audit final exam

purchases journal

( list of all purchases and we can analyze these for purchase patterns and use it to select a sample for tests of controls)

Unmatched Receiving Reports

(goods are a liability when received, so if invoices havemt arrived yet, the reciving report is left in unmatched file. havent gotten vendor invocie yet havent matched to a reciving report so we havent recorded that liability yet even tho the liab exists. we can review these for unrecorded liabs bc even tho u didnt get an invoice yet u owe the order as soon as u receive the goods).

Accounts (vouchers) payable trial balance

(list of payable amts by vendors. the total should agree to the ap control acct. ideally it should include all vendors even if they have a 0 bal since we;re most concerned w completeness, so we should consider confirming low and 0 bal accts as well as those w a bal)

unmatched vendor invoices

(might be invoices received but goods not received. first try to match the receiving reports to vendor invoices, then u should consider ifthese invoices are valid

open purchase orders

(open when a requisition is issued until the goods are received. no liability would be recorded until transaction is completed. so open purch orders would be things that have been requested but not yet received. there should be no liability currently recorded for these but we should review these items for items that have been received but for some reason have not been recorded. we should also record these for evidence of loss on purch commitments where mkt prices are currently below the purchase price agreed on in the purchase order)

fixed asset reports

(related to large purchs. we would trace them to a fixed asset report making sure details are consistent w the purchase order and we would vouch additions to purchasing documents)

Management letters (typically after the end of the audit)

- not required under GAAS. its a value added thing that we might do for mgmt. - are prepared as a by-product of procedures performed in audit (if we were doing a test and we noticed that the client is doing something ineffficiently or the process could be improved and so we want to tell them about them as a value added thing. not requried that they change it. its not bc theyre not in complaince w gaap. this really has to do w efficiency or effectiveness of ops. - provide recommendations to client for improving effectiveness and efficiency of operations in this letter - typically delivered by auditors to client following audit engagement completion

key elements of ethics

-Decision problems (questions reflecting choice. problems where we have to make a decision and reflect on that) -Moral principles (involves guides of right and wrong) -Consequences (concerned w good or bad of decisions made)

•If concerns exist, evaluate management's plans to mitigate

-If concerns do not remain: we think that mgmts mitigation plans will succeed and they will avoid bankruptcy then we can keep the standard unqual report. No effect on report or financial statements -If concerns remain: Disclose in F/S and modify auditors' report to include a para explaining our going concern issue if the fin stmts are in compliance w gaap and they have made that disclosure then u would still give an unqual unmod opinion but u would add an explanatory para to disclose a going concern issue. it is also possible that u might issue a qualified or disclaimer of opinion in certain search situations

physical controls

-Payroll Checks and signature plates kept in a secure location -Payroll Checks distributed by a person not involved in processing or recording payroll -Payroll checks distributed to individuals with proper identification -Unclaimed Payroll Checks stored in a secure location

performance reviews

-Payroll transaction data compared to prior-year data or budgeted/expected data -Review of payroll register for reasonableness -Reconcile the payroll bank account

seg of duties

-The personnel department and the hiring/employing department authorize payroll transactions and payroll-related changes -Payroll is recorded by the payroll department and general accounting -The cash disbursements department/Treasurer has custody of the payroll checks

ex of type 1 vs type 2:

-we had our clients major customer that makes up 20% of their ar has gone bankrupt and we find out about that on jan 28 2018 that this major customer of my client has filed bankruptcy. whats the type? it depends on what caused that customer to go bankrupt. this cust has gone bankrupt for something thats been happening for 2 years. theyve had a deteriorating fin position theyve been losing sales theyve been starting to not pay their bills on time. the condition that led to their bankruptcy excisted on dec 31 of 2017 so that means its a type 1 event so wed have to go back and adjust ada as of dec 31st to show that those accts are not going to be collectible. -if the bankruptcy was filed bc on jan 12 they had a major warehouse fire that was uninsured and theyre not going to be able to recover from that. thats a type 2 subs event bc the event that caused the bankruptcy happened after yr end and that means theyd just have to disclose and not adjust

An Ethical Decision Process

1.Define all facts and circumstances (who what when where and how Qs around this situation) 2.Identify stakeholders (one of most important steps in this process. anyone who will be impacted by the decision. think broadly and identify wide variety of tstakehodlers. when they make wrong ethical decision it is usually bc they too narrowly focus on just 1 or 2 stakehodlers and not every1 that could be impacted) 3.Identify stakeholders' rights and obligations in general and to each other 4.Identify alternatives and consequences (both good bad sr and lr) 5.Choose superior alternative with respect to consequences and/or rules (pick alternative that complies w the ethical standards and criteria u think are most important)

Basic Activities in Acquisition and Expenditure Cycle

1.Purchase goods and services -Department requesting purchase of item(s) prepares purchase requisition -Bidding may be required on high dollar purchases -Purchasing prepares a purchase order approved by the appropriate person (usually dependent on dollar amount of purchase order) -May be done electronically by EDI (ex: gm w vendors that supply automatically) 2.Receiving the goods or services -After vendor approval, goods are received by company and evidenced by preparing a receiving report 3.Recording the asset or expense and related liability -Vendor bills company for goods using a vendor's invoice 4.Paying the invoice through the cash disbursement process

Components of the Standard (Unqualified) Report for Publicly Traded Clients

1.Report Title: Must include "Independent" & "Registered" 2.Addressee: Usually stockholders and/or BOD/company 3.Opinion Section: 2 paragraphs: -1st: lists FS audited, indicates conclusions are based on professional judgement, that FS are in conformity with GAAP -2nd: references the ICFR Report & Opinion 4. 1.Basis for Opinion Section: 2 paragraphs: -1st: Management is responsible for FS, auditor is responsible for expressing an opinion, auditor is registered w/PCAOB & independent -2nd: auditor followed PCAOB AS, audit designed to obtain reasonable assurance that FS are free of material misstatements whether due to error or fraud, evidence accumulated is appropriate to express opinion presented, auditor evaluates appropriateness of accounting principles, estimates, and FS disclosures & presentations.

