A4 - Performing Further Procedures, Forming Conclusions, and Communications

Payroll and Personnel Cycle - Internal Controls Related to the Payroll and Personnel Cycle

Most significant risks are: 1. Creation of fictitious employees 2. Falsification of hours worked

Internal Control Communications - Definitions - Material Weakness

-A deficiency, or a combination of deficiencies, in IC (over financial reporting), such that there is a reasonable possibility that a material misstatement of entity's FS will not be prevented, or detected and corrected on a timely basis -"Reasonable possibility" = likelihood of an event is either "reasonably possible" or "probable" -So, raise reasonable possibility that a material misstatement won't get prevented/detected and corrected -So, any fraud -So, if you find a material misstatement that IC filled to detect/correct

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle - Auditing Accounts Receivable - Accounts Receivable Confirmations - Confirmation Exceptions

-AR confirmation exceptions occur hen there is a disparity between the amount of the receivable recorded in the client's accounting records and the amount of the receivable confirmed by the client's customer For confirmation exceptions, the auditor should determine whether the exception is due to: 1. A timing difference, or 2. A misstatement

Matters that Require Special Consideration - Accounting Estimates Including Fair Value Estimates

-Accounting estimate = approximation of a FS element, item, or account -Estimates used because either: 1. Data about past events cannot be accumulated in a timely, cost-effective manner, or 2. Measurement of some accounts depends on outcome of future events -Responsibility of MANAGEMENT to make reasonable estimate and include them in FS Examples of estimates include: 1. Net realizable values of inventory and AR 2. Compensation in stock option plans 3. Future pension and warranty expenses 4. Probability of loss and related amounts due to litigation 5. Fair value amount

Financing Cycle - Internal Controls Related to the Financing Cycle - Internal Control Over Equity

-All stock issuances, dividend declarations, and treasury stock purchases must be authorized by the board of directors. Evidence of these events should be duly recorded in the minutes of board minutes -Many large entities use a stock transfer agent, who ensures that stock issuances comply with he articles of incorporation, prepares stock certificates, and maintains records of shares authorized, issues, and outstanding. If stock transfer agent is not used, then the entity should implement the following controls: 1. An officer of entity should be responsible for ensuring that stock transactions comply with the articles of incproation and regulatory requirements and should matinain the stock certificate book. To ensure proper segregation of duties, the individual who maintains the stock certificate book should have no accounting responsibilities -So, most companies will use a third-party stock, transfer agent which makes the control process easy, but when they don't, we also want to make sure there's someone responsible to maintaining the stock certificate book, and making sue all transactions are in compliance with the articles of incorporation 2. There should be a periodic independent reconciliation of the stock certificate book with the number of shares outstanding

Matters that Require Special Consideration - Opening Balances - Auditor Remains Responsible

-Although the current period auditor may consider information obtained from the review of the predecessor's audit documentation, auditor remains solely responsible for audit work performed and conclusions reached during current audit -Should NOT make reference to the report to work of predecessor auditor as basis for auditor's opinion

Investment Cycle - Auditing Particular Types of Investments - Derivatives

-An entity may invest in derivatives to hedge against risks, like fluctuating prices -Under these circumstances, gereally accepted accounting principles specify that, in order to qualify for hedge treatment, an entity must demonstrate and disclose a number of transaction features, like risk exposure -Auditor would therefore need to examine the contracts to evaluate the character of the hedge and the degree to which losses should be recognized in the determination of income, as well as to determine the appropriate character of an disclosures

Management Representation Letter

-At conclusion of fieldwork, auditor must obtain a management representation letter from client -Auditor prepares test of representation letter -Printed on client letterhead and signed by client -So: -We're skeptical of what management tells us, so we find evidence to corroborate that evidence -Our audit evidence partially rests on what management told us in their Rep. letter -Auditor's job to get management's rep. in writing in the Rep. Letter

Matters that Require Special Consideration - Litigation, Claims, and Assessment - Letter of Inquiry to Client's Attorneys - Refusal to Respond by Attorneys

-Attorney's refusal t respond to a letter of inquiry where attorney has devoted substantial attention to litigation matters is a limitation in the scope of an independent auditor's examination, sufficient to preclude an unmodified opinion -So, if no response, and must consider the impact of that scope limitation, may be modified

Matters that Require Special Consideration - Litigation, Claims, and Assessment - Letter of Inquiry to Client's Attorneys - Response by Attorneys

-Attorneys in turn send their replies directly to the independent auditor -In these replies, attorneys give their evaluation concerning litigation, claims, and assessments within their knowledge of control -Date of attorney's response should be as close as possible to date of auditor's report -Lawyer's response to the letter of inquiry should include a professional opinion on the expected outcome of any lawsuit and the likely outcome of any liability, including court costs 1. Substantial Attention Limitation -Lawyers may limit their replies to matters to which they have given substantial attention -Responses may also be limited to material matters if an understanding has been reached between lawyer and auditor as to what amount would be considered material -So, lawyers don't tell you everything, only thing requiring substantial attention 2. Confidentiality Limitation -In some cases, my be unwise for an attorney to disclose certain confidential information -Ex: Knowledge of a patent violation if the disclosure of violation in FS could bring about a lawsuit -So, won't provide confidential information

Those Charged with Governance - Required Communications - Matters Related to the Auditor's Responsibility

-Audit required to communicate tot hose charged with governance auditor's responsibilities with regard to audit Includes: 1. Auditor responsible for forming and expressing an opinion about whether the FS are prepared, in all material resects, in conformity with the applicable financial reporting framework 2. Audit does not relive management or those charged with governance of their responsibilities 3. Auditor responsible for performing audit in accordance with GAAS 4. Audit designed to provide reasonable assurance, rather than absolute, about whether the FS are free from material misstatement 5. Audit of FS includes consideration of IC over financial reporting as a bassi fro designing audit procedures that are appropriate in circumstances, but not for purpose of expressing an opinion on effectiveness of entity's IC over financial reporting (NONISSUERS ONLY) 6. Auditor responsible for communication significant matters related to FS audit 7. When applicable, auditor responsible for communicating particular matters requires by law or reg., by agreement with entity, or by additional requirements applicable to engagement 8. In certain situations, audit may determine appropriate to communicate circumstance or relationships that, in auditor's professional judgement, may reasonable y thought to bear on independent, and to which auditor gave significant consideration, in reaching conclusion that independence has not been impaired -These responsibilities may be communicated though engagement letter or other form of contract

Internal Control Communications - Communication of Control Deficiencies - Communication of Other Deficiencies

-Auditor should communicate to management only, in writing or orally, other deficiencies in IC identified during audit that are of sufficient important to merit management's attention but are not significant deficiencies or material weaknesses -If other deficiencies are communicated orally, communication should be documented 1. If auditor has communicated other deficiencies in a prior period and management has chosen not to correct the deficiencies for cost or other reasons, auditor need not repeat communication in current period 2. Auditor is not required to repeat information about other deficiencies if information has already be communicated to management by other parties, such as internal auditor or regulators 3. Auditor may communicate details of other deficiencies to those charged with governance, either orally or in writing, if those charged with governance wish to be made aware of details or if auditor chooses to information them

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit - Communication and Correction of Misstatements

-Audit should communicate on a timely basis with appropriate level of management all misstatements accumulated during audit Auditor should request that management correct those misstatements: 1. If, at auditor's request, management has examined a class of transactions, account balance, or disclosure and corrected misstatements that were detected, auditor should perform additional audit procedures to determine whether misstatements remain 2. Auditor may request that management examine and perform procedures to determine the amount of the actual misstatement in class of transactions, account balance, or disclosures, and to make appropriate adjustments to FS. This may occur when misstatement is based on auditor's projection of misstatements 3. Auditor may request that management record an adjustment needed to correct all factual misstatements, including effect of prior period misstatements other than those that auditor believes are clearly trivial 4. When auditor has identified a judgmental misstatement involving differences in estimates, such as a difference in a FV estimate, auditor may request that management review the assumptions and methods used in developing management's estimate 5. If management refuses to correct some or all of misstatements communicated by auditor, auditor should obtain an understanding of management's reasons for not making corrections, and should take that understanding into account when evaluating whether the FS as a whole for from material misstatement

Matters that Require Special Consideration - An Entity's Ability to Continue as a Going Concern - Audit Procedures

-Auditor examines evidence obtained during audit to determine whether there is information that is contrary to basic principle of going concern Audit should examine evidence obtained from: ADMITS: 1. A - Analytical Procedures - Can show negative trends 2. D - Debt compliance - Auditor should review terms of debt and loan agreements (covenants) 3. M - Minutes - Auditor should review minutes from stockholder and board of director meetings 4. I - Inquiry - of client's legal counsel -So, could be a lawsuit that if client lost, it could put them in risk of not being a going concern 5. T - Third parties - Auditor should obtain audit evidence about ability and intent of parties to provide necessary financial support, including written evidence of such intent -So, are there guarantors/third parties that will affect the financial status of our client 6. S - Subsequent events - review -So, something that happens after year-end that could cast substantial doubt

Those Charged with Governance - Other Communication Considerations - Communication With Management

-Auditor may discuss matters with management prior to communicating those matters to those charged with governance -Certain matters communicated to those charged with governance, such as those related to competence and integrity of management, might not be appropriate for discussion with management -So, auditor isn't require to tell management what they're discussing with audit committee and governance, but it is a good idea to do so management is aware of anything, professional courtesy -Doesn't matter if management agrees with issues auditor tells audit committee, just matters you made management aware you're telling audit committee

Internal Control Communications - Evaluation of Control Deficiencies -

-Auditor must evaluate control deficiencies (both individually and in combination) to determine whether they repent significant deficiencies or material weaknesses -Severity of a deficiency, or a combination of deficiencies, depends on not only whether a misstatement has actually occurred, but also on: 1. Magnitude of potential misstatement, and 2. Whether there is a reasonable possibility that entity's controls will fail to prevent, or detect and correct, a misstatement of an account balance or disclosure Auditor should consider both likelihood and magnitude of potential misstatements 1. Likelihood - is there a reasonable possibility that entity's controls will fail to prevent, or detect and correct, misstatement? Consider nature of related accounts 2. Magnitude - consider both dollar amount and volume of activity in accounts exposed to deficiency -If more than one control deficiency affects same account balance or disclosure, individual insignificant deficiencies may, in combination, constitute a significant deficiency or material weakness -Auditor should consider whether any controls tend to compensate for identified deficiency. A compensating control is one that limits severity of a control deficiency and may prevent it from being identified as a significant deficiency or material weakness -Indicators of a material weakness include senior management fraud, restatement of previous FS to correct a material error, identification by auditor of a material misstatement that entity's controls would not have detected, and ineffective oversight of those charged with governance

Internal Control Communications - Detection of Control Deficiencies

-Auditor of FS not required to perform procedures to identify deficiencies in IC, or to express an opinion on effectiveness of IC -Auditor may, though, become aware of control deficiencies while performing audit -Auditor has a responsibility to evaluate control deficiencies identified during audit and, in some cases, to report those deficiencies -Auditor may discuss relevant facts and circumstance with management when determining whether auditor has identified IC deficiencies -Level of management with whom it is appropriate to discuss findings is on that is familiar with IC area concerned and that has authority to take remedial action -However, when findings call into question management integrity or competence, it may not be appropriate to discuss findings directly with management -So, can you ask management for help> Yes, but not if the IC questions management's integrity and compliance

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit - Identification of Misstatements

-Auditor should accumulate misstatements identified during audit, other than those that are clearly trivial -"Clearly trivial" - not that same as "not material." Matters that are inconsequential, both individually and in aggregate, and when judged by any criteria of size, nature, or circumstance. If there is uncertainty about whether an item is clearly trivial, then it cannot be considered trivial -Clearly Trivial = Inconsequential -Auditor may designate an amount below which misstatements are clearly trivial and do not need to be accumulated. Amount should be set so that any misstatement below amount would not be material to the FS, individually or in aggregate, considering possibility of undetected misstatement

Management Representation Letter - Requirements - Who Signs It?

-Signed by CEO and CFO -Members of management with overall responsibility for financial and operating matters who are responsible for and knowledgeable about items contained in letter (CEO and CFO) should sign letter -Other officers and employees may be asked to sign

Those Charged with Governance - Required Communications - Planned Scope and Timing

-Auditor should communicate with those charged with governance regarding planned scope and timing of audit -Purpose = provide insight to those charged with governance regarding auditor's activities, as well as improve auditor's understanding of entity -Auditor should consider the following when communication the planned scope and timing: 1. Auditor may communicate how significant risks of material misstatement will be addressed, planned approach toward IC, factors affecting materiality, and any potential use of IC audit staff 2. Auditor should be careful not to comprise effectiveness of audit procedures, like by making them too predictable 3. Auditor may solicit information from those charged with governance. Ex: Auditor may inquire as to arty with whom auditor should communicate, the allocation of responsibility between management and those charged with governance, the entity's objectives, strategies, and risks, matters to which auditor should pay particular attention, and significant communications with regulators 4. Communication also may include discussion of attitudes, awareness, and actions of those charged with governance with respect to IC, fraud, relevant change, and matters previously communicated by auditor

Investment Cycle - Investments Measured at Fair Value - Auditor's Responsibilities

-Auditor should obtain sufficient appropriate audit evidence to provide reasonable assurance that FV measurements and disclosures are in conformity with GAAP Auditor should: 1. Understand entity's process for determining GV measurements and disclosures 2. Understand relevant controls 3. Assess risk of mat. mis. of FV measurements 4. Evaluate whether method used is in conformity with GAAP 5. Consider need for a specialist (if complex) 6. Test fair value measurements and disclosures 7. Evaluate sufficiency, competency, and consistency of evidence obtained with respect to FV measurements and disclosures 8. Obtain relevant management representations (if management told us something, let's get that in writing) 9. Communicate relevant matters to those charged with governance -Auditor bases his/her evaluation on information available at time of audit -NOT responsible for predicting future conditions that, if known at time of audit, might have affected FV measurements and disclosures

Matters that Require Special Consideration - Audit Procedures - What Happens When Auditor Finds an Estimation Unreasonable or not Determined in Conformity with Requirements of Applicable Financial Reporting Framework?

-Auditor should treat difference between recorded estimate and best estimate supported by audit evidence as a misstatement -If auditor determine a range of reasonable estimates, then auditor should treat the difference between recorded estimate and closest reasonable estimate support by audit evidence as a misstatement

Those Charged with Governance - Other Communication Considerations - Other Standards - Additional Requirements for Issuers`

-Auditors of issuers required to report (to audit committee) all critical accounting policies, all material alternative GAAP accounting treatments, and other material communications between auditor and management -Should discuss and provide a draft of auditor's report to audit committee -If no formal audit committee exists, communications should be made to full board of directors

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit - Based on Results of substantive Audit Procedures

-Based on result of substantive audit procedures, auditor will propose adjusting journal entries to client -Client may/may not book these proposed entries -Management is response for FS and has final decision on whether or not to book recommended entries -Examiners may ask for basic adjusting journal entires on audit exam -If management does not make the recommended entries and the auditor determines that the uncorrected errors are not material in the aggregate, auditor should document errors in summary of uncorrected errors and document conclusion that errors do not cause FS to be misstated

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle - Auditing Sales Transactions

-COVE U since it's a transaction The following tests of details may be performed as tests of controls or dual-purpose tests. The cutoff procedure is performed most often as a substantive procedure: 1. Completeness (Cove u) -Auditor should trace a sample of shipping documents to the corresponding sales invoices, and to the sales journal and accounts receivable subsidiary ledger: IS trAce | | Sales Journal trAce | | Invoice trAce | | Shipping doc. 2. CutOffer (cOve u) -To ensure that sales were recorded in the proper period, the auditor should compare a sample of sales invoices from shortly before and after year-end with the shipment dates and with the dates the sales were recorded in the sales journal -To ensure that significant returns were not made following year-end, the auditor should analyze the record of sales return following year-end - Indicates effort to boost revenue -So, look at sales right before and after year-end and make sure they were recorded appropriately (ex: FOB terms, sales returns, etc.) 3. Valuation, Allocation, and Accuracy (coVe u) -The auditor should compare prices and terms on a sample of sales invoices with authorized price lists and terms of trade to determine whether sales are recorded at the appropriate level 4. Existence and Occurrence (covE u) -The auditor should vouch a sample of sales transactions from the sales journal to the sales invoice back to the customer order and shipping documents Sales Journal | | Vouch Invoice | | Vouch Shipping docs. 5. Understandability and Classification (cove U) -The auditor should examine a sample of sales invoices for proper classification into the appropriate revenue accounts

Expenditure Cycle - Performing Specific Procedures to Obtain Evidence: The Expenditure Cycle - Auditing Purchase Transactions

-COVE U since it's transactions The following substantive tests may also be performed as tests of controls or dual-purpose tests 1. Completeness (Cove u) -The auditor should trace a sample of vouchers to the purchase journal -The auditor should also account for the renumbered sequencing of purchase orders, receiving reports, and vouchers Purchase Journal trAce | | Voucher 2. CutOff (cOve u) -The auditor should compare dates on a sample of vouchers with the dates the transactions were recorded in the purchase journal -The auditor should also examine purchases before and after year-end to determine if they were recorded in the proper period 3. Valuation, Allocation, and Accuracy (coVe u) -The auditor should recompute the mathematical accuracy of a sample of vendor invoices -Invoices 4. Existence and Occurrence (covE u) -The auditor should test a sample of vouchers to confirm proper authorization and the presence of the receiving report -Vouchers 5. Understandability and Classification (cove U) -The auditor should verify the account classification of a sample of purchases -Right account?

