How to Comply With Sarbanes-Oxley Section 404: Assessing the Effectiveness of Internal Control

1.6. WORKING WITH THE INDEPENDENT AUDITORS

To render an opinion on either the financial statements or the effectiveness of internal control, the company's independent auditors are required to maintain their independence, in accordance with applicable SEC rules. These rules are guided by certain underlying principles, which include:

• The audit firm must not be in a position where it audits its own work.

• The auditor must not act as management or as an employee of the client.

For example, with regard to internal controls, the auditor could not design or implement internal controls and still be allowed to perform an audit.

The auditor's rules of independence require the audit committee to preapprove nonaudit services related to internal control over financial reporting. In seeking this preapproval, the auditor will:

• Provide a written description of the scope of the internal control–related services to the audit committee.

• Discuss with the audit committee the potential effects of the service on the independence of the firm.

• Document the substance of its discussion with the audit committee.