Using the Audit Risk Model

1.Set audit risk at desired levels (normally, low). set by accting firm and not subject to debate 2.Assess risk of material misstatement, which incorporates inherent risk based on the nature of the account balance or class of significant transactions and control risk based on gaining an understanding of internal control. Note that AS 2110 indicates that the auditor should [presume that there is a fraud risk involving improper revenue recognition. 3.Set detection risk at the significant account and assertion level based on the level of audit risk and risk of material misstatement.

Types of Opinions

1.Unmodified/Unqualified opinion •F/S are in accordance with GAAP. issued standard unmodified/unqualified opinion or •Standard report may be modified to disclose additional matters 2.Qualified opinion •"Except for" some matter, F/S are in accordance with GAAP for a scope lim or except for this accoutn or these accts (for departure from gaap) 3.Adverse opinion • only happens based on there being a pervasive departure from gaap. F/S as a whole are not in accordance with GAAP. they are pervasively misstated. worst type of opinion. fss are a work of fiction and u shouldnt rely on them 4.Disclaimer of opinion •No opinion is issued by auditors. unable to form an opinion bc of a scope limitation thats pervasive so not able to get enough information to get an opinion. could also have a disclaimer of opinion bc of lack of independence.

The basic activities in the revenue and collection cycle for a typical manufacturing company include:

1.receiving and processing customer orders; 2.delivering goods and services to customers; 3.billing customers and accounting for accounts receivable; and 4.collecting and depositing cash received from customers.

more Components of the Standard (Unqualified) Report for Publicly Traded Clients

5.Critical Audit Matters (If applicable): Unknown # paragraphs: -Standard 1st if have CAM: defines what they are (material & challenging, subjective or complex), statement that it does not alter opinion, CAMs are not separate opinions or disclosures. -Titled section for each CAM, includes: reference to account & disclosure in FS, identify the CAM, principal consideration (complex, subjective, etc), and how addressed in the audit. 6.Name of Auditor 7.Auditor Tenure Date (year) 8.City & State 9.Audit Report Date. very applicated date to determine it's the last day of fieldwork its also the date through which the auditor has certain responsibilities including reviewing for subsequent events so that is the standard unmodified opinion for privately held clients issued by the asb

AICPA Code of Professional ConductActs Discreditable Rule 1.400

A member shall not commit an act discreditable to the profession (including, but not limited to): •Withholding client's books/records/documents when they have requested their return. •Discrimination •Failure to follow GAGAS on a Governmental audit •Making false or misleading journal entries •Failure to meet requirements of a Governmental body, commission, or regulatory body •Failure to file personal income tax return •Disclosure of CPA examination questions or answers • these can cause u to be disciplined

SEC & PCAOB Independence Rules

An auditor's independence depends on auditors both having the proper mental state and passing the appearance test. Thus they must have: •Independence in fact -A mental state of objectivity and lack of bias. and •Independence in appearance -depends on whether a reasonable investor, with knowledge of all relevant facts and circumstances, can conclude that the auditor is not capable of exercising objective and impartial judgment. so we have to be both

undue influence threat

Attempts to coerce or otherwise influence the CPA member (e.g., promoting them w significant gifts or threats to replace the auditor over an accounting principles disagreement). if the client is trying to threaten or bribe us, this is a potential threat to independence

AICPA Code of Professional Conduct:Principles and Rules of Conduct

Basic tenets of ethical conduct are aspirational goals of behavior (look at high level principles 1st): •Responsibilities - members should exercise sensitive professional and moral judgment in all their acts •Public Interest - honor the public trust and demonstrate commitment to professionalism •Integrity - perform responsibilities with the highest sense of integrity •Objectivity - impartial, unbiased, and independent, free of conflicts of interest and independent in fact and appearance when auditing other attestation services •Due care - diligence, competence, thorough, prompt. observe the profession's technical and ethical standards, strive continually to improve competence and quality of service, and discharge professional responsibilities to the best of the member's ability. •Scope and nature of services - observe the principles of code of professional conduct when considering the scope and nature of services provided While Principles are aspirational goals of behavior, the Rules of Conduct are enforceable ethical regulations that CPAs must follow. and the rules themselves are much more specific

adverse interest threat

CPAs acting in opposition to clients (e.g., through litigation). adversarial relationships w actual or threatened litigation will make the auditor nonindependent (either if we are suing our client or client suing us). may also exist from a 3rd party lawsuit if the client us alleging audit misconduct, then that would also cause us to not be independent

familiarity threat

CPAs having a close or longstanding relationship with a client. immediate and close fam memebrs may not hold a position of influence in an audit client, this could be a significant investment in or an ability to influence an audit client or work in an accounting or financial reporting function within that client.