Investment Cycle - Performing Specific Procedures to Obtain Evidence: The Investment Cycle - Auditing Investment Transactions

-COVE U since transactions 1. Completeness (Cove u) -Perform analytical procedures testing the reasonableness of dividend and interest income to determine that all investment income has been recorded 2. CutOff (cOve u) -Ensure purchases, sales, and investment income were recorded in the proper period 3. Valuation, Allocation, and Accuracy (coVe u) -Independent calculations should be made to determine the validity of recorded gains or losses from security sales and of discount and premium amortization -Recalculation should be made to determine accuracy of recorded dividend and interest income -Investment income from dividends may be recalculated by comparing recorded income with dividends records produced by investment advisory services -So, think of: 1. If sold something, did they calculate G/L 2. If HTM, did they properly calculate amortization 4. Existence and Occurrence (covE u) -Analytical procedures performed to test the reasonableness of dividend and interest income provide evidence of the existence of investment income 5. Understandability and Classification (cove U) -Examine a sample of investment transactions to determine that the transactions were recorded in the proper accounts -Ex: Unrealized gains and losses on AFS securities should be recorded in other comp. inc., and unrealized gains and losses on trading securities should be recorded in earnings (IS) -AFS --> OCI -Trading --> Earnings (IS)

Inventory Cycle - Performing Specific Procedures to Obtain Evidence: The Inventory Cycle - Auditing Inventory Transactions

-COVE U since transactions Inventory sales and purchases should be audited as part of the audits of the revenue cycles and the expenditure cycle

Cash Cycle - Performing Specific Procedures to Obtain Evidence: The Cash Cycle - Auditing Cash Receipts and Cash Disbursements

-COVE U since transactions The following tests of details are generally performed as dual-purpose tests: 1. Completeness (Cove u) -Cash receipts = auditor should TRACE a sample of remittance advise to the cash receipts journal and deposit slips Cash receipts journal/Deposit slips trAce | | Remittance Advices -Cash disbursements = auditor trace sample of canceled checks to the cash disbursements journal Cash disbursement journal trAce | | Canceled checks 2. CutOff (cOve u) -The auditor should verify the cutoff of cash receipts and cash disbursements shortlists before and after year-end for recording in the proper period -Auditor should also compare the dates for recording a sample of cash receipts with the dates the cash was deposited in the bank, and the dates for recording a sample of checks with the dates the checks cleared the bank, noting any significant -So, receipts/disbursements around year-end 3. Valuation, Allocation, and Accuracy (coVe u) -For cash receipts, from a sample of daily deposits, the auditor should foot the remittance advices and entries on the deposit slip and agree to the cash receipts journal and bank statement -For cash disbursements, from a sample of voucher packages, auditor should agree the purchase order, receiving report, invoice, cancelled check, and disbursement journal -So, making sure amounts recorded for receipts/disbursements are correct 4. Existence and Occurrence (covE u) -For cash receipts, the auditor should VOUCH a sample of entries in the cash receipts journal to remittance advices, deposit slips, and the bank statement Cash receipts JEs | | Vouch Remittance advices, deposit clips, and bank statement -Cash disbursements = auditor vouch a sample of entries from cash disbursements journal to canceled checks, voucher package, and bank statement Cash disbursement JEs | | Vouch Canceled checks, voucher package, bank statement 5. Understandability and Classification (cove U) -The auditor should examine a sample of remittance advices and canceled checks fro recording in the proper account -Everything in account should be in

Property, Plant, and Equipment Cycle - Auditing Property, Plant and Equipment Transactions

-COVE U since transactions The following tests of details can be performed as dual-purpose tests: 1. Completeness (Cove u) -TRACE a sample of fixed asset purchase requisitions to receiving reports and fixed asset subsidiary ledger -Review related repair and maintenance expense accounts to test for completeness of asset additions -Looking for items recorded as repairs that should have been capitalized -Review lease and rental agreements to ensure that capitalized leases are poorly records and operating leases are excluded -So, Biggest concern: did they capitalize everything they should have? -So, ex: booked a maintenance expense when should have been capitalized -So, ex: op. lease instead of a capital lease -Repairs and maintenance account - auditor reviews this account in order to locate items that should have been capitalized (look at repairs and maintenance to look for unrecorded additions to PP&E) 2. CutOff (cOve u) -Review fixed asset purchases and dispositions from shortly before and after year-end for recording in the proper perriod 3. Valuation, Allocation, and Accuracy (coVe u) -Depreciaion expense should be recalculated for reasonableness and conformity with GAAP -G/Ls and removal of accumulated depreciation for fixed assets sold or retired should be tested for reasonableness 4. Existence and Occurrence (covE u) -VOUCH sample of purchases to receiving report and vendors invoice and a sample of dispositions to asset retirement form and other supporting documents 5. Understandability and Classification (cove U) -Examine a sample of significant charges to repairs and maintenance expense for items that should have been capitalized (also a completeness test) -Review lease transactions for proper classification as operating or capital -So: 1. Repairs and maintenance vs. Capitalized 2. Operating Lease vs. Capital Lease

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle

-COVER U - FS assertions -We now need to collect evidence from each account, transaction, and disclosure to test the assertions -Existence is generally a more relevant assertion than completeness when auditing the revenue cycle -The risk that accounts receivable and sales with be overstated (existence) is high, while the risk that they will be understated (completeness) is low

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle - Auditing Accounts Receivable

-CVER because account balance 1. Completeness (Cver) -The auditor should obtain an aged trial balance of accounts receivable and trace the total to the general ledger control account General Ledger trAce | | Accounts Receivable Aging 2. Valuation, Allocation, and Accuracy (cVer) -The auditor should examine the results of confirmations (a test of accuracy) and test the adequacy of the allowance for doubt accounts )a test of valuation) 3. Existence and Occurrence (cvEr) -The auditor should confirm a sample of accounts receivable 4. Rights and Obligations (cveR) -The auditor should review bank confirmations and debt agreements for liens on receivables -The auditor should also inquire of management and review debt agreements and board minutes for evidence that accounts receivable have been factored or sold - IS AR pledged, debt agreements, collateral

Investment Cycle - Performing Specific Procedures to Obtain Evidence: The Investment Cycle - Auditing the Investment Balance

-CVER because account balance 1. Completeness (Cver) -The auditor should obtain evidence of completeness of the ending investment balance through the following procedures: 1. If entity has a high volume of material investment transactions, auditor should search for unrecorded purchases o securities by examining transactions for a few days after year-end -Derivatives may not involve CR/CD (sometimes, no amount of money is changing when derivative is initiated, only when settled at the end of its term, so looking for unrecorded purchases by looking at cash or receipts may be good for ordinary inventory, but not for derivatives) -One of the characteristics of derivatives is that they may involve only a commitment to perform under a contract and not an initial exchange of tangible consideration. Therefore, auditors designing tests related to the completeness assertion should not focus exclusively on evidence relating to cash receipts and disbursements 2. Auditor should confirm securities held by the third-party custodian or count securities on hand to determine that all securities have been recorded, although these are primarily tests of existence -Confirmation good is securities held by a third party 3. The auditor should request information from the counterpart to the derivative or the holder of a security to determine whether any side agreements or agreements to repurchase securities exist. Even if the entity states that no derivatives exist with a frequently used counterparts or holder, the auditor may want to confirm that this information is true -So, if there's a counterpart/derivative to an investment, figure out: 3.1. What it is 3.2. Side-agreements 3.3. Interest (look at accrual) 4. If there is a difference between the expectation of interest earned, determined from the underlying agreement, a d actual interest earned, this may indicate the existence of an interest rate swap agreement -So, looking at interest accrual 2, Valuation and Allocation (cVer) -The auditor should perform the following procedures: 1. Obtain and foot a listing go investments by category (trading, available fo sale, held-to-maturity, derivative, and equity method) and agree the total to the general ledger -So, list of investment in total is mathematically accurate 2. Review the schedule of investment activity and obtain evidence of any additions and subtractions that occurred during the year -So, year 3. Obtain evidence corroborating the quoted year-end fair value by comparing assigned values to prices published by various sources (exchanges registered with the SEC or other reliable sources of financial information) or obtained from a third party, such as an independent broker-dealer or appraiser -So, looking at: 3.1. Sources 3.2. Confirmations 4. Recalculate the ending values of investments not reported at fair value -Investments classified as held-to-maturity should be valued at amortized cost at year-end -Investments in another entity where significant influence exists and ownership is between 20% and 50% should be accounted for using the equity method -So, if not recorded at FV, see how they calculated value of investment and if that's accurate 5. Determine whether there has been any permanent impairment in the value of individual securities -So, consider impairment 6. Assess the reasonableness and appropriateness of assumptions, market variables, and valuation models, and of any decline in fair value -So, assumptions are reasonable of FV 3. Existence (cvEr) -The two primary tests of existence of investments are confirmation of securities held y third parties and examination of securities on hand -A third test of existence is analytical procedures over interest earned: 1. Confirmations should be requested from the custodian for securities that are in the possession of third parties -Should also send confirmations to the broker-dealer and to counterparts concerning any unsettled transactions -So, confirmation to broker dealer/other counterpart 2. An examination of the securities on hang should coincide with examinations of other liquid assets (like cash) -This procedure prevents the concealment of theft by making it impossible for one asset to serve as a substitute for another (ex: to cancel a stolen asset) -The face of the instrument should be examined to determine if ownership is correctly recorded -The auditor should record the details of the security count on a worksheet, which should also include an acknowledgement by the client that the securities were returned intact -If a safe-despot box is used, the securities should be counted on the BS date, or the bank should be requested to seal the box until the count is later completed -So, examine/inspect investments on hand to see if it's appropriate 3. There is an expectation that interest earned on an investment in a debt security will agree to the effective interest rate when the security was purchased -The auditor may perform analytical procedures to obtain evidence that interest earned does not materially differ from the expectation as evidence of existence of the security 4. Rights and Obligations (cveR) -The confirmation of securities and the count of securities on hand -Examine broker's advices for a sample of securities purchases during the year to verify the entity's ownership -So: 4.1. Counting investments 4.2. Third party confirmation

Expenditure Cycle - Performing Specific Procedures to Obtain Evidence: The Expenditure Cycle - Auditing Accounts Payable

-CVER since account balance -For accounts payable, the completeness and accuracy assertions are generally more relevant than the existence and rights and obligations assertions, because the risk of understatement is greater than the risk of overstatement -So, going to test more for: 1. Completeness 2. Accuracy -Not as concerned with: 1. Existence 2. Rights and obligations 1. Completeness (Cver) -The auditor should perform the following procedures to ensure completeness of AP: 1. Agree the AP listing to the general ledger 2. Obtain a sample of vendor statements and agree to the vendor accounts 3. Perform a search for unrecorded liabilities 3.1. The auditor should select cash disbursements made subsequent to year-end and examine the supporting documentation (receiving reports, vendor invoices, etc.) The auditor looks for items that should have been recorded at the BS date, but were not 3.2. Note that cash disbursements made subsequent to year-end may be identified by reviewing the cash disbursements journal, subsequent bank statements, or the voucher register 3.3. The auditor should also examine open vouchers, receiving reports, vendors' invoices, and statements received for a period after year-end as part of the search for unrecorded liabilities SO, you're going to want to: 1. Review disbursements from Jan., Feb., ... Look for payment made after year-end and look at the material ones (ex: in Jan. look for payments over 20,000, in Feb. look for over 10,000, etc.) 2. Identify disbursements related to expenses BEFORE year-end (Looking at all the disbursements, some related to the new year, and some relate to the current year) 3. Confirm year-end liability (You paid this in Jan., so this means there should have been an AP before year-end Dec.) 2. Valuation, Allocation, and Accuracy (cVer) -The auditor should perform the following procedures: 1. Obtain the AP listing, foot the listing, and agree the listing to the general ledger 2. Obtain a sample of vendor statements and agree the amounts to the vendor accounts 3. Review the results of AP confirmations - Not required procedures 3. Existence and Occurrence (cvEr) -The auditor should vouch selected amounts from the AP listing to the voucher packages. The auditor may also confirm AP -AP confirmations are not required because strong external evidence to support AP is generally available. However, confirmations of AP may be sent when IC is weak, when there are disputed amounts, or when monthly vendor statements are not available. Typically, vendors with small or zero balances would be selected for confirmation. Note that although confirmations are generally used to test existence, the AP confirmation is primarily a test of completeness that also provides evidence of existence. -AP confirmations are similar to those used for AR. P confirmations are positive and generally "blank." The objective is to determine whether AP are understated at the BS date -The major limitation of AP confirmation is that they may only be sent to vendors of record. If a material error were present in AP, it would most likely involve unrecorded liabilities: therefore, no record would exist. Although AP confirmations may have limitations, evidence of unrecorded liabilities eventually will surface when unpaid vendors step delivering goods -So, only use confirmations when: 1. IC are weak 2. When there are likely disputes/errors 3. No vendor statement to look at 4. Picking small accounts payables 4. Rights and Obligations (cveR) -The auditor should review a sample of voucher packages for the presence of the purchase requisition, purchase order, receiving report, and vendor invoice to verify that the AP are owed by the entity -So, looking at voucher packages

Inventory Cycle - Performing Specific Procedures to Obtain Evidence: The Inventory Cycle - Auditing the Inventory Balance

-CVER since account balance -The observation of the beginning and ending physical inventory counts is a required generally accepted auditing procedures -Attendance by the auditor at the physical inventory count involves the following dual-purpose tests: 1. Evaluating management's instructions and procedures for the inventory count (test of controls) 2. Observing the performance of management's count procedures (test of controls) 3. Inspecting the inventory to ascertain its existence and condition, and (sub. pro.) 4. Performing test counts (sub. pro.) -An auditor who is not present to observe the physical inventory must use alternative procedures to justify any opinion expressed. This is acceptable when it is impractical or impossible to observe physical inventory, or when inventories are not material -SO, audit (GAAS) say must be present at BOTH beg. and end, inventory balances to observe inventory counts at those points but these are dual-purpose tests (good to look at controls and the account balance) -If the company maintains a well-kept perpetual inventory system and performs physical cycle counts throughout the year to ensure accuracy, the auditor may observe the inventory before or after year-end if necessary. If inventory counting is done at a date other than the date of the FS, the auditor should obtain evidence about whether changes in inventory between the count date and the FS date are recorded properly. If the assessed level of control risk is high, the observation procedures should be performed at year-end, SO, must have evidence for "gap" period -The auditor should observe the physical inventory count of goods help off-site in public warehouses or on consignment if the inventory held therein is significant. Otherwise, confirmation of such inventory is sufficient -So, is inventory significant?: 1. Yes = Observe (how third party does inventory count) 2. No = Confirmation (of balance held at third party) 1. Completeness (Cver) -In conjunction with the inventory observation, the auditor should test the physical inventory report by tracing test counts tot he report, thereby verifying its completeness -The auditor should also select from a sample of prenumbered inventory tags and TRACE to the physical inventory report sheets to test their completeness 2. Valuation, Allocation, and Accuracy (cVer) -The auditor should perform the following procedures: 1. Test the mathematical accuracy of the inventory report and reconcile it to the general ledger inventory accounts 2. Inquire about obsolete or damaged goods, scan the perpetual records for slow-moving items, and be alert during the inventory observation for damaged goods or signs of obsolescence -So, looking for: 2.1. Damaged goods 2.2. Obsolete goods 2.3. Irregular items 3. Examine vendor invoices, review direct labor rates, test the computation of standard overhead rates, and examine standard cost variance analyses. These prices and rates is can then be applied to a sample of inventory items to determine whether the inventory is valued appropriately 3. Existence and Occurrence (cvEr) -The primary purpose of the observation of the client's inventory count is to establish the existence of inventory -During the observation, the auditor should verify the existence of a sample of items in the physical inventory report by locating and performing test counts of the items -The auditor should also test the existence of the items on the client's inventory report sheets by vouching a sample of items from the inventory report sheet to the corresponding renumbered inventory tags -So, the inventory observation and the related evidence we gathered shows existence Inventory Report | | Vouch Audit count/Inventory tags 4. Rights and Obligations (cveR) -The auditor should ascertain that consigned inventory on hand is excluded from the physical inventory count, whereas consigned goods in the hands of consignees are included in inventory balances -The auditor should also confirm that any inventory held off-site is properly accounted for at year-end -Also, inventory in transit at year-end should be properly accounted for based on shipping terms -SO, documentation should: 1. Ownership 2. Consignment 3. In-transit

Internal Control Communications - Can Deficiencies Exist, Even if Auditor Found No Misstatements?

