as our search engine crawled the Web.
The web site itself may have changed. You can check the current page or check for previous versions at the Internet Archive. Yahoo! is not affiliated with the authors of this page or responsible for its content.
SO Act Section 404 Practical Guide June 2004 pwc
Sarbanes-Oxley Act:
Section 404
Practical Guidance for Management
Ju
ly
2004 pwc





This monograph is designed to assist management in its efforts to satisfy its responsibilities
established by the Public Company Accounting Reform and Investor Protection Act of 2002. The
monograph is based on rule-making and guidance available as of July 2, 2004; accordingly, as new
rules or modifications or interpretations to existing rules emerge, certain aspects of this monograph
may become obsolete. Because interpreting this guidance is proving to be an evolutionary process,
preparers and users are cautioned to carefully evaluate and monitor further implementation guidance
from the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight
Board (PCAOB). PricewaterhouseCoopers will continue to monitor regulatory activities, company
interpretations, and evolving practices; we will update our policies and will issue updated perspectives
as warranted. In providing the information contained in this monograph, PricewaterhouseCoopers is
not engaged in rendering legal, or other professional advice and services. As such, this monograph
should not be used as a substitute for consultation with professional, legal, or other competent
advisors.







pwc



To Our Clients and Friends:

The Public Company Accounting Reform and Investor Protection Act of 2002 (the Act or the Sarbanes-Oxley
Act) requires public companies to develop new practices involving corporate governance and financial
reporting with the objective of restoring the public trust in the capital markets. One of the most challenging
aspects of the Acts requirements involves a companys responsibilities for internal controls.
Entitled Management Assessment of Internal Controls, Section 404 of the Act (Section 404) stipulates that
public companies must take responsibility for maintaining an effective system of internal control, in addition to
reporting on the systems effectiveness. The Act requires most public companies (i.e., accelerated filers that
meet certain market capitalization requirements) to report annually on the companys internal control over
financial reporting for fiscal years ended on or after November 15, 2004. The majority of the remaining public
companies, including foreign private issuers, will be required to comply with these requirements for fiscal years
ended on or after July 15, 2005.
While Section 404 poses numerous challenges for preparers, users, and external auditors both in
implementing the mandate and understanding its implications this monograph is primarily designed to
address the challenges facing preparers.
We fully recognize that implementation, particularly in the critical first year, will present preparers with many
challenges, complexities, and new costs. However, for the benefits of Section 404 to be realized by all of the
participants in the capital markets, a substantial effort will be needed. A thorough assessment and evaluation
of internal control over financial reporting will go a long way to achieving a fundamental objective of Section
404: restoring investor confidence in financial reporting. This monograph is presented to you in that spirit.
The monograph is one in a series of publications
1
that we have issued in relation to the Sarbanes-Oxley Act.
This monograph describes the key activities integral to a successful Section 404 assessment process
including, among others, scoping, documenting, testing, evaluating, and reporting. It reflects the insights and
perspectives we have gained by working with our clients and obtaining input from the many
PricewaterhouseCoopers partners and staff who have concentrated significant amounts of time on
understanding this new reporting model. We provide our observations and analysis, note the lessons we have
learned from recent experiences with clients, and offer examples that illustrate specific aspects of Section 404.
We are pleased to share our experiences with you.


1
Our previously issued white papers are entitled: The Sarbanes-Oxley Act of 2002: Strategies for Meeting New Internal Control
Reporting Challenges; The Sarbanes-Oxley Act of 2002 and Current Proposals by NYSE, Amex, and NASDAQ: Board and Audit
Committee Roles in the Era of Corporate Reform;
and The Sarbanes-Oxley Act of 2002: Understanding the Auditor's Role in Building
Public Trust.
We have also issued a DataLine entitled, Managements Responsibility for Assessing the Effectiveness of Internal Control
Over Financial Reporting Under Section 404 of the Sarbanes-Oxley Act.


Pwc


Many companies have made significant progress in their efforts to comply with Section 404. For those
companies this monograph should (i) provide useful perspectives on evaluating and testing the design and
operational effectiveness of control over financial reporting that will be conducted in the future and (ii) affirm or
initiate a reassessment of established work plans or processes. For other companies that are early in the
process, this monograph should provide useful information in developing their overall strategy for implementing
Section 404. It is worth noting that interpreting these new rules has proven to be an evolutionary process.
Additional future interpretative guidance may be issued by the SEC for registrants and by the PCAOB for
external auditors. Such guidance could impact views expressed in this publication.



Raymond Bromark
Raymond Beier
Americas Theater Leader
Leader
Professional, Technical, Risk and Quality
National Technical Services





pwc
Table of Contents
SECTION I: Executive Summary .................................................................................................1

The Most Significant Financial Legislation in Nearly 70 Years
Why the Sarbanes-Oxley Act Was Issued .....................................................................................1
The Benefits of Effective Internal Control over Financial Reporting ..................................................1
Implications of Section 404 .................................................................................................................1
SECTION II: Getting Started Project Initiation .......................................................................3

Project Oversight ................................................................................................................................3
Project Management...........................................................................................................................6
SECTION III: Scoping and Planning The Beginning of an Effective Project ........................8

Identify the Significant Accounts, Disclosures, and Business Processes/Cycles .............................10
Determine Multiple-Location Coverage.............................................................................................16
The Five Components of Internal Control .........................................................................................26
Control Environment .............................................................................................................26
Risk Assessment...................................................................................................................28
Control Activities ...................................................................................................................29
Information and Communication ...........................................................................................30
Monitoring .............................................................................................................................31
Other Considerations ........................................................................................................................32
Period-End Reporting Process..............................................................................................32
Accounting Estimates and Judgments ..................................................................................34
General Computer Controls ..................................................................................................35
Company-Level Controls.......................................................................................................36
SECTION IV: Use of Service Organizations .............................................................................38

The Steps for Evaluating the Procedures to Perform Over Service Organizations ..........................
40
Determine If a Service Organization Is Being Used.........