financial self interest threat

CPAs having a financial relationship with a client. would potentialy cause us to not be independent so any direct fin interest is prohibited. indirect fin interest is allowed up to the point of materiality with reference to the members wealth. immediate family memebrs have the same limitations. close family members have the same limitations if the covered memebr is aware of them. material coopertive arangements w the clients loans to or from the audit clients are also prohibited so be aware of that.

advocacy threat

CPAs promoting a client's interests or position. we cannot act in the capacity of a mgr, employee, promoter or trustee of the client. this could include performing ongoing monitoring or control acts determining which, if any, recommendations for improving internal controls should be implemented, reporting to the bod or audit committee on behalf of mgmt or the individual responsible for the internal audit func, authorizing executing or consummating tansactions or otherwise exercising authority on behalf of the client, preparing source docs for transactions, having custody of assets, approving or being responsible for the overall internal audit work plan, including the determination of the internal audit risk and scope project priorities and the frequency of performance of audit procedures, performing forensic acc services, litigation support work, or any other services in which it appears that the cpa is taking an advocacy position on the clients behalf. although performing tax compliance work would not normally impair indpencece, certain tax work in which an advocacy position is required does. so u have to be careful. so if we r representing client in court for tax dispute that could be us taking an advocacy position which is not independent. being connected w a client as an employee or in any capacity equivalent to a member of client mgmt so for ex being listed as an emplloyee in client directory or publciation or permitting urself to be referred to by title or description as supervisor or being in charge of the clients internal audit func or using the clients letterhead or internal correspondance forms and communications could all portenally considered threats.

self review threat

CPAs reviewing their own work. this is a breach of independence. so if we perform bookkeeping or make acc or mgmt decisions when mgmt lacks expertise in fin stmts such that they cannot take primary responsibility for the FSs, we cannot authorize trans, control assets, sign checks or reports, prepare source docs, supervise client personnel, or serve as the client's registrar, transfer agent, or general counsel. those would be us potentially reviewing our own work when we audit them

mgmt participation threat

CPAs taking on the role of client management or otherwise performing management functions.

AICPA Code of Professional ConductFees and Other Types of Remuneration Rule 1.500

Contingent Fees (established for the performance of any service and any arrangement in which no fee will be charged unless a specific finding or result is attained or the fee depends on the results of the service) (and commissions): Those fees based on a particular finding or outcome. so if we say if u get an unqual opinion ur gonna pay me a mil but if u get a qual u pay me 800k. not allowed. •Not permitted for attest engagements (aka an audit or review) •Not contingent if: -Fixed by courts and not based on an agreement w ur client or -Based on hours worked or services provided • Is Allowed for non-attest (consulting, litigation support) engagements

Who is a Covered Member? (AICPA). the standard requires that covered members are independenct and cannot have any fin interest in clients that could afffect their judgement or would appear to influence their judgement

Covered members include (AICPA): •All individuals participating in an engagement. •An individual in a position to influence someone on the engagement (even if not on engagement). •A partner or manager who provides nonattest services to an attest client aka a partner or mgr that works for that client not on their audit but as a consultant for a nonattest service but that client is also an attest client then theyre also a covered member. ex: nonattest service would be taxes for client that we also audit. taax partners are also covered memebrs •A partner in the office where engagement partner practices. so if the engagement partner is in clt office than any ptnr in clt office is also covered •The firm's benefit plan. so if they have a retirement plan that invests, that retierment plan is a covered memebr and cannot invest in audit clients. •An entity that can be controlled by any person considered a member. anybody whos considered a covered member, if someone can control that covered member, theyre also a covered member.

AICPA Code of Professional Conduct Independence Rule 1.200 (continued)

For the purpose of independence •Immediate family members have the same restrictions as the member -Spouse, spousal equivalent, or dependent cannot have •A direct financial interest •A material indirect financial interest •Hold a position of influence with an audit client •Close relative -All immediate family members and parents, siblings, or nondependent child cannot (includes in-laws) •Ownership or control of an audit client •Employment with a client in an audit sensitive position

Fraud in Accounts Payable

If the review for fraud risk indicates that a potential significant risk of fraud exists in the acquisition and expenditure cycle, auditors can use several types of searches and matches using CAATs. •Inspect invoices in files for photocopies. fraudsters use photocopies, whiteout, cut & paste to create false or duplicate invoices. •Inspect vendor's invoices submitted in numerical order. may use same pad of prenumbered invoices to send bills. So your invoices should NOT be sequential and SHOULD have large gaps, unless your client is their only customer. •Inspect vendor's invoices that are always in round numbers. when you consider price, shipping, and taxes, the likelihood that the number is round (no cents, or in even 10's, 100's, or 1000's) is rare. •Scan vendor's invoices for invoices that are always slightly lower than a review threshold. if it is common knowledge that a control kicks in at $10,000, and a lot of invoices are just below that amount for a vendor, review. •Scan vendor invoices for vendors with only post office box addresses. file should have a physical location somewhere (billing to po, shipping to physical) •Scan vendor invoices for invoices with no listed telephone number. legit businesses do not hide their phone numbers, fraudsters usually don't buy phone line for a fake business. •Match vendor and employee address and telephone numbers. make sure employees are not also vendors. •Scan multiple vendors at the same address and telephone number. may be legit, but might indicate that a front organization is conducting a false invoice scheme. •Vouch a sample of vendor invoices to the approved vendor list. all vendors should be approved. Look for vendor names that are close but not the same. •Review invoices for addresses of the local mail drops. mail drop is shipping and packaging stores that accept client mail. (like the UPS store). It is a street address, but not their business, Adds legitimacy to fraudulent businesses.