-Significant deficiencies and material weaknesses CAN exist even though auditor has not identified misstatements during audit -Reasonable assurance

Property, Plant, and Equipment Cycle - Performing Specific Procedures to Obtain Audit Evidence: Property, Plant, and Equipment - Auditing the Property, Plant, and Equipment Balance

-CVER since account balance 1. Completeness (Cver) -Obtain and foot fixed asset schedule and agree the total to the general ledger -Obtain and foot a schedule of additions and dispositions of fixed assets -TRACE to the fixed asset subsidiary ledger Fixed Asset Subsidiary Ledger trAce | | Actual Asset 2. Valuation, Allocation, and Accuracy (cVer) -Recalculate accumulated depreciation for reasonableness -Evaluate fixed assets for impairment by examining entity's documented impairment analysis, identifying circumstances that could indicate that the book value of fixed assets is not recoverable -Reperforming entity's impairment analysis to determine whether recorded impairment losses are reasonable -If entity uses IFRS, auditor should verify reasonableness of any fixed asset revaluations (IFRS component) -So, 1. Recalc. depreciation 2. Recalc. accumulated depreciation 3. Evaluate impairment 3. Existence (cvEr) -VOUCH additions to the fixed asset accounts by examining internal documents (like asset requisition form) by examining external evidence (like invoices), and inspecting actual asset -Should also pick older assets from subsidiary ledgers and then locate those assets, as a means of testing for unrecorded retirements .................................................Additions |..................................................|.....................................................| |..................................................|.....................................................| Vouch.....................................Vouch..........................................Vouch Internal docs.............External evidence.....................Actual asset 4. Rights and Obligations (cveR) -Examined invoices, deeds, and title documents to confirm ownership of fixed assets

Cash Cycle - Performing Specific Procedures to Obtain Evidence: The Cash Cycle - Auditing the Cash Balance

-CVER since account balance 1. Completeness, Valuation and Allocation, Existence -The primary audit procedures performed to test this are bank confirmation and the audit of the year-end bank reconciliation 1.1. Bank Confirmation -The standard bank confirmation should be sent to all banks which the client has done business during the year, regardless of whether there is a year-end balance to confirm -This is done because the bank confirmation, in addition to verifying year-end balances, also provides evidence about actual loans, contingent liabilities, discounted notes, pledged collateral, and guarantee or security agreements -SO, allows auditor to: 1. Confirm multiple accounts with the same institution 2. Confirmation of debt held by that institution -So, it helps not only to confirm existence and completeness, but also provides evidence of other liabilities (killing two birds with one stone) 1.2. Bank Reconciliation -The year-end bank reconciliation for every account should be tested by: 1. Footing the bank reconciliation and the list of outstanding checks 2. Agreeing the balance per the books on the year-end bank reconciliation to the general ledger 3. Agreeing the balance per the bank on the year-end bank reconciliation to the balance per the bank confirmation 4. Agreeing deposits in transit and outstanding checks to the cutoff bank statement. The cutoff bank statement is obtained by the auditor from the bank and covers the first 10-15 days of the period after year-end. Reconciling items should generally clear during the 10-15 day period. Any item that does not clear should be investigated by the auditor and resolved with he client if necessary

Cash Cycle - Performing Specific Procedures to Obtain Evidence: The Cash Cycle - Auditing Presentation and Disclosure

-CVR U because disclosure 1. Completeness (Cvr u) -The auditor should ensure that all required disclosures related to cash have been included in the notes to the FS -Required disclosures related to cash include: 1. Policy defining cash and cash equivalents 2. Restrictions on cash, including sinking fund requirements 3. Compensating balance requirements 2. Valuation, Allocation, and Accuracy (cVr u) -The auditor should read the footnotes and other information related to cash to determine whether the information is accurate and presented at the appropriate amounts 3. Rights and Obligations, and Occurrence (cvR u) -The auditor should compare disclosures to other audit evidence to ensure that all dislocated information related to cash has occurred 4. Understandability and Classification (cvr U) -The auditor should read all cash-related disclosures to ensure that they are understandable

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle - Auditing Presentation and Disclosure

-CVR U since a disclosure 1. Completeness (Cvr u) -Auditor should ensure that all required disclosures related to AR and sales have been included in notes to FS -Revenue cycle disclosures include: 1. Revenue recognition method(s) 2. Revenue by reportable segment 3. Related party revenues and receivables 4. Receivables by type (trade, officer/employer, affiliates) and term (short or long term) 5. Pledged or discounted receivables 6. Allowance for doubtful accounts related to the receivables and a discussion of the analysis to assess client risk 7. Inclusion in receivables of amounts related to long-term contracts 2. Valuation, Allocation, and Accuracy (cVr u) -The auditor should read the footnotes and other information related to AR and sales to determine whether the information is accurate and presented at the appropriate amounts 3. Rights and Obligations, and Occurrence (cvR U) -The auditor should determine whether any receivables have been pledged, assigned, or discounted and, if so, determine whether disclosure is required -The auditor should compare disclosures to other audit evidence to ensure that all disclosed information related to AR and sales has occurred -So, are terms of who owes and owns in the disclosures correct? 4. Understandability and Classification (cvr U) -The auditor should read all AR and sales related disclosures to ensure that they are understandable -So, do the disclosures make sense if you read them?

Expenditure Cycle - Performing Specific Procedures to Obtain Evidence: The Expenditure Cycle - Auditing Presentation and Disclosure

-CVR U since disclosure 1. Completeness (Cvr u) -The auditor should ensure that all required disclosures related to AP and purchases have been included in the notes to the FS -Required disclosures include: 1. Payables by type (trade, officer/employer, affiliates) and term (short or long term) 2. Purchase contracts and purchase commitments 3. Related party purchases and payables 4. Expenses by segment 2. Valuation, Allocation, and Accuracy (cVr u) -The auditor should read the footnotes and other information related to AP and purchases to determine whether the information is accurate and presented at the appropriate amounts 3. Rights and Obligations, and Occurrence (cvR u) -The auditor should compare disclosures to other audit evidence to ensure that all disclosed information related to AP and purchases has occurred 4. Understandability and Classification (cvr U) -The auditor should read all AP and purchase related disclosures to ensure that they are understandable -The auditor should determine whether material long-term payables or non trade payables require separate disclosure

Expenditure Cycle - Internal Controls Related to the Expenditure Cycle - Cash Disbursements

-Ideally, invoices should be paid by check -For effective IC, the functions of approving the payment and signing the checks should be segregated -Approved voucher packets (matched invoice, purchase order, receiving report, and requisition) prepared by the accounting department (AP) are received by the treasurer, who prepares, signs, and mails the checks and cancels all supporting documents after payment -Paid vouchers are returned to the accounting department for posting of the payment and filing of the documents -So, whoever approves the payment can't be the same person writing the checks, so the Treasury should make sure voucher payable is properly approved, and then they will prepare and sign the check, and they also cancel the document so they don't pay the same thing twice

Property, Plant, and Equipment Cycle - Auditing Presentation and Disclosure

-CVR U since disclosures 1. Completeness (Cvr u) -Ensure that all required disclosures related to fixed assets have been included in notes to the FS -Required disclosures include: 1. Depreciation methods and useful lives 2. Depreciation expense for period 3. Balance of each class of capital assets by nature/function 4. Accumulated depreciation allowances by class or in total 5. Liens and mortgages 6. Capital and operating lease information 2. Valuation, Allocation, and Accuracy (cVr u) -Read the footnotes and other information relates to feed assets to determine whether the information is accurate and presented at the appropriate amounts 3. Rights and Obligations, and Occurrence (cvR u) -Inquire of management and review loan agreements, minutes, and other documents to determine whether fixed assets have been pledged as collateral -Compare disclosures with other audit evidence to ensure that all disclosed information related to fixed assets has occurred 4. Understandability and Classification (cvr U) -Auditor should read required disclosures for understandability

Investment Cycle - Performing Specific Procedures to Obtain Evidence: The Investment Cycle - Auditing Presentation and Disclosure

-CVR U since disclosures 1. Completeness (Cvr u) -Ensure that all required disclosures related to investments have been included in the notes to the FS -Should determine whether all required marketable security and derivative disclosures have been made 2. Valuation, Allocation, and Accuracy (cVr u) -Read the footnotes and other information related to investments to determine whether the information is accurate and presented at the appropriate amounts 3. Rights and Obligations, and Occurrence (cvR u) -Inquire of management and review loan agreements, minutes, and other documents to determine whether investments have been pledged as collateral -Compare disclosures to other audit evidence to ensure that all disclosed information related to investments has occurred -So, looking at: 1. Board minutes 2. Pledged as collateral 4. Understandability and Classification (cvr U) -Read required disclosures for understandability -Review and evaluate methods used to account for, classify, and value securities

Inventory Cycle - Performing Specific Procedures to Obtain Evidence: The Inventory Cycle - Auditing Presentation and Disclosure

-CVR U since disclosures 1. Completeness (Cvr u) -The auditor should ensure that all required disclosures related to inventory have been included in the notes to the FS -Inventory disclosures include: 1. Cost method (LIFO, FIFO, weighted average) and valuation method (net realizable value or lower of cost or market) 2. Raw materials, work-in-process, and finished goods inventory balance 3. Consigned inventory 4. Pledged or assigned inventory 5. Significant losses from inventory write-downs or purchase commitments 6. Warranty obligations 2. Valuation, Allocation, and Accuracy (cVr u) -The auditor should read the footnotes and other information related to inventory to determine whether the information is accurate and presented at the appropriate amounts 3. Rights and Obligations, and Occurrence (cvR u) -The auditor should determine that inventory-related obligations have been properly disclosed by inquiring of management and reviewing loan agreements and minutes for evidence that inventory has been pledged or assigned -The auditor should also inquire about warranty obligations -The auditor should compare disclosures to other audit evidence to ensure that all disclosed information related to inventory has occurred 4. Understandability and Classification (cvr U) -The auditor should read all inventory-related disclosures to ensure that they are understandable -The auditor should review inventory records for proper classification between raw materials, work in process, and finished goods

Revenue Cycle - Internal Controls Related to the Revenue Cycle - Cash Receipts

-Cash is a good area for fraud is no proper IC are in place, so we want segregation of duties --> ARC (Authority, Record Keeping, and Custody) these should all be separated -Incoming mail must be opened by a person who does not have access to the accounts receivable ledger Receipts should be listed in detail and three copies distributed to the following personnel: 1. Cashier - Receives actual receipts and prepares bank deposit 2. Accounts Receivable Department - Enters receipts into the accounts receivable subsidiary records 3. Accounting Department - Enters receipts into accounts receivable control account -The accounts receivable department should match (match: deposit slip, remittance listing, actual JE's recorded) the details from the bank deposit ticket with he details from the remittance advices. This will reveal any discrepancies. Cash collections should be restrictively endorsed upon the receipt and deposited daily. Devices such as cash registers or lock boxes (cash sent directly to bank, and bank tells us, great control) should be used as safeguards

Cash Cycle - Fraud Risk Related to the Cash Cycle

-Cash is an area with high fraud risk, especially when IC is weak -So, need to know where fraud risks lie and what aud. pro. to perform, since cash is a target of fraud since it's easy to just put in your pocket Two common cash fraud schemes: 1. Lapping -Kiting

Cash Cycle - Fraud Risk Related to the Cash Cycle - Kiting

-Cash recorded in two places at once -Kiting occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank until after year-end -Kiting may be used to cover a cash shortage or to pad a company's cash position -Kiting results in an intentional overstatement of cash in the FS as the cash is simultaneously reflected in two different bank accounts -To detect kiting effectively, a bank transfer schedule should be prepared. For any bank-to-bank transfers that occur near year-end, the disbursement date on the check and in the ledger for the disbursing account should precede the receipt date noted by the bank and in the ledger for the receiving account -To ensure that kiting has not occurred, evidence should exist that all deposits in transit and outstanding checks listed on the bank reconciliation at year-end cleared in the next period. This information can be confirmed by using a bank cutoff statement -SO, two accounts, bank A and bank B, and you get a check from bank A and you deposit it in bank B, but you record the receipt before year-and, but record the disbursement after year-end, so in effect you create the illusion that that cash is both in bank A and bank B at year-end, and hopefully because that will all show up after year-end, you can disguise them in your bank reconciliation process -So, look at bank transfer schedule (shows the amount of money after year-end) and look at movements that startle year-end to indicate possible fraud to boost cash balance

Revenue Cycle - Internal Controls Related to the Revenue Cycle - Collections Flowchart

-LOOK AT IT -PAGE A4-6

Investment Cycle - Investments Measured at Fair Value - Measuring Fair Value

-Certain financial assets and liabilities, like marketable securities and derivative, are presented or disclosed at FV in the FS -FV = amount at which an asset could be sold (or amount at which liability could be settled) in a current transaction between willing parties at the measurement date (exit price) A three-level hierarchy is used to measure FV: Level 1: Observable quoted prices in active markets for identical assets or liabilities -Quoted prices from national exchanges or over-the-counter markets are available from national publications and the exchanges, and generally are considered to provide sufficient evidence of the FV of the derivatives and securities -If a quoted market price is available, this should be the method used to determine the FV of the investment Level 2: Observable inputs other than quoted market prices for identical assets or liabilities -When quotes prices for identical assorts or liabilities are not available, next consideration is whether there are other directly or indirectly observable inputs -Most common of these observable inputs are quotes prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets in market that are not active Level 3: Unobservable inputs using estimates and valuation methods, such as discounted cash flow, determined based on management's judgements -If quoted prices are not available, estimates of FV may be available from broker-dealers or other third-party sources based on proprietary valuation models or from entity based on an internal valuation model -Auditor should ensure that pricing source does not have a relationship that would impair objectivity in determining FV -Auditor should also consider obtaining futrther estimates if subjective information was used in valuation process -FV measurements may arise from both initial recording of a transaction and later changes in value -Changes in FV measurement may be treated in different ways under GAAP (ex: included in net income, reflected in other comprehensive income and equity, etc.)

Those Charged with Governance - Other Communication Considerations - Two-Way Communication

-Communcation should be two-way -Auditor should communicate purpose, form, timing, and expected general content of further communications as a means establishing effective two-way communication, but those charged with governance should also communicate relevant matters to auditor -Audiotr may request additional information from those charged with governance as a means of obtaining further audit evidence. There should be an established process for each party to take action and report back to other -Inadequate two-way communication many be indicative of unsatisfactory control environment, which may affect auditor's assessment of risk of mat. mis.

Investment Cycle - Auditing Particular Types of Investments - Derivatives - Cash Flow Hedge

-Consider how probable the future cash flow is -Auditor must assess management's determination that forecasted transaction is probable of occurring Transaction's probably should be supported by observable facts and attendance circumstances, such as the following: 1. Frequency of similar past transactions 2. Financial and operational ability of entity to carr out transaction 3. Extent of loss that could result if transaction does not occur 4. Likelihoods that transactions with substantially different characteristics might be used to achieve the same business purpose

Management Representation Letter - Requirements - What is Date on Rep. Letter?