Conceptual Framework for AICPA Independence Standards

In April 2006, the PEEC adopted the Conceptual Framework for AICPA Independence Standards, which describes the PEEC's risk-based approach to analyzing independence issues that arise: 1.Identify and evaluate threats to independence. 2.Determine whether safeguards eliminate or sufficiently mitigate the identified threats. 3.Determining whether independence is impaired.

AICPA Code of Professional ConductIndependence Rule 1.200 (continued 2)

Loans from financial institutions are permitted if: •it was Obtained prior to 2/5/01 under old rules. •it was Obtained prior to the lender becoming a client. •The loan was sold to an attest client (didnt originate there). •The loan was obtained before the CPA became a member. •Loans on life insurance. •Fully collateralized by cash deposits, loans, leases, etc. •Credit cards and cash advances less than $10,000. in general, sometimes no loans w an audit client. if u had gmac loans, they werent allowed to work on the gm audit bc of that

•Commissions (percentage based fee charge for professional services in connection with executing a transaction or performing some other business activity like insurance sales commission, security sales commission):

Receiving fees for recommending the products or services of clients or third parties (non-CPA) -Permitted for non-attest, if disclosed. if ur gonna recommend that ur client ourchase some product or do some service and ur gonna get some kickback on that, if theyre not ur audit client its permitted but u have to disclose that ur getting a commission to them -Prohibited for attest engagements (aka attest, audit, or review clients) •Referrals: Receiving fees for recommending the services of CPAs -Permitted for any engagement, if disclosed (the fact that ur getting that fee)

Roll-forward Procedures

Roll-forward procedures: Extend work from interim period to date of the financial statements •Include both tests of controls and substantive procedures •Performed following date of the financial statements. ex: if perform in oct we extend that testing to include the months of nov and dec w roll forward testing for either tests of control or substantive testing •Idea is to obtain evidence through the date of the financial statements

SEC & PCAOB Independence Rules (continued 1)

SEC rules require that companies (not auditors) disclose the following in proxy statements delivered to their shareholders (so they have to disclose, the client dicloses total audit fees paid to the pub acc firm or the annual audit and the review of quarterly fin info, total fees to the pub acc firm for tax and other advisory work (nonaudit services): •Total audit fees to the public accounting firm for the annual audit and the reviews of quarterly financial information; •Total fees to the public accounting firm for tax and other advisory work; •Whether the audit committee or the board of directors considered the public accounting firm's advisory work to be compatible with maintaining the auditor's independence; •If more than 50 percent, the percentage of the audit hours performed by persons other than the principal auditor's full-time, permanent employees.

SEC & PCAOB Independence Rules (continued)

The SEC and PCAOB rules prohibit or place restrictions on the following types of nonaudit services provided to audit clients. if u are the auditor for a client u cannot perform any of these nonaudit services to that client: •Financial information systems design and implementation; •Appraisal or valuation services; •Actuarial services; •Internal audit services; •Management functions; •Human resources; •Broker-dealer services; •Legal services; •Expert services; •Any service for an audit client for a contingent fee or commission; •Tax services that are based on judicial proceedings (where we might have to act in an advocacy role) or aggressive interpretations of tax law; •Planning or opining on the tax consequence of a transaction; •Tax services for key company executives.

AICPA Code of Professional ConductIndependence Rule 1.200 (continued 1)

Write-up services (reviewing fin records and make sure they are in compliance w the applicable standards) are allowed if: •Client understands and accepts the statements as their own and •Auditor does not assume a role of employee or management and •No other relationship that impairs integrity and objectivity. •Exception: Cannot do write-up services for public company clients so this is something where pcaob rules will be a little more strict than the aicpa rules. could do a write up service for a nonpublic company even if we audit them, but not for a publicly traded company

Omitted Procedures

auditor does not have a responsibility to continue to review their work after the report is released, but if something like a quality control review, pcaob inspection, or peer review uncovers that the audit omitted some required procedures in order to be in complaince with gaas then we would: •Perform procedures if: -Omitted procedures are important and if -Individuals are currently relying on financial statements and auditors' reports . perform the procedures to make sure the FSs and report are still accurate •If previous opinion can be supported once we gather this info, then no further action necessary •If previous opinion cannot be supported (would be changed bc of the omitted procedures, and the evidence we gather from then): -Withdraw the original report and -Issue revised reports and -Inform persons currently relying on the financial statements about the fact that we changed our report

reasons for departing from standard (unmodified) report

departures from gaap scope limitations audit of group financial statements

•Predecessor auditors.

not the continuing auditor. more complicated. only auditor for this yr or pervious yrs. -With permission, auditors may present reissued report from predecessor on prior years' F/S along with successor's report on current F/S. make sure in report we clearly identify which yrs we are giving opinions on -If predecessors' report not presented, successor auditors' report must reference predecessors' report and opinion on prior years' F/S (w an other-matter paragraph included)

Substantive Procedures in the Acquisition and Expenditure Cycle

obtain (or retain) engagement -> engagement planning -> risk assessment -> audit evidence -> reporting Completeness Assertion‒search for unrecorded liabilities: •Inquire about procedures for identifying and recording liabilities •Scan open purchase order file to find the purchase orders that havent been filled •Examine unmatched vendor statements or invoices •Examine unmatched receiving reports occurring near year-end (make sure whats received is in books) •Trace unpaid vouchers in accounts payable ledger to receiving reports •Confirm account payables with normal suppliers (even those with zero balances) •Review cash disbursements occurring after year-end to try to find receivables that should've been recorded but were not. Evidence is harder to obtain than for existence! Must search for unrecorded liabilities.

Other Matters Related to Confirmations

process largely controlled by the auditor, who picks the accts to be confirmed, makes the letters out from the client w the nums and amts already in the docs, stand w client as he signs letters, put letters in envelope and another stamped envelope for returned response adressed to audit firm and mail from post office not in client building, this is making sure client cant interfere w this process •All confirmations returned by the post office as non-deliverable must be investigated •Responses to positive and blank confirmations provide more reliable evidence than negative non-responses •Recipients of accounts receivable confirmations might not report understatements •Auditors must have heightened professional skepticism for electronic responses (fax or e-mail) -Verify that the response came from an appropriate person at the employer •Non-response to Positive/blank confirmation requests -Follow up with second and sometimes third requests. -A lower than expected response rate could be indicative of fictitious customer accounts -Alternative procedures for no response after second request to make sure shipping docs, invoice, and subsequent pmt records •Non-response to negative confirmation requests -Only provide limited evidence concerning financial statement assertions -Alternative procedures are not necessary for unreturned negative confirmation requests bc we consider nonresponses to be a confirmation of balance •Follow-up on all exceptions and amke sure we get enough evidence to support assertion we are trying to assess

Significant Accounts and Relevant Assertions in the Revenue and Collection Cycle

revenue: occurrence, completeness, cutoff AR: existence, completeness, valuation (both sig accts, assertions are high risk areas for this cycle. this cycle has the greatest risk for clients to overstATE these accts using ficticious sales or other methods mentioned in pervious side. also measure for completeness bc they do make mistakes that can be material as well even tho completeness is not biggest concern but could be an issue if client has a systematic error not where theyre committing fraud. bc we are concerned witht he client holding open their books, cutoff is also improtant. bc we reocrd ar at net realizable value and not actual amts owed, valuation is also relevant)

were all shipments invoiced?

selecting from ship docs and tracing to sales invoice file (journal) trace sample of shipping docs to invoices (completeness)

did all recorded sales actually occur?

test from sales invoice files (journal) to shipping docs. vouching sample of invoices to shipping docs (occurrence)

ethics

that branch of philosophy which is the systematic study of reflective choice, of the standards of right and wrong by which it is to be guided, and of the goods toward which it may ultimately be directed.

AICPA Code of Professional ConductConfidentiality Information Rule 1.700

•A CPA cannot disclose confidential information without client's consent •Exceptions: -To remain in compliance with standards -If workpapers are subpoenaed by court -As part of a PCAOB peer or quality review of practice -As part of an ethics violation for a state board of accountancy investigation

AICPA Code of Professional ConductForm of Organization and Name Rule 1.800

•A firm can practice in any form permitted by state including: - Limited Liability Partnership (LLP) - Limited Liability Corporation (LLC) •Firm name should not be misleading. •All partners must be CPAs or members of AICPA if included in firm name. non cpa partners are called directors or another title.

The Generalization Argument

•A judicious combination of the imperative and utilitarian principles. •Considers the consequences of a decision made by similar persons acting under similar circumstances •asks "What would happen if everyone acted in that certain way?" dont consider that if we do osmething, every1 else is still going to follow the rule and we're the only rule breaker. •If the answer to the question is that the consequences would be undesirable, the conclusion is that the way of acting is unethical and should not be done. if every firm decided to misstate ada to make their FSs look better what would happen? then no FSs would be reliable. if the result is undesirable, which it would be, then we wouldnt wanna do it

What is an Ethical Problem?

•A problem situation exists when an individual must make a choice among alternative actions and the right choice is not absolutely clear. •An ethical problem situation may be described as one in which the choice of alternative actions affects the well-being of other persons, not just urself •More often, there is a conflict between what we should do and what we want to do. that creates the ethical dilemma. ethical behavior could be said to be that which produces the greatest good and or conforms to the moral rules and principles and or is best demonstrates the virtues u value the most. it is when any of these 3 conflict w each other that we have an ethical dilemma that is the worst. in acc,we have to make the decision to conform w the code of ethical behavior that applies to you as a professional and that does sometimes create an ethical dilemma

Adjusting Entries and Financial Statement Disclosure (final overall stmt of whether the FSs as a whole are materially misstated)

•Accumulate dollar effects of identified misstatements •Evaluate materiality on an overall basis -Rollover method considers the current period income effect(s) of misstatements only -Iron curtain method considers the aggregate effects of the adjustments on the entity's balance sheet including misstatements from prior years that had not been corrected -SAB 108 requires adjustments to be proposed if material under either approach reaches the level of material •Recommend adjustment of all misstatements identified (all actual misstatements that we found even tho it might not be material bc we know those are mistakes. for likely misstatements, we might not foce the issue if its immaterial.) •Carry any uncorrected misstatements forward for consideration in future audits under the iron curtain method •Communicate all adjustments and misstatements to audit committee or individuals charged with governance. look @ exhibit 11-4 in the book