-Dated Same Date as Audit Report -Client representation letter should be dates as of date of auditor's report -Sometimes, circumstances may prevent management from signing representation letter and returning it to auditor on date of auditor's report. When this happens, auditor may accept management's oral confirmation, on or before date of auditor's report, that management has reviewed final representation letter and will sign representation letter without exception as of date of auditor's report -Possession of signed representation letter is necessary before releasing auditor's report

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit - Internal Control Deficiencies and the Risk of Material Misstatement

-Deficiency in other design or operation -Will allow for a material misstatement to occur -Once tests of controls have been performed, auditor will assess control risk -If evidence indicates that controls are operating affectively auditor will rely on those controls during audit testing -If evidence indicates that controls are not operating effectively, further testing will be required -Control deficiencies may be noted in design of controls or in the failure of the effectively designed control -Examples: 1. Deficiencies in design of controls: 1.1. Inadequate documentation and design of IC over preparation of FS or over a significant account or process 1.2. Lack of appropriate controls over segregation of duties on safeguarding of assets 1.3. Inadequate design of IT controls 1.4. Lack of appropriate qualifications or training of client personnel 1.5. Inadequate design of monitoring controls or absence of an appropriate process to report control deficiencies 2. Failure in effectively designed controls 2.1. Failure of control over a significant account or process 2.2. Undue bias or lack of objectivity 2.3. Misrepresentation by client personnel to auditor 2.4. Management override of controls 2.5. An observed deviation rate that exceeds auditor's expected rate 2.6. Failure of information and communication component of IC to provide complete, accurate, and timely information -If deficiencies are noted, further testing is required and may take form of additional IC testing or more extensive substantive procedures -So, once find material misstatements, must determine they're impact, and what doubt does that cast on out initial investment of RMMM, and in particular assessment of control risk When control deficiencies are noted, auditor should: 1. Consider compensating controls -So, this control isn't working, but control Y helps address that controls weakness 2. Decide whether there is a significant deficiency or material weakness -So, so we need to consider a significant deficiency the warrants governance attention? 3. Determine potential misstatements that could occur -So, recuasse of deficiency 4. Design substantive tests related to the deficiency to provide evidence that FS are free from material misstatement with regard to audit objective and area -So, what other sub. testing do we do/add to address weakness

Internal Control Communications - Definitions - Significant Deficiency

-Deficiency, or a combination of deficiencies, in IC (over financial reporting) that is less severe than a material weakness, yet important enough to merit attention by those charged with governance

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle - Auditing Accounts Receivable - Accounts Receivable Confirmations - Negative Confirmations

-Differ from positive in that customer's are requested to respond to the auditor only if they disagree with the stated amount owed Negative confirmations used to confirm AR when: 1. The combined assess level of inherent and control risk is low (RMM low) 2. A large number of small account balances are being confirmed, and 3. There is no reason to expect that recipients of requests will ignore them

Management Representation Letter - Requirements - If No Rep. Letter, What Happens?

-Disclaim, or -WITHDRAW

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle - Auditing Accounts Receivable - Accounts Receivable Confirmations - Positive Confirmations

-Do you agree or disagree with this amount? Either way, customer has to give us a response -Auditors send confirmations to their client's customers stating the amounts of receivables owed by the customer at fiscal year-end -The customers are requested to return a statement to the auditor indicating whether they agree with the amount and to provide information about any exceptions -This type of confirmation is known as positive confirmation Positive confirmations should be used to confirm AR when: 1. There are large individual accounts 2. There are expected errors or items in dispute, and 3. When internal control is weak -Note: Positive confirmations may also be "blank," which means that the recipient is requested to fill in the balance. Blank forms provide a greater degree of assurance (since the recipient cannot simply sign off without actually checking the balance) but may also result in lower response rates because a greater effort is required by the recipient -Confirmation responses received electronically (faces, emails) should be verified by calling the sender. The sender should also be requested to mail the original confirmation directly to the auditor -The auditor should consider the types of information respondents will be readily able to confirm. For instance, some accounting systems facilitate the confirmation of single transactions rather than entire balances. In such cases, the auditor would either confirm individual invoices, or would include a client-prepared statement of account showing details of the customer's account balance being confirmed -Not: That confirmations generally provide evidence regarding existence and rights and obligations. They do not provide reliable evidence regarding valuation (customer may need to confirm a abalone owed despite an inability to pay) or completeness (customers may not report understatement errors) So, good for: 1. Existence 2. Rights and obligations Bad for: 1. Valuation 2. Completeness

Investment Cycle - Auditing Particular Types of Investments - Investment in Securities When Valuations Are Based on the Investee's Financial Results

-Ex: Equity method When investments in securities are valued based on an investee's FS, such as equity method investments, auditor should perform following procedures to obtain sufficient appropriate audit evidence in support of the investee's financial results: 1. Obtain and read the FS and audit report of investee 2. If FS are NOT AUDITED (request that they should be) or the audit report is not satisfactory, request that the entity arrange with the investee to have FS audited -So, if you're an investor with sig, influence, you could used sig. influence to get FS audited 3. If carrying amount of investment reflects factors that are not recognized in investee's FS or FVs that are materially different from investee's carrying amounts, obtain sufficient appropriate evidence in support of such amounts -So, what if FV and CV vary significantly? May be when they invested in the company, they said the FV is this above CV, and record it based on FV (after seeing evidence on FV adjustments) 4. If difference between FS periods of entity and investee could have a material effect on entity's FS, determine whether management has considered lack of comparability and determine the effect, if any, on auditor's report -So, investee has different year-end, if small gay, only determine difference -For equity method investments, auditor should inquire of management regarding the entity's ability to exercise significant influence over investments to determine whether investments have been properly classified

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle - Auditing Accounts Receivable - Accounts Receivable Confirmations - Confirmation Exception - 1. Timing Differences

-Ex: customer mailed check before received a confirmation, so how they don't owe as much money, so you say confirmation is wrong even though at the time the confirmation was right -Occur hen there is a delay in the recording of the transaction by client or customer -Ex: An entity may correctly record a receivable on Dec. 31 when the goods are shipped to the customer, but the customer may not record the payable until goods are received on Jan. 5 -This is NOT a misstatement

Internal Control Communications - Definitions - Control Deficiency

-Exists when design or operation of a control does not allow management or employees, in normal course of performing their assigned functions, to prevent, detect and correct misstatements on a timely basis -So, can be anything that can lead to a misstatement, IC won't prevent/detect and correct mis., not how big mis. could be but that it could happen 1. Deficiency in design occurs when: 1. A necessary control is missing, or 2. When an existing control does not achieve desired objective 2. Deficiency in operations occurs when: 1. A properly designed control does not operate as designed (not doing what it should), or 2. Is performed by an inappropriate person

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle - Auditing Accounts Receivable - Accounts Receivable Confirmations - Confirmation Nonresponses

-FIRST, auditor will FOLLOW-UP, if that doesn't work, the do alternative procedures -Nonresponse should be followed up with second and even third confirmation requests if necessary -Client may be asked to intervene -When confirmation responses are not received, auditor should perform alternative procedures, such as: 1. Inspecting shipping documents 2. Reviewing subsequent cash receipts -If a 100% overstatement of AT from the nonresponding customers would be immaterial, alternative procedures may not be necessary. This assume that there is no unusual pattern to the nonresponses

Misstatements and Internal Control Deficiencies - Adjusting Journal Entries - Purchases

-FOB shipping point and destination -Important o know whether client is buyer/seller

Those Charged with Governance - Form and Timing of Communication - PCAOB Standards

-For issuers -In addition to items above, PCAOB's audit committee communication requirements for issuers include the following: 1. Additional information related to planned scope and timing of audit, including: 1. NET of specialized skill of knowledge needed to complete engagement 2. Extent to which auditor will use work of company's internal auditors when performing FS audit 3. Extent to which auditor will use work of internal auditor, company personnel, and third parties when performing IC audit 4. Names, locations, and responsibilities of other public accounting firms that will perform audit procedures 5. Basis for determination that auditor is principal auditor, if other auditors will perform significant work in engagement 2. Additional matters related to significant audit findings, including: 1. Effect on FS or disclosures of significant accounting policies in controversial areas or areas in which there is a lack of authoritative guidance 2. Critical accounting policies and practices 3. Critical accounting estimates 4. Significant unusual transactions 5. Situations in which auditor identified bias in management's judgements 6. Auditor's views on matters about which management consulted with other accountants 3. Matters related to going concern, when there is substantial doubt about company's ability to continue as a going concern, including: 1. Conditions and events that auditor identified that indicate that there is substantial doubt 2. Effect of substantial doubt on FS and adequacy of disclosure 3. Effect of substantial doubt on auditor's report 4. If auditor concludes that substantial doubt about company's ability to continue as a going concern is alleviated by management's plans, basis for this conclusion 4. Reasons for modification of auditor's opinion 5. Reasons for and wording of explanatory language added to auditor's report

Inventory Cycle - Internal Controls Related to the Inventory Cycle

-IC over inventory purchases and sales covered in Revenue/Expenditure cycles -For inventory held by entity, proper IC includes: 1. Adequate safeguarding of inventory 2. Segregation of duties The following duties should be segregated: 1. Purchasing -Serially numbered, properly approved purchase orders should be prepared and issued to the accounting and receiving departments 2. Receiving -The receiving department is solely responsible for the receipt of goods -Responsible for: 1. Verification of quantities received 2. Detection of damages goods 3. Preparation of receiving report 4. Delivery of goods received to warehouse departments 3. Warehouse -The warehouse department acts as custodian for the verified quantity of goods received 4. Shipping -The shipping department is responsible for shipment of goods after authorization (in the form of an approved sales order from the credit department)

Communications Regarding Noncompliance - Reporting to Those Charged With Governance

-IF those charged with governance are not involved in management of entity, auditor should communicate with those charged with governance matters involving noncompliance -Matters that are clearly inconsequential need not be communicated -IF noncompliance appears to be intentional and material, communicate to those charged with governance as soon as practicable -If management or those charged with governance are involved in noncompliance, communicate to next higher level of authority at entity -If not higher level, obtain legal advice

Inventory Cycle - Performing Specific Procedures to Obtain Evidence: The Inventory Cycle - Auditing the Inventory Balance - What is Considered Observation?

-NOT the auditor counting the inventory -CLIENT counts the inventory and the auditor simply observes -Auditor may make test counts of certain items, but generally the auditor would not count the client's entire inventory

Matters that Require Special Consideration - Opening Balances - Discovery of Material Misstatements in Opening Balances

-If auditor obtains audit evidence that opening balances contain misstatements, the auditor should should determine the effect on the current period FS -If auditor believes that FS reported on by the predecessor auditor require revision, auditor should ask client to arrange a meeting (involving both auditors and the client) to the auditor is not satisfied with the resolution, auditor should consider implications on current audit and whether to resign from engagement -SO: 1. Does is impact current FS? 2. Predecessor FS require revision So: 1. If the opening balances were materially misstated, how does that impact the current year FS 2. If we determine there's a material misstatements does that in fact create the need for the predecessor FS to be adjusted, which would likely pull the predecessor auditor back in

Investment Cycle - Investments Measured at Fair Value - Impairment Indications

-Impairment loss resulting from a decline in FV that is other than temporary may need to be recorded -If recorded, auditor should evaluate management's basis for decision If not recorded, auditor should consider whether following situations exist that could indicate need for an impairment loss to be recorded: 1. FV is significantly below cost and: 1.1. Decline is attributable to adverse conditions specifically related to security or to specific conditions in an industry or in a geographic area 1.2. Decline has existed for an extended period of time 1.3. Management does not possess both intent and ability to hold security for a period of time sufficient to allow for an anticipate record in FV 2. Security has been downgraded by a rating agency 3. Financial condition of issuer has been deteriorated 4. Dividends have been reduced or eliminated, or scheduled interest payments have not been made 5. Entity recorded loss from security subsequent to end of reporting period

Those Charged with Governance - Other Communication Considerations - Other Standards - Reporting Fraud and Noncompliance With Laws and Regulations

-In SSARS engagement, if an accountant becomes aware that fraud or noncompliance with laws and regulations may have occurred, such matters should be communicated to an appropriate level of management -Management should be asked to consider the effect of fraud or noncompliance with laws and regulations on the FS -Accountant should consider impact of matter on compilation or review report -When accountant believe that FS are materially misstated, accountant should obtain additional or revised information -If entity will not provide additional/revised information, account should withdraw from engagement 1. Inconsequential Matters - need to be communicated 2. Documentation - communication may be writing/orally, but oral should be documented 3. Other Options - accountant should consider withdrawing/consulting legal counsel if fraud or noncompliance with laws and reg. involve owner of business 4. Confidentiality - Obligations of this preclude disclosure outride entity, except in certain limited circumstance (legal requirements, successor accountant, subpoena)

Matters that Require Special Consideration - Audit Procedures

-In evaluating reasonableness fo an estimate, auditor must first obtain an understanding of how management developed its estimate Auditor would then perform one or a combination of following: 1. Review and test procedures used by management to develop estimate 2. Develop an independent estimate of item for comparative purposes 3. Review subsequent events and transactions (occurring prior to date of auditor's report) that corroborate value of estimate. For complex estimates, like FV, auditor may need to consider using a specialist to assist in audit process, especially if a Level 3 valuation is performed by management

Matters that Require Special Consideration - Opening Balances - Auditor's Responsibility

-In initial audit and reaudit engagements, auditor should obtain sufficient appropriate audit evidence about whether: 1. Opening Balances contain material misstatements that could materially affect the current period FS -So, not just looking at gif the closing balances are materially misstated, but the beginning balances too 2. Accounting policies reflected in the opening balances have been consistently applied in the current period FAS and whether any changes in accounting policies have been properly accounted for, presented, and disclosed in accordance with the applicable financial reporting framework -So, consistently applies OR changed correctly -So, should have followed same acct. policies from beginning to end, or if not, change was done correctly and for the right reasons

Matters that Require Special Consideration - Litigation, Claims, and Assessment - Letter of Inquiry to Client's Attorneys - Inherent Uncertainties

-In some cases, inherent certainties may make it difficult for an attorney to form conclusions regarding pending litigation -If auditor is satisfied that FS disclosure is adequate, no modification to opinion would be required -So, if lawyers don't give a definite estimate, that's okay., as long as the appropriate GAAP was reduced -NOTE: Management is primary source of information regarding contingencies including litigation, claims, and assessments. Letter sent to client's attorney is simply a means of corroborating information provided by management -Attorney is not the primary source of information, so the open-ended question goes to management to tell us about all litigation and assessments they are the primary source, and the attorney just corroborated those facts -So, as long as management followed GAAP in the amount and probability then they will accrue it if probable and estimable

Property, Plant, and Equipment Cycle

-Includes all tangible assets with service lives greater than one year that are used in the operation of a business and are not acquired for resale -Major transactions: 1. Purchases 2. Repairs and maintenance 3. Depreciation 4. Disposal 5. Leasing

Financing Cycle

-Includes entity's: 1. Debt 2. Equity

Those Charged with Governance - Audit Committees - Sarbanes-Oxley Requirements

-Issuers -Requires audit committee to: 1. Approve engagement of auditor 2. Preapproce services to be performed 3. Ongoing comuncatsions with auditor -Auditors of issuers report to and are overseen by audit committee, NOT management

Matters that Require Special Consideration - Audit Procedures - What Should Auditor Keep in Mind with Estimates Accounts, like Doubtful Accounts?

-It is also tied with an expense account on the IS that will affect net income -Therefore, management's estimates regarding allowance account are susceptible to bias

Expenditure Cycle - Internal Controls Related to the Expenditure Cycle - Expenditures Flowchart

-LOOK AT IT -PAGE A4-12

Revenue Cycle - Internal Controls Related to the Revenue Cycle - Sales Flow Chart

-LOOK AT IT -PAGE A4-5

Matters that Require Special Consideration - Litigation, Claims, and Assessment

-MANAGEMENT'S RESPONSIBILITY to identify and account for contingent liabilities, including litigation, claims, and assessments, through the policies adopted by management for such purposes -Management representation letter should indicate that management has disclosed to the independent auditor all such relevant information -So, management's responsibility to: 1. Identify contingent liabilities 2. Determine their probability 3. Estimate potential loss 4. GAAP requirements -So, auditor's responsibility to: 1. See if management did it right For actual or potential litigation, claims, and assessments, auditor should obtain audit evidence relevant to: 1. Period in which underlying cause for legal action occurred 2. Degree of probability of unfavorable outcome, and 3. Amount or range of potential loss Potential litigation, claims, and assessments can be discovered by conducting following the audit procedures: 1. Inquiring of management about unrecorded contingencies related to litigation 2. Reviewing IRS reports and tax returns for unsettled disagreements 3. Reviewing minutes of board and stockholder meetings 4. Obtaining a letter from the client's attorney

Those Charged with Governance - Audit Committees - Specific Functions of Audit Committee

-Main function = enhance IC by creating means of direct communication between "outside directors" and auditor -Audit committee part of IC structure Audit committee typically: 1. Selects and appoints auditor and set audit fee -Negotiates fee 2. Assures auditor is independent of company 3. Reviews nature and details of audit engagement 4. Reviews quality of auditor's work 5. Reviews scope of audit 6. Ensures any recommendations made by auditor are given proper attention 7. Maintains lines of communication between auditor and board of directors 8. Helps solve any disagreements related to accounting treatment of any material items in FS 9. Evaluates IC of company with help of auditor 10. Makes reports to board of directors and stockholders when necessary

Investment Cycle - Auditing Particular Types of Investments - Derivatives - Considerations Regarding Hedging Activities

-Management can't just say it's a hedge get must prove they met all requirements for it to be considered a hedge If management accounts for a derivative as a hedge, auditor must ensure that following has occurred: 1. Derivative was designated as a hedge at its inception by management 2. Management has documented the hedging relationship, risk management objective, and strategy for undertaking the hedge (what they're hiding, why they did it, strategy for hedge) 3. Management has established an expectation that the hedge will be effective in achieving the heading strategy and is periodically assessing its effectiveness (effective at canceling risk?) -Auditor should also gather audit evidence supporting the adjustment in the carrying amount of the hedged items for the change in the hedged item's fair value that is attributable to the hedged risk