Consistency: Effect on Report. when theres a lack of consistency we will

•Add emphasis-of-matter paragraph following the opinion paragraph. opinon is staying unqual unmod •May issue a qualified opinion (GAAP departure) if: -Change made is not justified -Change is not accounted for in accordance with GAAP as long as their in compliance w gaap and the change is justified, then we can simply leave opinon unqual and add empasis para after opinion paragraph

AICPA Code of Professional ConductAdvertising and Other Forms of Solicitation Rule 1.600

•Advertising and solicitation of new clients is permitted but it cannot be: •Advertising: Cannot be "false, misleading, or deceptive" -Cannot create false or unjustified expectations of favorable results. cant say every1 gets an unqual opinion every time or u cant say the tax return will be x amt of dollars every time -Cannot state ability to influence third parties. cant say we have an in w the irs or pcaob etc -Cannot underestimate fees ("low balling") and then raise it later

Auditing Accrued Liabilities and Prepaid Expenses

•Agree balances to prior year workpapers beg bals •Verify all payments •Examine underlying agreements •Recalculate amounts -Agree expense accounts to trial balance •Search for unrecorded accruals so we could -Review cash disbursements at year-end -Look for expected accruals at other stages of the audit (bonds, notes, employees paid on 15th, etc.) •can do Analytical Procedures

Auditing Cost and Expense Accounts (a lot of cost and exp accts are related)

•Analytical procedures (e.g. estimate sales commissions exp if u look at sales.) •Agree to related balance sheet account (e.g. look at depreciation and agree it w bs acc: accumulated depreciation) •Substantive tests of transactions (e.g. look at details of purchases of ppe and make sure recorded correctly) •Vouch detail (e.g. look at legal expense and vouch it to make sure legal exps were for appropriate items back to supporting docs or send letter to legal)

Analytical Procedures

•Analytical procedures: Study of relationships among financial and nonfinancial data -Can be used in planning (required), substantive testing, and near the end of the audit (required) -Near the end of the audit, analytical procedures identify unusual or unexpected relationships not previously identified or found a justification for during •Review accounts for "miscellaneous," "other," and "clearing" accounts (may relate to earnings management by our client to make sure those are all zeroed out)

AICPA Code of Professional ConductIndependence Rule 1.200

•Applies to attestation engagements (audits (pos assurance) and reviews (what we do to quarterly FSs. less in scope than an audit but we still do issue type of opinion. neg assurance)) •related to Financial relationships: -No direct financial interest and -No material indirect financial interests and -No material joint ventures with client, officers, directors, or shareholders and for -Loans - normal lending practices, collateral required! •for Managerial relationships: -Cannot act as a promoter, underwriter, or equivalent to an employee (i.e., no decision making)

Going-Concern Uncertainties

•Auditors are responsible to evaluate whether substantial doubt exists about ability of entity to continue in existence for one year beyond date of F/S. justifying going concern is how we justify using accrual accounting -opinon that FSs are in accordance w gap means that existence may be presumed for a reasonable time so we have to tell if thats not going to happen •Options -Add emphasis-of-matter paragraph following opinion paragraph that directs users attention to mgmts disclosures about their going concern issues (still unmodified opinion if we disclose and FSs clearly indicade how bad the company is doing). most common. -If serious uncertainty if they can continue, may issue disclaimer of opinion -Modified language must include the words substantial doubt and going concern when we add that explan para

Association with Unaudited F/S

•Auditors permit use of name in communication including F/S that we havent audited if we've done something else for the client related to their FSs or something that theyre communicating •Issue disclaimer of opinion (one paragraph) to make sure they know we havent audited those FSs -Do not mention auditing procedures performed -Must identify any known departures from GAAP in the report -Should cover all unaudited prior years' financial statements that are included to make sure its clear that we didnt audit any of those as part of this report

Ability to Continue as a Going-Concern

•Auditors required to consider whether evidence obtained during audit raises questions about ability to continue as a going concern (what we should notice in a normal audit: negative trends like reoccurring operating losses, working capital deficiencies, and negative cash flows from operations indications of financial difficulty like default on loans, denial of credit from suppliers restructuring of debt or arrearages and divs and internal matters like work stoppages and substantial dependence on the success of a particular project or activity and it might also be external matters including legal proceedings, loss of a key franchise license or patent or loss of a major customer or supplier) •If concerns exist, evaluate management's plans to mitigate

Communication with Individuals Charged with Governance incldues (continued)

•Auditors' responsibility under GAAS •Overview of planned scope and timing of audit •Judgment about quality of accounting policies, estimates, and disclosures related to mgmt •Significant difficulties encountered during audit, especially those being encountered with mgmt •Uncorrected misstatements •Disagreements with management • Material, corrected misstatements • Representations requested from management • Management consultations with other auditors • Significant issues discussed with management • Auditor's understanding of significant unusual transactions • Other findings or issues significant and relevant to those charged with governance. we would communicate these things throughout the audit and especially at the end of the audit

AICPA Code of Professional ConductIntegrity and Objectivity Rule 1.100. most important rule