Investment Cycle - Investments Measured at Fair Value - Management's Responsibility

-Management is responsible for making FV measurements and disclosures in accordance with GAAP -When a Level 3 valuation is used to estimate FV, an appropriate valuation method should be used. The method should incorporate assumptions that a market participant would use. These assumptions must be identified and supported in the FV disclosures included in the FS -NOT auditor's job to figure out what FV is, that's management's job to come up with that number first

Internal Control Communications - Communication of Control Deficiencies - Management's Evaluation

-Management's responsibility to evaluate and address control deficiencies -Management may decide to accept certain significant deficiencies or material weaknesses based on costs that would be incurred to correct them -Auditor is still required to communicate such deficiencies in writing

Payroll and Personnel Cycle - Internal Controls Related to the Payroll and Personnel Cycle - Service Organizations

-Many entities use service organizations to process payroll transactions -Service organization's services are considered to be part of a user entity's information system when those services affect the initiation, execution, processing, or reporting of the user company's transactions -In such cases, controls places in operation by service organization are considered to be part of user organization's information system -So, rather than fo payroll themselves, companies will (for more cost efficient, effective, and accurate reasons) used a specialist at payroll (like ADP) but whenever service organization is used in this way, it now becomes part of entity's IC, and so auditor needs to now obtain an understanding of this service org.'s IC

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit - Effect of Identified Misstatements on Assessment of Control Risk

-Material weakness is deficiency, or a combination of deficiencies, in IC over financial reporting, such that there is reasonable possibility that a material misstatement of entity's FS will not be prevented, or detected and corrected on a timely basis -Identification by auditor of a material misstatement that would not have been detected by entity's IC is an indicator of material weakness -However, reverse is not necessarily true -Existence of a material weakness does not necessarily mean that the FS are materially misstated -It is essential for auditor to evaluate type and cause of misstatements discovered during audit testing -In order to decide whether misstatements are consistent with assessment of control risk, auditor should consider: 1. Frequency with which misstatement occurred 2. Effect on other audit areas, and 3. FS implications -If inconsistent, audit risk model should be reassessed, and implications on entire audit (including audit sample size) must be considered -All misstatements should be evaluated, even misstatements of small dollar amounts, as they could be an indication of a more serious internal problem

Expenditure Cycle - Internal Controls Related to the Expenditure Cycle

-Mirror image of the Revenue Cycle -Thinking of recognition of purchases, AP, cash disbursements -Risks of how companies are spending money and how that spending is recognized

Misstatements and Internal Control Deficiencies - Adjusting Journal Entries

-Misstatements can be corrected using adjusting journal entries -May affect any account that appears in the FS

Those Charged with Governance - Audit Committees

-NOT employees -NO material financial interest -Committee of board of directors -Made up of three-five people in board who are "outside directors" -Outside directors = neither employees nor part of management and do not have a material financial interest in company -Subgroup of those charged with governance

Cash Cycle - Internal Controls Related to the Cash Cycle

-Need segregation of duties with cash handling -Control procedures and tests of controls related to cash receipts and cash disbursements were covered in Revenue and Expenditure cycle -Segregation of duties is a key control over cash -Proper segregation of duties demands that close consideration be given to check-writing authority -Separation of cash handling, record keeping, and reconciliation of bank statements should exist, as well as separation of petty cash activities -Good IC for cash would also include the use of a voucher system for cash disbursements

Matters that Require Special Consideration - An Entity's Ability to Continue as a Going Concern

-On every audit, auditor responsible for = evaluating audit evidence to determine whether there is substantial doubt about entity's ability to continue as a going concern for a reasonable period of time -Reasonable period of time: 1. FASB = one year after date of FS issuance (or available to be issued) -Issuance + 1 year 2. GASB - one year after FS date. GASB further required that, if a governmental entity currently knows information that may raise substantial doubt shortly thereafter, such information should also be considered -FS data + 1 year + info. that may raise substantial doubt -If going going concern basis not applicable (issuance + 1 year) to the financial reporting framework (like cash basis), auditor should use one year after FS issuance/available to be issued -If there are condition or events, considered in aggregated, that raise substantial doubt of going concern, auditor should: 1. Obtain sufficient appropriate audit evidence by performing additional audit procedures, including consideration of mitigation factors 2. Evaluate management's plans to alleviate substantial doubt 3. Conclude on whether there is substantial doubt and appropriateness of going concern basis of accounting (as opposed to liquidation basis of accounting) 4. Include emphasis-of-matter or explanatory paragraph in auditor's report for nonissuer or issuer, respectively, to reflect this conclusion

Matters that Require Special Consideration - Litigation, Claims, and Assessment - Letter of Inquiry to Client's Attorneys - Concluding Procedures

-Once auditor has review audit evidence regarding potential claims and assessments and has received letter of inquiry from client's attorney, information should be analyzed to determine if management has adequately accounted for an recorded any amounts that are considered probable and are reasonable estimable -Auditor should also verify that amounts that are probable but not reasonably estimable, or that are reasonably possible, are adequately disclosed in footnotes

Communications Regarding Noncompliance - Reporting to Regulatory and Enforcement Authorities

-Ordinarily, disclosure of noncompliance to parties other than management and those charged with governance is NOT part of auditor's responsibility because of confidentiality -However, duty to disclosed outside of entity include: 1. In response to inquiries of an auditor to a predecessor auditor 2. In réponse to a court order (subpoena) 3. In compliance with requirements for audits of entities that receive federal financial assistance from a governmental agency

Those Charged with Governance - Other Communication Considerations - Other Standards - Other Auditing Standards

-Other auditing standards may also require communication with those charged with governance -Ex: Communication may be required to IC-related matters, fraud, illegal acts, etc. -So, these are auditing standards outside of GAAS that may dictate that there's additional stuff auditor must tell governance

Revenue Cycle - Fraud Risk Related to the Revenue Cycle

-Presumptive fraud risk - assume there is fraud in revenue unless you find evidence why there isn't -There should be a presumption in every audit that there is risk of mat. mis. due to revenue recognition fraud Fraud risk because: 1. Largest single line item on IS 2. Involves subjectivity and estimation Common revenue cycle frauds include: 1. Early revenue recognition 2. Holding the books open past close of acct. period 3. Fictions sales 4. Failure to record sales returns 5. Side agreements used to alter ales terms and conditions to induce customers to accept goods and services they otherwise do not need 6. Channel stuffing achieved by convincing distributors to purchase more inventory than they can sell in near term 7. Overstatement of receivables, achieved by overstating balances, reporting fictitious balances, or understating allowance for uncollectible accounts

Internal Control Communications - Communication of Control Deficiencies - Timing

-Recommended: By release -Required: Release + 60 days -Recommended to do it before report release date -Window extending 60 days beyond report release date is acceptable, though -Earlier communication is also acceptable -While such early communication need not be in writing, it does not negate requirement for eventual written communication of all significant deficiencies and material weaknesses

Internal Control Communications - Applicability - Financial Statement Audit (Nonissuers)

-SAS -Purpose = express opinion on FS -However, certain deficiencies related to IC may be noticed by auditor during audit -Such deficiencies create a reporting responsibility for audit

Matters that Require Special Consideration - Litigation, Claims, and Assessment - Letter of Inquiry to Client's Attorneys

-Seek direct communication with entity's external legal counsel through a letter of inquiry regarding litigation, claims, and assessments -Prepared by management and sent by auditor to attorneys -When in-house legal counsel has responsibility for litigation, claims, and assessments, auditor should also seek direct communication with in-house legal counsel through a letter of inquiry -Auditor should document basis for any decision not to seek direct communication with legal counsel -Client's refusal to permit inquiry of attorney = disclaimer OR withdrawal

Matters that Require Special Consideration - An Entity's Ability to Continue as a Going Concern - Emphasis-of-Matter (Explanatory) Paragraph

-Should be added when there is a going concern uncertainty -Working of emphasis-of-matter (explanatory) paragraph must include the terms "substantial doubt" and "going concern" -Do NOT indicate "for one year" -Note: For issuers, although general rule is going concern uses is to add an explanatory paragraph to unqualified opinion, auditor is not precluded from choosing to disclaim an opinion due to a going concern uncertainty. Decision between an unqualified opinion with an explanatory paragraph and disclaimer of opinion is based on auditor's judgement -So, we may go through this whole process and just don't have enough evidence to positively conclude that yes, there is a going concern issue or not, so since we can't get evidence we need, it's a scope limitation, so (and disclaim for lack of evidence for going concern -So, may disclaim for uncertainty

Internal Control Communications - Communication of Control Deficiencies

-Significant deficiencies and material weaknesses, even those that were corrected during audit, must be communicated on a timely basis in writing to management and those charged with governance -So: -All significant deficiencies and material weaknesses must be communicated, regardless if they were corrected -In writing to management AND governance -Timely manner

Financing Cycle - Performing Specific Procedures to Obtain Evidence: The Financing Cycle - Auditing the Equity Balance and Transactions

-So all equity balance and transactions live in the same place: the BS, no IS impact -When auditing equity, the auditor is primarily concerned about completeness, valuation, and existence and occurrence Auditor should also focus on evaluating classification and understandability 1. Completeness -If client uses a stock transfer agent, third-party confirmations should be used to provide evidence of the completeness of shares authorized, issued, and outstanding, as well ass to provide evidence of the individual transactions -If a client does not use a stock transfer agent, the primary source of evidence of completeness is the stock certificate book. The auditor should examine the stock certificate stubs for proper recording, for any canceled certificates, and for the existence of the remaining unissued certificates. The auditor should foot the shares outstanding in the stock certificate book and agree the total the general ledger. The auditor should examine all shares of treasury stock and agree the total to the general ledger -So, if stock transfer agent, confirm, but if not, need to examine the stock certificate book to ensure the issuer are properly accounted for -The auditor should ensure that all required disclosures related to equity have been included in the notes to the FS -Required disclosures include: 1. Number of shares authorized, issued, and outstanding 2. Rights and privileges of securities, including dividend and liquidation preferences, participation rights, call prices and dates, conversion or exercise prices or rates and pertinent dates, sinking-fund requirements, unusual voting rights, and significant contracts to issue additional shares 3. Appropriations of RE and restrictions on dividends 2. Valuation -Recompute the value assigned to stock transactions during the period -Analyze the RE accounts from inception (or since last audit) -Review the property of any direct evidence of existence 3. Existence and Occurrence -VOUCHING transactions recorded during current period to board minutes -Stock transfer agent confirmation and inspection of stock certificate book also provide evidence of existence 4. Understandability and Classification -Determine whether there are restrictions on REs resulting from loans, or state laws -Inquire of management regarding any appropriations of REs -Restrictions and appropriations must be properly disclosed

Investment Cycle - Performing Specific Procedures to Obtain Evidence: The Investment Cycle

-Sufficient audit evidence must be obtained by the auditor for investments which may be in the form of: 1. Debt and equity investments 2. Derivative investments 3. Loan and advance accounts -Substantive tests of details related to the investment cycle generally focuses on the ending balance in the investment accounts and presentation and disclosure -Analytical procedures are used to test the reasonableness of related gains and losses and investment income -So, focusing on ending balance when doing tests of details, and gains/losses when using analytical procedures

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle - Auditing Accounts Receivable - Accounts Receivable Confirmations

-The auditor should review the accounts receivable schedule for accuracy and collectibility -Confirmation of AT is a required generally accepted auditing procedure unless: 1. Receivables and immaterial 2. Confirmation would be ineffective 3. Inherent and control risks are very low and evidence provided by other procedures is sufficient to reduce audit risk to an acceptably low level -If confirmations are not sent, the auditor must document how omissions of this procedure was alternatively tested

Those Charged with Governance

-Those who bear responsibility to oversee obligations and strategic direction of an entity. including financial reporting process -Encompasses: 1. Board of directors 2. Audit committee

Cash Cycle - Fraud Risk Related to the Cash Cycle - Lapping

-Today's CR (cash receipts) cover yesterday's theft -The theft of cash is often concealed by failing to account for cash receipts -Most common method is lapping -Lapping occurs when an employee withholds funds received by a customer for personal use and fails to apply these receipts of cash or checks to the customer's receivable balance -The unrecorded receipt is covered by applying a subsequent receipt to the previously unrecorded account Safeguards against lapping include the following: 1. Independent comparison of recorded cash receipts with funds actually deposited 2. Separation of incoming receipts from subsidiary AR remittance advices 3. Comparison of the details of bak deposits and the details of remittance credits (Comparison of the deposits were made vs. the date that they're recorded - if you see a consistent trend or the amount differs, it might indicate possible fraud) 4. Provision of timely statements 5. Confirmation of customer balances -One of the best methods to guard against lapping is use a "lock box" system. In this system, customers send their payments directly to the bank, which prevents company employees from having access to payments received. A statement is then sent by the bank to the company so the cash can be applied in the general ledger to the outstanding receivable balance -SO, you receive checks in the morning and decide to steal one, so you endorse it to cash and leave the building with it, but now there's a customer who made a payment who no won't have a decrease in their AR account, so the next day you decide to find another check for the same amount and you endorse it in such a way and record it that it covers the amount you stole yesterday, and if you keep this going you can cover for each day's theft

Communications Regarding Confidential Client Information

-Under most circumstances, member of AICPA in public practice shall not disclose any confidential information without specific consent of client -However, there are a few exceptions

Those Charged with Governance - Form and Timing of Communication - Timing of Communication

-Vary according to circumstances, but should occur on a timely basis in a manner that allows appropriate action to be taken -So, don't want to tell them last minute -For audits of issuers, communications are required to be made before issuance of auditor's report -So, so they have enough time to take action before auditor's report

Misstatements and Internal Control Deficiencies - Adjusting Journal Entries - Inventory - Consignment

-Watch for: 1. Which role? 2. Where? Audit client is the Consignee (Holding Another Company's Goods) - excluded from client's FS Audit client is the consignor (Goods are held at consignee's place of business) - included in client's FS

Misstatements and Internal Control Deficiencies - Adjusting Journal Entries - Purchases - If Client is the Seller

-Watch: 1. FOB term 2. Whose role? FOB Shipping Point - excluded from client's inventory as soon as item is with carrier FOB Destination - excluded as soon as item has reached destination

Misstatements and Internal Control Deficiencies - Adjusting Journal Entries - Purchases - If Client is the Buyer

-Watch: 1. FOB term 2. Whose role? FOB Shipping Point - included in client's inventory as soon as item is with carrier FOB Destination - included in client's inventory as soon as item has reached destination

Misstatements and Internal Control Deficiencies - Adjusting Journal Entries - Inventory - Periodic Inventory

-Watch: 1. Perpetual, or 2. Periodic -Sales recorded after every sale is made -Inventory is adjusted at end of period through a periodic count -Formula to calculate COGS: Beginning Inventory + Purchases ________________________________________________________________ Cost of Goods Available for Sale - Ending inventory (based on physical count) ________________________________________________________________ COGS -Sales JE: Cash/AR xxx Sales xxx -COGS recorded at period end -COGS JE: COGS xxx Inventory xxx

Misstatements and Internal Control Deficiencies - Adjusting Journal Entries - Inventory - Perpetual Inventory

-Watch: 1. Perpetual, or 2. Periodic Record a sale JEs: 1. Cash/AR xxx Sales xxx 2. COGS xxx Inventory xxx

Revenue Cycle - Internal Controls Related to the Revenue Cycle - Sales

-What generates the initial recognition of some of this revenue Under strong IC, segregation of the functions in a sales transaction should exist as follows: 1. Preparation of the Sales Order -The sales function begins with the receipt of a customer purchase order by the sales department -If it is determined that the order can be filled, a serially numbered (great control for 1: completeness, 2: existence) sales order is prepared and sent to the credit department for approval -So, a customer orders study, and the business gets a purchase order from the customer and then sees if they can fulfill that, and if they can, they make a sales order and send to credit department 2. Credit Approval -The credit department determines whether or not the customer may receive goods on credit -If the order is approved, a copy of the approved (by looking at customer's account) sales order is sent to the shipping department, the billing department, and the accounting department -So, once sale order is created, it is forwarded to the credit department and responsibility is to say is this a customer we should extend credit to and actually send them the goods - they received customer's account approve the sales order 3. Shipment -In the shipping department, a serially numbered (completeness and existence) bill of lading is prepared and a cosy is sent to the customer -The goods are shipped, and at this point a receivable is created based on invoice shipping terms -So, now, warehouse is actually go to send out ordered goods then shipped and recorded on our books as AR 4. Billing -The billing department prepares a serially numbered sales invoice -Shipping documents, sales orders, and invoices are compared to assure that all shipments were based on valid customer orders and were properly billed -Prices and discounts are applied to the invoice, and necessary extensions and footings are computed -The invoice is then sent to the customer and to the accounts receivable department -Match: 1. Shipping, 2. Order, 3. Invoice -So, want to see a match here, whoever the customer ordered, should be the same as what is shipped, and what we're billing them for 5. Accounting -The sale is entered into the sales journal, and a receivable is record Billing and Accounting may be consolidated in one department

Payroll and Personnel Cycle - Performing Specific Procedures to Obtain Evidence: The Payroll and Personnel Cycle - Auditing the Payroll Accrual

-When IC over payroll is effective, auditor generally focuses substantive procedures on analytical procedures and recalculation of payroll accruals (WHEN IC IS EFFECTIVE) (valuation assertion) -So, if IC are effective, we will have a much lighter sub. approach with an. pro. and recalcs. -Tests related to completeness, existence, and rights and obligations (WHEN IC IS INEFFECTIVE) are generally performed only when entity's IC over payroll cannot be relied upon -So, if IC are ineffective, do detailed testing hitting each assertion 1. Completeness (Cver) -Test completeness of payroll accrual when performing search for unrecorded liabilities -Ex: Cash paid next year 2. Valuation and Allocation (cVer) -Recalculate any year-end payroll accrual and compare calculated amount to reported accrual -So, going to be a certain # of days to accrue for in new year (since most people not always paid Dec. 31) and recalculate this accrual -Ex: going to be a certain number of days to accrued for in the new year (since most people not always paid Dec. 31) and recalculate this accrual 3. Existence (cvEr) -VOUCH amounts from client's accumulation of the payroll accrual to supporting documentation Payroll Accrual | | Vouch Supporting documents 4. Rights and Obligations (cveR) -Examine supporting documentation to verify that the payroll accrual is an obligation of the entity -So, ensure payroll accrual is an obligation of the entity

Communications with Component Auditor

-When auditor acts as auditor of group FS, group auditor must communicate its requirements to component auditor on a timely basis Communication includes: 1. Explanation of how group engagement team will use work of component auditor, and a request for confirmation that component auditor will cooperate with group engagement team 2, Ethical requirements, including independence requirements, that are relevant to group audit 3. List of related parties prepared by group management, and a request that component auditor communicate on a timely basis any related parties not previously identified by group engagement team 4. Identified significant risks of material misstatement of group FS that are relevant to work of component auditor At conclusion of audit, group engagement team should request component auditor communicate back to them all matters relevant to group engagement team's conclusion Communication includes: 1. Whether component auditor has compiled with ethical requirements relevant to group audit, including independence and professional competence 2. Identification of financial information of component being audited 3. Component auditor's overall findings, conclusions, or opinions

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit - Examples of Management Bias

-When evaluating audit findings, auditor should consider any potential bias in management's judgements about the amounts of disclosures in the FS Examples of management bias include: 1. Selective correction of misstatements brought to management's attention during the audit 2. Identification by management of additional adjusting entries that offset misstatements accumulated by auditor 3. Bias in selection and application of accounting principles 4. Bias in accounting estimates -If auditor identifies bias in management's judgement's, the auditor should evaluate whether this bias, together with the effect of uncorrected misstatements, results in material misstatement in the FS

Communications with Component Auditor - Assuming Responsibility for the Work of the Component Auditor

-When group engagement team is assuming responsibility for work of component auditor, content of communication to component auditor should: 1. Be detailed 2. Include work to be performed by component auditor 3. Component materiality levels 4. Threshold above which misstatement cannot be regarded as clearly trivial to group FS Communication requested from component auditor should also include: 1. Component auditors compliance with group engagement team's requirements 2. Instances of noncompliance at component that could give rise to a material misstatement of group FS 3. Significant risks of material misstatement of group FS, due to fraud or error, and component auditor's responses to such risks. These significant risks should be communicated on a timely basis 4. List of corrected and uncorrected misstatements of financial information of component 5. Indicators of possible management bias regarding accounting estimates and application of accounting principles 6. Identified material weaknesses and significant deficiencies in IC 7. Other significant findings including fraud or suspected fraud involving component management or employees, or others that resulted in a material misstatement of financial information of component

Management Representation Letter - Contents of Management Representation Letter - Written Representation Regarding Internal Control

-When performing an integrated audit which includes an audit of IC over financial reporting -Auditor should obtain additional written representations from management about its repressibility for IC, in which management: 1. Acknowledges its responsibly for establishing and maintaining effective IC and states management has performed an evaluation of effectiveness of entity's IC 2. States assertion and specifies criteria used to evaluate assertion 3. Affirms management did not rely on auditor's procedures as basis for assertion 4. Confirms that all significant deficiencies and material weaknesses have been disclosed to auditor, and indicates whether deficiencies identified in previous engagements remain unresolved 5. Describes fraud resulting in material weakness or fraud involving sanrio management or key employees 6. States whether there were any significant changes to IC after the "as of" date of report -Failure to obtain such written representations = scope limitation: 1. Disclaimer, or 2. Withdrawal

Investment Cycle - Internal Controls Related to the Investment Cycle

-Worried about: -How are these investments reported on the BS -What things need to be recorded on the IS (G/L, unreal., comp. inc.) -FV of derivatives Internal control over investments requires strong segregation of the following duties: 1. Authorization of Purchase or Sale of Investment -Ideally, the board of directors should authorize the purchase or sale of investment 2. Custody of Investments -An independent, third-party custodian is recommended but, at minimum, custody should take the form of join control by two company officials with the investments kept in a safe-deposit box -If held by the company, the investments should be periodically counted and reconciled with the investment subsidiary ledger by a party not associated with the investments 3. Record Keeping -A separate party from those mentioned above must keep detailed records of the investments -Ex: Accounting department (processing transactions in the investment category) -Internal controls should also exist regarding processing and fear value measurement -The initial classification of investments are trading, available-for-sale, or held to maturity significant impacts subsequent reporting -Controls surrounding fair value estimates, whether inside the company or outside the company (should a third party be used to assess fair value), also must be understood

Management Representation Letter - Is it Required?

-YES -Management's refusal = 1. Disclaimer, or 2. Withdrawal

Internal Control Communications - Applicability - Integrated Audits (Nonissuers and Issuers)

1. Audit of Internal Control (Nonissuers) -SAS -Optional -Audit of IC should be integrated with audit of entity's FS 2. Audit of Internal Control (Issuers) -PCAOB -Required

Matters that Require Special Consideration - Audit Procedures - Example with Allowance Account

1. Based on discussion with client, auditor will determine approach taken to estimate the allowance balance, either percentage of sales or percentage of receivables -So, auditor must look at an estimate and say how likely it is that estimate could be different (lots of calcs. in the estimate, or just a guess?) -So, we see estimate could be wrong, that could be a high-risk area 2. For each approach auditor will discuss percentages used in analysis ad relevant factors that must be considered in estimation process 3. Based on approach sued by client, auditor will obtain information about sales and receivables provided in trial balance 4. In addition, receivable again reports may be obtained at year-end to determine whether estimates have been calculated appropriately -If different percentages are applied to receivable again buckets, percentages used will be assessed for reasonableness 5. As allowance balance provides an estimate for potential write-offs, auditor will obtain information regarding accounts written off during current year and adequacy of previous year's allowance balance. Historical write-offs can also be reviewed as these are typically a basis for percentages used to estimate allowance balance. Based on information, auditor can begin assessing whether balance is too low or too high

Financing Cycle - Performing Specific Procedures to Obtain Evidence: The Financing Cycle - Auditing the Debt Balance

1. Completeness (Cver) -Review board minutes for evidence of new debt, obtain new debt agreements -TRACE all new debt contracts tp the FS -Obtain a listing of all debt and agree the total to the general ledger -Any debt dislocated on the standard bank confirmation should be traced to the debt agreements and FS -Notes and bonds should be confirmed directly with creditors -Auditor should inquire of management regarding new debt and any off-BS financing transactions -Also can use bank confirmations FS trAce | | Debt agreements/ dent contracts 2. Valuation and Allocation (cVer) -Examine new debt agreements to determine whether they were recorded at the proper amount -Recompute any interest payable and recompute amortization of premiums or discounts 3. Existence (cvEr) -Confirm notes or bonds directly with creditors 4. Rights Obligations (cveR) -Examine note and bond agreements to verify that they are the obligations of the entity

Payroll and Personnel Cycle - Performing Specific Procedures to Obtain Evidence: The Payroll and Personnel Cycle - Auditing Presentation and Disclosure

1. Completeness (Cvr u) -Ensure all required disclosure related to payroll have been included in the notes to the FS -Required disclosures include: 1. Pension and postretiement benefit disclosures 2. Stock-based compensation disclosures 3. Defrred compensation and profit-sharing plans 2. Valuation, Allocation, and Accuracy (cVr u) -Read the footnotes and other information related to payroll to determine whether the information is accurate and presented at the appropriate amounts 3. Rights and Obligations, and Occurrence -Inquire about accruals for proper disclosure -Compare disclosures to other audit evidence to ensure that all dislcosed information related to payroll has occurred 4. Understandability and Classification (cvr U) -Read required discourses for understandability

Financing Cycle - Performing Specific Procedures to Obtain Evidence: The Financing Cycle - Auditing Presentation and Disclosure Related to Debt

1. Completeness (Cvr u) -Ensure that al required disclosures related to debt have been included in the notes to the FS -Required disclosures include: 1. Details of maturity dates, interest rates, call and conversion privileges, and assets pledged as collateral 2. Future sinking fund payments and maturities for each of the next five years 3. Restrictive loan covenants 2. Valuation, Allocation, and Accuracy (cVr u) -Read the footnotes and other information related to debt to determine whether the information is accurate and presented at the appropriate amounts 3. Rights and Obligations, and Occurrence (cvR u) -compare disclosures with other audit evidence to ensure that all disclosed information related to debt has occurred 4. Understandability and Classification (cvr U) -Read required disclosures for understandability

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit - Internal Control Deficiencies and the Risk of Material Misstatement - Examples of Control Deficiencies

1. Deficiencies in design of controls: 1.1. Inadequate documentation and design of IC over preparation of FS or over a significant account or process 1.2. Lack of appropriate controls over segregation of duties on safeguarding of assets 1.3. Inadequate design of IT controls 1.4. Lack of appropriate qualifications or training of client personnel 1.5. Inadequate design of monitoring controls or absence of an appropriate process to report control deficiencies 2. Failure in effectively designed controls 2.1. Failure of control over a significant account or process 2.2. Undue bias or lack of objectivity 2.3. Misrepresentation by client personnel to auditor 2.4. Management override of controls 2.5. An observed deviation rate that exceeds auditor's expected rate 2.6. Failure of information and communication component of IC to provide complete, accurate, and timely information

Management Representation Letter - Contents of Management Representation Letter

1. Financial Statements -Management responsible for: 1. Fair presentation of FS in accordance with applicable financial reporting framework, and 2. Design, implementation, and maintenance of IC relevant to preparation and fair presentation of FS that are free from material misstatement, whether due to fraud or error 2. Completeness of Information -Management provided auditor with all relevant information -Access -Agreed on terms of engagement -All transactions recorded reflected in FS 3. Fraud -Acknowledgment of management's responsibility for design, implementation, and maintenance of IC to prevent and detect fraud -Management has disclosed to auditor results of its assessment of risk that FS may be materially misstated as result of fraud -Management has disclosed to auditor its knowledge of fraud or suspected fraud affecting entity involving: 3.1. Management 3.2. Employees who have sig. roles in IC 3.3. Others, when fraud could have mat. effect on FS -Management has disclosed auditor its knowledge of any allegations of fraud or suspected fraud affecting entity's FS communicate by employees, former employees, analysts, regulators, others 4. Laws and Regulations -All instances of identified or suspected noncompliance with laws and regulations whose effects should be considered by management when preparing FS have been disclosed to auditor 5. Uncorrected Misstatements -Management believes effects of uncorrected misstatements are immaterial, individually or in aggregate, to the FS as a whole -Summary of these items should be included in or attached to written rep. 6. Litigation and Claims -All knowns actual or possible litigation and claims whose effects should be considered by management when preparing the FS have been disclosed to auditor an accounted for and disclosed in accordance with applicable financial reporting framework 7. Estimates -Management believes significant assumptions used when making accounting estimates are reasonable 8. Related Party Transactions 1. Identified 2. Properly accounted for -Disclosure of identity of entity's related parties and all related party relationships and transactions of which it is aware -Management has appropriately accounted for and disclosed such relationships and transactions 9. Subsequent Events -All events after FS but before auditor's report -Any that require adjustment or disclosure have been 10. Additional Representations -Auditor should obtain additional representations from management regarding issues specific to entity's FS -Possible induce: -Impact of new accounting principle -Impairment of assets -Intent to hold debt securities to maturity -Obsolescence of inventory -Restrictions on cash -Plans to discontinue a line of business, etc.

Matters that Require Special Consideration - An Entity's Ability to Continue as a Going Concern - Other Going Concern Considerations

1. IF, in auditor's judgement, entity's going concern disclosures are inadequate, a departure from GAAP exists. This may result in either a qualified or adverse opinion 2. IF management is unwilling to perform or extend its evaluation to meet the period of time required by the applicable financial reporting framework when requested to do so by auditor, auditor should issue a qualified or adverse opinion 3. IF the FS have been prepared using going concern basis of accounting but, in auditor's judgement, management's use of going concern basis of accounting in preparation of FS is inappropriate, auditor should express an adverse opinion 4. IF auditor's doubts about entity's ability to continue as a going concern are removed in a subsequent period, emphasis-of-matter (explanatory) paragraph of prior period need not be repeated 5. Auditor should communicate going concern issues to those charged with governance

Internal Control Communications - Definitions - Indicators of Material Weakness

1. Identification of any level of fraud (even immaterial fraud) perpetuated by senior management 2. Restatement of previously issued FS to correct a material misstatement 3. Identification by auditor of a material misstatement that would not have been detected by entity's IC 4. Ineffective oversight by those charged with governance

Internal Control Communications - Evaluation of Control Deficiencies - Severity of a Deficiency Depends on What?

1. Magnitude of potential misstatement, and 2. Whether there is a reasonable possibility that entity's controls will fail to prevent, or detect and correct, a misstatement of an account balance or disclosure

Communications Regarding Noncompliance - Reporting Noncompliance in the Auditor's Report

1. Material Effect on the FS -If noncompliance has a material effect on FS and not adequately reflected in FS -Qualified or adverse 2. Insufficient Evidence -If auditor unable to obtain sufficient appropriate audit evidence about noncompliance or suspected noncompliance -Qualified or dulcimer 3. Client Response -If client refuses to accept auditor's report as modified -Withdraw and notify those charged with governance

Revenue Cycle - Performing Specific Procedures to Obtain Evidence: The Revenue Cycle - Auditing Accounts Receivable - Accounts Receivable Confirmations - Confirmation Exceptions - 2. Misstatements

A confirmation exception would be indicative of mis. if the exception is due to any of the following errors or fraud: 1. Ficitous sale 2. Goods sent to wrong customer 3. Invoice sent to wrong customer 4. Incorrect price or quantity charged to customer 5. Misappropriation of cash received from customer 6. Payment applied to wrong customer account -Additionally, a confirmation exception could be due to a dispute between the client and the customer because customer claims that goods do not meet their specifications, that the goods ere damaged in transit, or that price of goods is in dispute

Communications Regarding Confidential Client Information - Exceptions

A member is obligated to disclose confidential information even without consent of client in following circumstances: 1. Member must disclose confidential client information is necessary to comply with a validity issued subpoena or summons -Member is not required to notify client that its records have been subpoenaed or that summons related to client's records have been issued -Member may consult legal counsel to determine validity and enforceability of subpoena or summons and specific client information required to be provided -Member may also wish o consult with his/her state board of accountancy 2. Member must disclose confidential information as part of quality review of member's professional practices authorized by AIPCA (a request for confidential information by a state CPA society voluntary quality-control review panel) 3. Member must disclose confidential client information in response to any inquiry either made by ethics division or trial board of AICPA or by a duly constituted investigative or disciplinary body of state CPA society, or under authority of state statutes

Matters that Require Special Consideration - Opening Balances - Effect on the Auditor's Report - Qualified or Adverse

A qualified or adverse opinion expressed if one ore more of the following conditions exist: 1. Opening balances contain a misstatement that materially affects the current period FS, and the effect of the misstatement is not appropriately account for or adequately presented or disclosed -So, opening balance materially misstated and affect current year 2. Current period's accounting policies are not consistently applied regarding opening balances -So, not consistent 3. A change in accounting policy is not properly accounted for or adequately presented or disclosed -So, error in change

Management Representation Letter - Requirements - Who Prepares it?