•CPAs must remain free of conflicts of interest: -A conflict of interest may exist when there is a significant relationship with a person, entity, product, or service that could be viewed as impairing the members objectivity. such as performing litigation support services from plaintiffs when ur client is the defendant, recommend client invest in a company or product that the auditor has a fin interest in, or perform consulting services for clients while also having a fin or managerial interest in a major competitor •Do not knowingly misrepresent facts. if u know ur client is filing a fraudulent return or entering false journal entries, those are things u cant just ignore. •May not subordinate judgments to others. this is basically letting others make the decision and not using ur own judgement. make ur own judgments. •Do not knowingly make false or misleading entries in an entity's financial records. this appplies to mgmt accts relating to fin stmts. do not subordinate judgment to superiors who want to make the FSs look better •If disagreements exist concerning the preparation of financial statements or the recording of transactions, accept the supervisor's position if acceptable. if ur in a disaggreement, u dont want to subordinate ur judgment, but if ur supervisor can give u a specific reason for why they want to do it a speicific way and they convince u thats 1 thing. if not, u want to: -Report to higher level if supervisor's position is not acceptable. and -Consider resigning if upper management will not take appropriate action

Emphasis of a matter

•Call user attention to important matters that we feel is important for FS users. doesnt change opinon just want them to look at it •Add emphasis-of-matter paragraph after opinion paragraph discussing the matter. it is possible that auditors decisde that something is important and should have emphasis even if it was adequately disclosed and added to FSs.

Type of Scope Limitations (what caused the scope limitation)

•Circumstance-Imposed -Situation in which matters beyond auditors' and client's control limit procedures performed by auditors -Example: inability to observe year-end inventory because of late appointment. or natural disaster -not clients fault so we came in late •Client-Imposed -Situation in which client specifically limits auditors' procedures -more negative than circumstance imposed limitation -Should be viewed as a significant restriction and a disclaimer is ordinarily issued bc clients fault bc we go to count inventory but they refuse to let us in so we take these more seriously and more likely pervasive

Other Tests of Controls in the Revenue Cycle

•Completeness of revenue and accounts receivable (by examining evidence of client review and follow up sales data related to specific classes of products or locations) •Accuracy of revenue and accounts receivable (by vouching prices to an approved price listing to make sure theyre using the correct prices). •Accuracy of revenue (by observing the client comparing shipping quantities to quantities recorded as sold and also exammine evidence to support that clients make these comparisons on a reg basis) •Cutoff of revenue (tract shipping dates on shipping docs to sales invoice dates. we could check the fob terms to make sure that rev is being recorded in the approp period when title transfers) •Classification of accounts receivable (by tracing posting of intercompany sales, sales returns, and etc to sales to make sure those are being classified correctly

Procedures Performed During Fieldwork

•Completing substantive procedures •Attorney's letters •Written representations •Going-concern assessment •Adjusting entries •Audit documentation review •Subsequent events •Subsequently discovered facts

Summary Financial Statements

•Derived from the full set of financial statements (only reporting single number for ppe or current assets) •Auditor can only examine and report if audited full financial statements then theyd want to make sure that summary numbers match full numebrs •if issing reprot on summary of FSs: -Refers to auditors' report on full financial statements -Indicates whether information in summary financial statements is consistent in relation to the full financial statements

The Imperative Principle (Kant)

•Directs a decision maker to act according to the requirements of an ethical rule •Strict versions of imperative ethics maintain that a decision should be made without trying to predict whether an action will create the greatest balance of good over evil its all about following the rule(s) •Ethics in the imperative sense is a function of moral rules and principles and does not involve a situation-specific calculation of the consequences -follow rules in all situations regardless of the circumstances. dont consider consequences. this principle places higher importance on being consistent and less importance on the potential consequences of the decision we make. -the objection to this principle would be that all rules have exceptions and this princ does not recognize that exceptions could exist. -most professional codes of ethics have elements of the imperitive princple where we say this is the rule and we really dont consider exceptions as being something thats allowed. we expect our professionals to act in a way that conforms w the rules.

The Principle of Utilitarianism (J.S. Mill)

•Emphasizes examining the consequences of an action rather than following rules •The criterion of producing the greater good is made an explicit part of the decision process so trying to max greater good. principle itself does not sepecify what values make a decision good vs evil so that is left up to the decision maker •In act-utilitarianism, the center of attention is the individual act as it is affected by the specific circumstances of a situation. tends to permit too many exceptions to well established rules. if the decision is to break the rule, the outcome will then depend on others still following the rule and so there is definitely some contradiction in that rule •Rule-utilitarianism emphasizes the centrality of rules for ethical behavior while still maintaining the criterion of the greatest universal good . decision makers must first deetermine the reules that will promote the greatest good for the largest # of ppl and then emphasize those rules and deemphasize those rules that dont enhance the greater good.

Accounting Estimates

•Examples include future cash flows in evaluating asset impairments, allowance for doubtful accounts for receivables, and depreciation lives for fixed assets •Review management's process for developing estimates •Review estimates for reasonableness while we should have tested original acct estimates reasonableness throughout the audit we do perform a final overal reasonable test on mgmts process for developing estimates as well as an overall assessment of the reasonableness of mgmts assessments and estimatees in the aggregate we should also consider how events occurring after the FS date may affect the reasonableness of estimates for instance if the economy tanks right after the FS date then the estimates for allowance for doubtful accts efficient anymore so even though it happens after if it affects potentially amts reported thats something we need to think about

Income Taxes Payable

•Extremely complex area -Client may operate in multiple tax jurisdictions (fed,state, county,city, etc) •Usually requires tax specialist •Vouch payments (make sure paid to govt) •Examine correspondence with government agencies(make sure amt matches whats owed) •Follow standard for auditing estimates (amt paid on quartarly stmts is the companys estimate of what theyre gonna owe its not until they fill out their tax return that they find out if they did that correctly so we want to make sure the estimate is made in the right way)

Threats to an Auditor's Independence

•Familiarity threat. •Adverse interest threat. •Undue influence threat. •Self-review threat. •Financial self-interest threat. •Management participation threat. •Advocacy threat.