AUDITOR

Internal Control Communications - Applicability

An accountant communicates IC-related matters in following situations (next few flashcards) -What kind of client (issuer vs. nonissuer) -What kind of engagement (FS audit vs. Integrated audit) -Is this a communication that's only being used internally or could it be used externally

Financing Cycle - Internal Controls Related to the Financing Cycle - Internal Control Over Debt

An entity's IC over debt should include the following: 1. Adequate documentation of all financing agreements 2. Authorization of new debt financing by the board of directors or management 3. Detailed records of long-term debt and periodic independent verification of amounts between the ledger, details of debt, and the note holders' records 4. Adequate controls over interest and principal payments and the recording of bond premium and discount amortization amounts

Matters that Require Special Consideration - Auditor's Responsibilities

Audior has following responsibilities when evaluation estimates: 1. Evaluate degree of estimation uncertainty associated with an accounting estimate -Estimation uncertainty = susceptibility of an accounting estimate to an inherent lack of precision in its measurement -Auditor should determine whether accounting estimates with high estimation uncertainty give rise to significant risks 2. Assess management's written policies and practices regarding development and use of estimates 3. Verify that all material estimate have been developed 4. Determine that accounting estimates are reasonable. In evaluating reasonableness, auditor focuses on assumptions that are: 0Significant to estimate -Sensitive to variations -Deviations from historical partners, or -Subjective and susceptible to misstatement or management bias 5. Ensure that accounting estimates are properly presented and sisotcsed in conformity with GAAP

Those Charged with Governance - Required Communications

Auditor has responsibility to communication certain matters to those charged with governance

Internal Control Communications - Communication of Control Deficiencies - Optional Communication Content

Auditor may include following information in communication when appropriate: 1. Description of inherent limitations of IC 2. Specific nature and extent of auditor's consideration of IC during audit 3. Auditor may not report absence of significant deficiencies, but there is too great a potential for misinterpretation of very limited degree of assurance auditor would be providing in such instances 4. Auditor may issue a communication indicating that no material weaknesses were identified during audit, typically for client to submit governmental authorities -Management may prepare a written response to auditor's communication regarding significant deficiencies and material weaknesses identified during audit. Management's response may describe corrective actions taken or planned for future, or indicate that cost of correcting identified deficiencies would exceed benefits to be derived -If such response is included i a document containing auditor's written communication, auditor may add paragraph disclaiming an opinion on management's response

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit

Auditor must evaluate audit evidence gathered to determine whether the FS are free of material misstatement due to error or fraud

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit - Evaluation of Misstatements

Auditor must evaluate materiality of all misstatements fond during audit: 1. Size of misstatement is often evaluated in comparison to a relevant financial base, like net income, gross sales, gross margin, or total liabilities -So, how big is the misstatement against as relevant base? 2. Auditor must consider effects, both individually and in aggregate, of uncorrected misstatements. Misstatements should be evaluated in relation to specific accounts/disclosures involved and FS as a whole -Consider quantitative and qualitative factors -So, is it material? Either one misstatement is material, or a bunch of immaterial misstatements can combine to become material 3. As aggregate misstatements accumulated during audit approach the materiality level, auditor should consider risk that addition of undetected misstatements could cause materiality levels to be exceeded 4. Prior period misstatements may affect the FS of current period 5. Whether or not a misstatement is considered material is ultimately a matter of professional judgement 6. Qualitative considerations sometimes may cause an otherwise immaterial misstatement to be deemed material -The specific circumstances surrounding an entity may lead to situations in which misstatements that do no exceed materiality limits are still likely to influence the economic decisions of users -Misstatements are more likely to be considered material if they: -Affect trends in profitability or make a change in a trend, or change a loss into income (or vice versa) -Affect the entity's compliance with loan covenants, contracts, or regulatory requirements -Increase management compensation, indicate a pattern of management bias, or involve fraud or an illegal act -Affect significant FS elements, such as those involving recurring earnings (as opposed to those involving nonrecurring items) -Can be objectively determined, as opposed to including an element of subjectivity -Affect segment information presented in the FS -Misclassify between certain account balances, for example, between operating and non operating income or recurring and nonrecurring items -Are significant relative to the needs of users -Offset effects of individually significant but different misstatements -Are currently immaterial, but will have a material effect in the future -Are costly to correct -Represent a risk that possible additional undetected misstatements could affect the auditor's evaluations -So, material misstatement change the decision-making of the user which is part of the intent of the FS to provide those users with actionable info, so some things that could make immaterial numbers material are: 1. Will it change comp. from a profit to a loss 2. Will it affect compliance with a covenant/reg. 3. Will it impact management's bonuses 4. Will it impact management's bonuses 5. Will it change a sig, element on the FS 6. Did management have subjective bias 7. Affects segments 8. Classification between accounts significant to users

Those Charged with Governance - Required Communications - Significant Audit Findings

Auditor should communicate: 1. Auditor's views about qualitative aspects of entity's accounting practices, including: -Initial selection of, changes in, and appropriateness of significant accounting policies -Process used by management in formulating significant accounting estimates and basis for auditor's conclusions regarding reasonableness of estimates -Significant management judgements -Adequacy of FS disclosures 2. Significant difficulties with management encountered in performing audit 3. Disagreements with management, whether or not resolved 4. Uncorrected, nontrivial misstatement and their possible effect on audit opinion, including effect of uncorrected misstatements related to prior periods -Material uncorrected misstatements should be identified individually and should be corrected at request of auditor -Auditor should request correction of uncorrected material mistreatments -Auditor may also communicate uncorrected immaterial misstatements, such as a frequency occurring misstatements that could indicate bias in preparation of FS 5. Any circumstances that may appear to impair independence 6. Evaluation of company's identification of, accounting for, and disclosure of its relationships and transactions with elated parties 7. Other issues that auditor judges to be significant 8. Other issues that auditor judges to be significant -IF all those charge with governance are not involved with managing entity, auditor should communicate 1. Significant corrected misstatements brought to management's attention as a result of the audit and significant deficiencies/material weaknesses 2. Management representations requested by auditor 3. Management's consultation with other accountants

Payroll and Personnel Cycle - Internal Controls Related to the Payroll and Personnel Cycle - Internal Control Evaluation

Auditor should evaluate whether ICs provide reasonable assurance that: 1. Only valid employees are being paid 2. Payment is for actual hours worked 3. Correct rate of pay is used Following procedures should be performed: 1. Observe segregation of duties between human resource responsibilities and payroll distribution 2. Compare the personnel records for each department with the actual time cards and the employees actually working in each department (people getting paid that actually work for the company) 3. Observe payroll distribution on an unannounced basis to ensure that all personnel being paid ar actually employed by the company 4. Observe the use of time clocks and investigate time cards not being used 5. Test transfers and underlying employee authorizations if direct deposit is used (employees authorized and it's actually happening) 6. Test general and applications controls to ensure that payroll transactions are valid, properly authorized, and completely and accurately recorded -Ex: Hours worked should be compared to predetermined minimums and maximums (a range test), or to prior periods (a reasonableness test) IT (want to make sure IT is sound) 7. Test to ensure that only employees existing in the computer data files are accepted when entered (when we input employees, only those that exist will be accepted by the system

Misstatements and Internal Control Deficiencies - Forming Conclusions

Auditor's evaluation of audit results soudld include evaluation of the following: 1. Results of analytical procedures performed during overall review of FS 2. Misstatements found during audit, including uncorrected misstatements 3. Qualitative aspect of company's accounting practices 4. Conditions identified during audit that relate to fraud risk 5. Presentation of FS, including disclosures 6. Sufficiency and appropriateness of audit evidence obtained -So, what have we found that requires more attention? 1. Material misstatements - How to evaluate them, what helps us evaluate them, propose adjustment entries, what if they refuse to fix? 2. Deficiencies in IC - is it something minor, something more significant, a material weakness, who to communicate this to, what do we communicate?

Matters that Require Special Consideration - An Entity's Ability to Continue as a Going Concern - Factors That May Indicate Substantial Doubt

BASED on procedures performed, auditor identifies conditions and events that may be indicative of substantial doubt: FINE: 1. F - Financial difficulties -Loan defaults -Dividend arrearages -Denial of usual trade credit -Debt restructuring -Noncompliance with capital requirements -New financing sources or methods -Disposal of substantial assets -So, can't pay bills 2. I - Internal matters -Work stoppages -Labor difficulties -Substantial dependence on a particular project -Uneconomic long-term commitments -Significant revision of operations -So, like a strike 3. N - Negative trends -Recurrent losses -Working capital deficiencies -Negative cash flows -Adverse financial ratios -So, industry-wide, affecting client as a whole, easiest to look at 4. E - External matters -Legal proceedings -New legislation -Loss of key franchise -License or patent loss -Loss of a principal customer or supplier -Natural disasters -So, new government regulations, lawsuit from auditor's perspective, if we find these things, we say look, we have appropriate evidence to assert that you have a going concern issue, do you have anything to say in your defense? And this is the client's chance to raise mitigating factors

Those Charged with Governance - Audit Committees - Communication With the Audit Committee

Communication with audit committee is a key element in auditor's communication with those charged with governance Auditor should: 1. Have appropriate access to audit committee periodically 2. Meet with audit committee without management present at least once each year 3. Consider whether communication with audit committee is sufficient or whether this is also a need to communicate with other charged with governance

Misstatements and Internal Control Deficiencies - Adjusting Journal Entries - Correct Accounts That Are Overstated or Understated

Debits: -Assets -Expenses Credits: -Liabilities -Stockholder Equity -Sales

Matters that Require Special Consideration - Opening Balances - Effect on the Auditor's Report - Qualified or Disclaimer

Depends on either: 1. Full set 2. All but BS -So, when we audited 2014, couldn't get sufficient evidence to conclude the 2014 FS, zoo in 2015, we couldn't get enough evidence on the transactions since they depended on the FS in 2014, so we disclaimed everything but the BS, but in 2014, we could have had a clean year The inability of auditor to obtain sufficient appropriate audit evidence regarding opening balances may result in: 1. Qualified opinion/Disclaimer of opinion, or 2. Opinion that is qualified or disclaimed, as appropriate, regarding results of operations and cash flows, and unmodified regarding financial position

Transaction Cycles

Domino effect: understanding client --> to form risk assessment --> what controls we want to test based on that --> Now, gathering evidence and performing out sub. pro. --> Then, eval. results --> Then, communicate the results -Audits are generally performed by transaction cycle -Auditing by transaction cycles enables auditor to gather evidence for related accounts, transactions, and disclosures simultaneously (always look through the lens of what accounts, transactions, and disc. will be in each transaction cycle) -This makes audit process more efficient Common Transaction Cycles: 1. Revenue -Include sales revenue, receivables, and cash recipes 2. Expenditure -Includes purchases, payables, and cash disbursements 3. Cash -Includes cash receipts and cash disbursements 4. Inventory -Includes perpetual inventory, physical counts, and manufacturing costs 5. Investments -Includes investments in debt and equity and the income received from investments 6. Other Transaction Cycles -Includes cycles for PP&E, payroll and personnel, and financing

Payroll and Personnel Cycle - Internal Controls Related to the Payroll and Personnel Cycle - Segregation of Duties

Even when a service organization is used, there should be a proper segregation of duties, as follows: 1. Authorization to Employ and Pay -Human resources department hires new employees (on basses of requisitions from user departments and to maintain the personnel records containing hire date, department, salary, and position 2. Supervision -All pay base data (hours, absences, time off, etc.) should be approved by employee's immediate supervisor 3. Timekeeping and Cost Accounting -Data on which pay is based, such as hours worked or jobs completed, should be accumulated independent of any other function -Where there are employees who are paid by the hour, use time clocks. Each department supervisor should compare the job times tickets with employee clock cards that have been signed by the employee. Salaried employees fo not usually completeness time sheets, although they may be required to submit reports for vacation, sick leave, and overtime 4. Payroll Check Preparation -Payroll department computes salary based on information received -Ex: total hours worked for hourly employees -If service organization is not used, this department is responsible for issuing unsigned payroll checks that are later signed by treasurer or CFO -Check signature plate is used to sign the payroll checks; the treasurer or CFO should supervise this process -Should be controls over access to blank checks and check signature plates -Remember, payroll department is record-keeping department, not a custodial department. Although employees in this department computer salaries, create payroll register, and prepared unsigned checks, they should have neither authority to initiate changes in hours or rates, nor ability to signs checks 5. Check Distribution -Payroll checks are deposited directly into employees' bank accounts -If paychecks manually distributed, payroll checks should be distributed by a person who has no other payroll function -In larger corporations, this individual is often referred to as the paymaster -Employees should be required to show identification before receiving their paychecks. Unclaimed payroll checks should be investigated by an independent party -Internal auditing department periodically compares personnel files with payroll files. This is to help ensure that only authorized payments have been made in proper amounts to appropriate personnel

Financing Cycle - Performing Specific Procedures to Obtain Evidence: The Financing Cycle - Auditing Debt Transactions

Following tests of details can be performed as dual-purpose tests: 1. Completeness (Cove u) -Should examine new debt agreements and the board minutes for evidence of new agreements -Review interest expense for payments to debt holders not included in the debt listing -Should examine lease agreements for perp classification as operating or capital -So, look at: 1. Debt agreements 2. Board minutes 3. Interest payments (If we see interest payments to a vendor we don't know, that could indicate unrecorded) 4. Lease agreements (op. or capital) 2. CutOff (cOve u) -Review debt activity shortly before and after year-end to ensure that transactions were reported in the proper period 3. Valuation, Allocation, and Accuracy (coVe u) -Test a sample of debt receipts and payments and should compare interest expense to the debt balance for reasonableness 4. Existence and Occurrence (covE u) -Verify the existence of new debt by reviewing the board minutes for evidence of new agreements and then inspecting the agreements -So, debt agreements, and board minutes 5. Understandability and Classification (cove U) -Examine the due dates of notes and bonds to determine whether the debt should be classified as short or long term -So, if right expense accounts, or short or long-term

Payroll and Personnel Cycle - Performing Specific Procedures to Obtain Evidence: The Payroll and Personnel Cycle - Auditing Payroll Transactions

Following tests of details can be performed as dual-purpose tests: 1. Completeness (Cove u) -TRACE a sample of time cards to payroll register 2. CutOff (cOve u) -Examine a sample of time cards from before an after year-end and compare with payroll report to determine whether transactions were recorded in proper period 3. Valuation, Allocation, and Accuracy (coVe u) -Auditor should test accuracy and valuation of payroll expense by performing following procedures: 1. Compare total recorded payroll with total payroll checks issued 2. Test extensions and footings of payroll 3. Verify pay rates and payroll deductions with employees records from personnel 4. Recalculate gross and net pay on a test basis 5. Compare payroll costs with standards or budgets 6. Recompute mathematical accuracy of a sample of paychecks 4. Existence and Occurrence (covE u) -VOUCH time on payroll summaries by selecting a sample of payroll register entries and comparing with time cards and appropriate time reports -From a sample of payroll transactions, auditor should find related employee to verify existence and current employment status Payroll Register | | Vouch Time cards | | Vouch Employee -So, vouch to ensure this is a real, legitimate, employee 5. Understandability and Classification (cove U) -Examine a sample of paychecks for classification into proper expense accounts -So, a lot of expense accounts related to payroll (taxes, withholdings, etc.) so making sure recording in the correct accounts

Property, Plant, and Equipment Cycle - Internal Controls Related to the PP&E Cycle

IC for PP&E includes controls in both revenue and expenditure cycles as well as following special controls: 1. Acquisition -A special requisition form is generated for acquisitions -Form includes: 1. Description 2. Reason for acquisition 3. Amount to be charged 4. Probable cost -Form should be approved by top management -Acquisitions are tied to capital budget, which the board of directors usually approves -Variances from this budget should be promptly investigated -Bod of directs should also approve acquisitions of assets over a certain amount, regardless of whether these assets are purchase or constructed -Auditor should ascertain that company policy was followed and that fixed assed purchased were properly authorized -So, if a company normally uses requisition or not, now they need a special requisition, approval would come from high-up (man even be board) have a capital budget for these expenses, and if there are variances, they should have from it immediate attention 2. Subsidiary Ledgers -Contains detailed information concerning each asset -Usually info. including the following included, like asset's: 1. Description 2. Identification number 3. Location 4. Acquisition date 5. Cost 6. Depreciation method 7. Amount of depreciation -So, need to know not only total, but also al the elements that comprise the total, important to do that tot track down each individual asset because each is usually material 3. Physical Security -Fixed assets should have identification plates -Serial number on plate should be listed in control account -Physical controls to safeguard assets from theft, destruction, or unauthorized disposition should also be in place, including periodic physical inspection of plant and equipment -Comparison of serial number on ID plate to that listed in control account should be made -Auditor should also determine whether there are appropriate controls in place to safeguard fixed assets and prevent theft or destruction -So, identification that can't be subverted and have VIN number, locks, periodical inspecting the assets 4. Written policies -Written policies and records should be maintained -Specific capitalization policies are also necessary to prevent misstatements of revenues and expenses -So, more straight forward, having policies that are sense, because as long as they follow policy, they should be good 5. Disposition -Retirements of assets should be documented on a sequentially numbered work order containing evidence of proper authorization and the reason for retirement -This asset retirement order form is the basis for recording any cash received and for removing assets and its accumulated depreciation from subsidiary ledger -Should be a proper segregation of duties between authorization and custody (those who authorize a disposal should not be permitted to actually dispose of asset) -So, when a client decides to get rid of an asset, they need to prepare a work order (saying shipping it to whoever, shipping it to scrap yard, etc.) but need some sort of documentation that this happened to show: 1. Properly authorized 2. Books and records are properly updated (removing asset/accum. depreciation and recognizing any appropriate G/L)

Matters that Require Special Consideration - An Entity's Ability to Continue as a Going Concern - What Should Auditor do if Substantial Doubt of Going Concern

If there are condition or events, considered in aggregated, that raise substantial doubt of going concern, auditor should: 1. Obtain sufficient appropriate audit evidence by performing additional audit procedures, including consideration of mitigation factors 2. Evaluate management's plans to alleviate substantial doubt 3. Conclude on whether there is substantial doubt and appropriateness of going concern basis of accounting (as opposed to liquidation basis of accounting) 4. Include emphasis-of-matter or explanatory paragraph in auditor's report for nonissuer or issuer, respectively, to reflect this conclusion

Those Charged with Governance - Form and Timing of Communication - Form of Communication

In general, communications may be oral/writing: 1. Significant audit findings should be communicated in writing when, in auditor's judgement, oral communication would be inadqueate. Matters communicated during audit that were appropriately resolved need not be included in written communication 2. Auditor may also choose to communicate other matters in writing based on specific circumstances involved 3. Written communications should include a limitation on use of communication indicating for whom it is intended, and warning that it should not be used by others 4. Oral communications should be documented, copies of written communications should be retained

Management Representation Letter - Requirements

In man. rep. letter, client asserts that all material matters have been adequately disclosed to auditor: 1. Final Piece of Evidence -Obtained at end of auditor's fieldwork -Covers period up to date of auditor's report -Address all FS and periods covered by report, even if current management was not present during all periods 2. Letter is Mandatory -Auditor must receive letter in order to render an unmodified opinion -Management's refusal to furnish a written rep. letter generally results in a disclaimer or withdrawal 3. Dated Same Date as Audit Report -Client representation letter should be dates as of date of auditor's report -Sometimes, circumstances may prevent management from signing representation letter and returning it to auditor on date of auditor's report. When this happens, auditor may accept management's oral confirmation, on or before date of auditor's report, that management has reviewed final representation letter and will sign representation letter without exception as of date of auditor's report -Possession of signed representation letter is necessary before releasing auditor's report 4. Signed by CEO and CFO -Members of management with overall responsibility for financial and operating matters who are responsible for and knowledgeable about items contained in letter (CEO and CFO) should sign letter -Other officers and employees may be asked to sign 5. Representations -In rep. letter, management provides information on FS, completeness of information, recognition, measurement, and disclosure, and subsequent events 6. Materiality -May be limited to items that management and auditor agree are material -Materiality considerations do not apply to items not directly related to FS amounts -All minutes and financial records should be made available to auditor 7. Doubt About the Reliability of Written Representations -If auditor concludes that written representations are not reliable due to concerns about competence, integrity, ethical values, or diligence of management, or -Unresolved inconsistencies between rep. and other audit evidence, or -Auditor conclude sufficient doubt about integrity of management -Disclaim or withdraw

Matters that Require Special Consideration - Opening Balances - Audit Procedures

In order to obtain sufficient appropriate evidence regarding opening balances, auditor should: 1. Read the most recent FS, if any, and predecessor auditor's report -If a modification was made to predecessor auditor's opinion, auditor should consider the effect of the matter giving rise to the modification on the current period assessment of the risks of material misstatement -If modification of predecessor auditor's opinion is relevant to the current period's FS, auditor should modify auditor's opinion on current period's FS 2. Request that management authorize the predecessor auditor to allow a review of the predecessor auditor's audit documentation related to the most recently completed audit -The predecessor auditor ordinarily permits the auditor to review documentation of planning, risk assessment procedures, further audit procedures, audit results, and other matters of continuing accounting and audit significance 3. Perform audit procedures on current period transactions that provide evidence about the opening balances or consistency. Examples may include: 1. Tracing cash collections (payments) during the period, which will provide evidence of the AR (payable) opening balance 2. Observing current physical inventory counts and reconciling to the opening balance 3. Considering confirmation with third parties regarding investments and debt -So, if not satisfactory review from predecessor auditor, then test opening balance in the above ways

Investment Cycle - Investments Measured at Fair Value - Testing Fair Value Measurements and Disclosures

In testing entity's FV measurements and disclosures, auditor may: 1. Verify quoted market prcies 2. Determine whether management's significant assumptions provide a reasonable basis for FV measurements 3. Consider management's intent and ability to carry out courses of action that may affect FVs 4. Evaluate whether valuation model is appropriate given entity's circumstances 5. Test underlying data for accuracy, completeness, relevancy, and consistency 6. Develop independent FV estimates for corroborative purposes 7. Review subsequent events and transactions (occurring before date of auditor's report) for evidence regarding FV measurements at BS date 8. Consider use fo a specialist. If a specialist is used auditor must understand methods used to determine FVs

Matters that Require Special Consideration - Audit Procedures - What Should Auditor Do to Evaluate Management's Bias Towards Estimates?

Look at whether difference between reported estimate and best estimate supported by audit evidence indicates possible management bias

Those Charged with Governance - Audit Committees - Purpose of an Audit Committee

Many companies have established audit committees because: 1. SEC has strongly recommended this actions, and NY Stock Exchange requires all companies listed on exchange to have audit committees 2. Many large accounting firms and leasing accountants in country have strongly supported formation of audit committees 3. Use of audit committees tends to strengthen public's send of independence of public accountant

Expenditure Cycle - Internal Controls Related to the Expenditure Cycle - Accounts Payable

Once the accounting department obtains the receiving report, it will: 1. Record the payable 2. Approve the invoice for payment, and 3. Record the payment after it is paid by the treasurer 1. Recording the Payable -The copy of the purchase order sent to the accounting department notifies it that there will be a future cash disbursement -The receiving report is compared with the purchase order and the vendor's invoice to confirm quantity and to prevent payment of charges for goods in excess of those ordered and received -The accounting department records the goods as received in inventory, and records a payable -So, purchase order sent to the accounting department so they can recognize the invoice, the requisition, the purchase order, the receiving order, and they all agree, and they can record AP then MATCH: 1. Receiving report 2. Purchase Order (PO) 3. Invoice 2. Approving Invoice for Payment and Recording Payment -When the invoice arrives, the accounting department approves it by matching the invoice purchase order, receiving report, and (sometimes_ the requisition -When payment is made, the payable is reversed -The accounting department should ensure that the invoice amount is correct, and that it accurately reflects any purchase discounts or returns, before approving it for payment -So, once the invoice arrives, and has been recorded as a payable, and after some time, we're actually going to pay the bill, the AP department BOTH records the payable and they're approving the payment, but usually an AP clerk will record it, while an AP supervisor will approve the payment, so while it's in the same department, there's still a segregation of duties and once satisfied with amount being correct and taking into consideration of discounts, they will relay it for cash disbursement, and once disbursement made, they'll record the payment

Internal Control Communications - Communication of Control Deficiencies - Previosuly Existing Deficiencies

Previously communicated significant deficiencies and material weaknesses that have not been correct should be communicated again, in writing, during current audit by referring to previously issued written communication and date of that communication

Matters that Require Special Consideration - An Entity's Ability to Continue as a Going Concern - Reasonable Period of Time

Reasonable period of time: 1. FASB = one year after date of FS issuance (or available to be issued) -Issuance + 1 year 2. GASB - one year after FS date. GASB further required that, if a governmental entity currently knows information that may raise substantial doubt shortly thereafter, such information should also be considered -FS data + 1 year + info. that may raise substantial doubt -If going going concern basis not applicable (issuance + 1 year) to the financial reporting framework (like cash basis), auditor should use one year after FS issuance/available to be issued

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit - Documentation Requirements

The auditor document the following items: 1. The amount below which misstatement are clearly trivial 2. All misstatements accumulated during audit and whether they have they have been correct 3. Auditor's conclusion about whether uncorrected misstatement are material, individually or in the aggregate, and the basis for that conclusion Documentation of uncorrected misstatements should include: 1. Aggregated effect on the FS 2. Evaluation whether the materiality level or levels for particular classes of transactions, account balances, or disclosures, if any, have been exceeded 3. The effect of uncorrected misstatements on key ratios or trends and compliance with legal, regulatory, and contractural requirements

Expenditure Cycle - Internal Controls Related to the Expenditure Cycle - Purchases

The following three functions in a purchase transaction should be segregated: 1. Purchase Requisition -The purchase requisition begins the purchasing cycle -The department in need of the asset or services sends a properly approved, serially numbered requisition to the purchasing department -The requisitioning department should not have the authority to actually place the purchase order -This would indicate a weakness in IC -So, when a company wants to buy something, they issue a requisition, and this will get properly approved, and the sent to the purchasing department 2. Purchase Orders -Prior to placing the orders the purchasing department should request bids from various suppliers to make sure that the best price is obtained -Once properly approved, the purchasing department should create the purchase order, which will indicate the description, quantity, and related information for the goods and services that are being requested -For IC purposes, it is best that prenumbered purchase orders be used -There should be multiple copies that will be sent to: 1. The requisitioning department 2. The vendor 3. The receiving department 4.The accounting department -So, purchasing department's job is to go get the right price for the right goods, and once they find it, they'll issue a purchase order that is properly approved (purchase order will say we want this many of this item) and multiple issues will be sent to: 1. The requisition department, 2. to the vendor two they know what we're ordering, 3. receiving department so they know to be on the look out for this new purchase, and 4. accounting department so that the they get the invoice, they know it as properly approved -If the purchase order is canceled, all copies should be recalled and filed so that every purchase order number is accounted for 3. Receipt of Goods or Services -The copy of the purchase order sent to the receiving department servers an an authorization to accept the goods or services when they arrive -It is preferable that the copy not indicate the quantity ordered so that the receiving department is forced to count the goods upon arrival (Blind Copy - good IC) -In addition, the description of the goods should be matched to the purchase order and the condition of the goods should be examined -A receiving report is prepared by the receiving department and forwarded to the accounting department -The goods are forwarded tot he requisitioning department -So, receiving department already has purchase order so they know something is soon the ay, it's an authorization of them to say these are the goods we should accept when the goods arrive, but we don't tell the receiving department, how many we're getting t ensure there counting and we received the correct amount (blind copy - IC)

Those Charged with Governance - Governance Structure

Those charged with governance may include: 1. Members of entity's legal structure, such as company directors 2. Parties external to entity, such as certain gov. agencies 3. Collective group of people such as board of directors or audit committee, or single person, such as owner-manager

Management Representation Letter - Purposes of Representation Letter

Three primary purposes of obtaining man. rep letter: 1. Confirm representations explicitly or implicitly given to auditor 2. Indicate and document continuing appropriateness of such representations 3. Reduce possibility of misunderstanding concerning matters that are subject of representations

Investment Cycle - Auditing Particular Types of Investments - Marketable Securities

Type................Asset Class.................Unrealized G/L Trading..............Current........................Net Income AFS...................Current/LT............................OCI HTM..................Current/LT...........................----- -Trading and AFS securities over which investor has no significant influence should be carried at FV, and classification 1, 2, or 3 should be disclosed in the footnotes -HTM debt securities should be carried at amortized cost -Trading securities always reported as current assets with unrealized G/L report in net income -AFS and HTM reported as current/LT based on management's intent to hold versus sell, and unrealized G/L reported in OCI for AFS (HTM has no unrealized G/L) -Auditor should inquire of management and obtain written representation concerning management's intent and ability with resect to holding versus selling securities in the near term

Revenue Cycle - Internal Controls Related to the Revenue Cycle - Accounts Receivable

Under strong IC, segregation of the functions in an accounts receivable transition should exist as follows: 1. Sales -A receivable is recorded in the accounts receivable control accounts in the general ledger and in the accounts receivable subsidiary ledger -Periodically, an independent person should reconcile these two records 2. Collection of Cash Receipts -When payment is received from the customer, the receivable is elimination 3. Uncollectible Receivables -An aging schedule is prepared and sent to the credit department for use in carrying out it collection program -At some point, receivable deemed uncollectible should be written off -Controls for writing off receivables include proper authorization (by the treasurer) and record keeping -Without proper control, amounts subsequently collected easily could be misappropriated by employees -So, must have good controls so companies aren't recording fake sales and AR and then just writing them off 4. Sales Returns -Returned goods must be examined to ensure that they correspond with the reason for return before credit is given -A serially numbered receiving report may be used as a sales return slip -Once the return is approved, the sales return is recorded and the related outstanding receivable is eliminated -So, must have segregation of duties; say someone could create a return without checks and abalones, you can say a customer returned stuff and then cash in the money yourself when the customer pays -So, reviving report is made with a sales return from a customer, and it must be recorded 5. Sales Discounts -Sales discount procedures and records should be reviewed to ensure that discounts are properly given and recorded based on the selected method (gross versos net) -This ensures that receivables are not overstated

Matters that Require Special Consideration - An Entity's Ability to Continue as a Going Concern - Mitigating Factors

When an auditor believes the there is substantial doubt about an entity's ability to continue as a going concern, auditor is required to consider management's plans for dealing with conditions or events that led to auditor's belief, including: 1. Plan to borrow money or destructive debt -So, to not violate debt covenants 2. Plans to sell assets -To raise additional capital 3. Plans to delay or reduce expenditures 4. Plans to increase ownership equity -More investors -Note: Mitigating factors must include both intent and ability to carry out planned procedures -So, client needs to prove that yes they positively have the intention to do these things, but can they prove they have the ability to do that (documentation, how will you implement it, how cut costs, agreement with bank, proof) -After considering management's plans, auditor may decide that substantial doubt about entity's ability to continue as a going concern for a reasonable period of time has been alleviated -In some cases, auditor should still consider need for disclosure of the conditions and events that initially gave rise to the substantial doubt

Matters that Require Special Consideration - An Entity's Ability to Continue as a Going Concern - Documentation Requirements

When auditor believes that there is substantial doubt about ability of entity to continue as going concern for a reasonable period of time, following items should all be included in audit documentation: 1. Conditions or events that gave rise to substantial doubt 2. Any mitigating doctor that auditors considers significant 3. Audit work performed to evaluate management's plans, including written representations from management: 1. Describing its plans to mitigate substantial doubt and probability that those plans can be effectively implemented, and 2. FS disuse all matters relevant to entity's ability to continue as going concern 4. Auditor's conclusion about whether substantial doubt remains or is alleviated 5. Effect of auditor's conclusion on evaluation of FS and related disclosures, and on resulting auditor's report -So, must document: 1. Here's what we looked at and out conclusion 2. What raised the doubt 3. Did the client raise any mitigating factors 4. How do we go about those mitigating factors 5. What was our conclusion 6. What was impact of that conclusion

Misstatements and Internal Control Deficiencies - Addressing Misstatements Discovered in the Audit - Internal Control Deficiencies and the Risk of Material Misstatement - When Control Deficiencies Are Noted, Auditor Should Do What?

When control deficiencies are noted, auditor should: 1. Consider compensating controls -So, this control isn't working, but control Y helps address that controls weakness 2. Decide whether there is a significant deficiency or material weakness -So, so we need to consider a significant deficiency the warrants governance attention? 3. Determine potential misstatements that could occur -So, recuasse of deficiency 4. Design substantive tests related to the deficiency to provide evidence that FS are free from material misstatement with regard to audit objective and area -So, what other sub. testing do we do/add to address weakness

Internal Control Communications - Communication of Control Deficiencies - Communication Requirements

Written communication of significant deficiencies and material weaknesses should include the following: 1. Definition of term matierla weakness, and, when relevant, definition of significant deficiency 2. A description of the significant deficiencies and material weaknesses, including an explanation of their potential effects 2.1. Auditor does not need to qusntify potential effects 2.2. Potential effects can be described in terms of control objectives and types of errors control was designed to prevent, or detect and correct, or in terms fo risks of misstatement the control was designed to address 3. Sufficient information to enable those charged with governance and management to understand context of communication, including statement that: 3.1. Not designed to find IC deficiencies (purpose of audit was for auditor to express and opinion on FS) 3.2. Auditor is not expressing an opinion on effectiveness of IC 3.3. Audit included consideration of IC over financial reporting in order to design audit procedures that are appropriate in circumstances but not for purpose of expressing an opinion on effectiveness of IC 3.4. Auditor's consideration of IC was not designed to identify all deficiencies in IC that might be material weaknesses or significant deficiencies, and therefore, material weaknesses and significant deficiencies may exist that were not identified 4. A restriction regarding use of communication to management, those charged with governance, other within organization, and any governmental authority to which auditor is required to report 4.1. So, ex: not for distribution to general public