AICPA Code of Professional ConductGeneral Standards Rule 1.300Compliance with Standards Rule 1.310 Accounting Principles Rule 1.320. these are from the responsibility and performance principles from gaas

•Follow professional standards and interpretations. •Perform only those services that can be completed with professional competence. •Exercise due care. •Adequately plan and supervise all engagements. •Obtain sufficient relevant data to afford a reasonable basis for all conclusions and recommendations. • basically, follow gaas standards

Auditing Property, Plant, and Equipment

•General Approach -Small number of transactions •Relatively high dollar transactions -Authorization of Transactions (Board of Directors or approved capital budget) takes on added importance -Less concern for access to assets -More concerned with unrecorded disposals •Agree balances to prior year documentation •Purchases of Property, Plant, and Equipment -Vouch to invoice or cost records -Inspect title to make sure that ownership is in the correct place -Vouch to board minutes to make sure that those were properly approved •Expenditures subsequent to acquisition (major repairs) -Vouch to invoice and work descriptions -Consider propriety of classification (expense or capitalize) (is this something thats just an exp like a repair or something to cap that increases life of asset) •Disposal of Property, Plant, and Equipment (should be authorization that something is to be disposed of) -Vouch from Property, Plant, and Equipment board minutes -Vouch to cash receipts journal and validated deposit slip -Recalculate gain/loss and make sure its accted for appropriately -Trace from board minutes to Property, Plant, and Equipment for disposals (completeness0making sure all disposals are recporded) •Look for unrecorded disposals by -Agree balances to prior year workpapers -Examine insurance policies, property tax records, etc. -Physically inspect or confirm fixed assets •Both existing and newly-acquired items •Confirm assets leased to others under capital leases w a confirmation request of physically inspect the ones the client has by looking at them •Depreciation Expense -Recalculate using useful life, salvage value, cost, and method determined by client -Evaluate reasonableness of useful life (made by mgmt), salvage value, etc. and make sure we agree w it -Is depreciation consistent with company policy (half year conventions)? •Lease Agreements -Verify proper treatment (capitalized or operating) -Ensure disclosure in footnotes is appropriate

Inherent Risks in the Payroll Cycle

•Ghost employees. don't exist but get paid, or paying terminated •Overpaying (padding) for time or production. high inherent risk where emplyees report more time than they work •Incorrect accounting (classification). classified incorrectly (capitalized when should have been expensed, or vice versa) •Failure to pay third-parties (e.g. payroll taxes, insurance). withhold from employees paychecks but fail to pay the entity owed.

Effect on Report

•Group auditors should -Verify component auditors' reputation and independence b4 hiring them and -Communicate and coordinate with component auditors in planning and performing all of the work •Options -Take responsibility for work: Standard (unmodified) report as if we did the whole audit or -Name component auditors •Present report of component auditors, only with their permission or -Refer to component auditors but not by name •Modify Auditor's Responsibility section and •Modify opinion paragraph and •Still express unmodified opinion, if appropriate

Audit of Group Financial Statements

•Group financial statements: Financial statements comprised of more than one division/subsidiary/segment/component and there are more than one auditors for each division/subs/seg/component. happens frequently actually and especially for international orgs that may have a us segment that is audited by 1 auditor, and some foreign elements audited by other auditors -when we have a group audit, we need to distinguish who are the group auditors and who are the component auditors •Group auditors: Conduct audit of material portion of the entity (us auditor for us company w most work in us. they issue the consolidated opinion) •Component auditors: May be engaged by group auditors to audit divisions, subsidiaries, or components. under supervision of group auditor

Subsequently Discovered Facts discovered prior to audit report release date

•If discovered prior to audit report release date, perform procedures related to items that we found out about, but not about other things -Revise date of auditors' reports to reflect new completion date or -Dual date auditors' reports (more common bc if we revise the date of the auditors report for the new completion date then we have to continue our entire review for subsequent events up to that date

Inherent risk

•Improper Revenue Recognition -Cut-off (clients hold open their books after fiscal yr end to inflate sales. this is a cutoff issue) -Bill and Hold (make an arrangement with customers to bill the customer now as if they have taken possession of the goods and recognize rev now but they dont ship it they kkeep it stored in their warehouse and that isnt technically rev bc we have to switch possession from rev to be recognized) -Channel Stuffing (client asks customer to buy more than they normally would at the exp of later sales. what they buy b4 fiscal end is more. what they buy after fiscal end is less.) •Returns and Allowances (can be used to manipulate rev and AR #s. address these risks!) •Collectability of Receivables (underestimating allowance for dbtful accts can lead to ovrstmt of ar. an oveerstmt of net income through understmt of bad debt exp.

An Emphasis on Independence

•Independence Rule 1.200 states: •A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council. rule itself has very little substantive content but there is a lot of interprestations related to independence that has been issued by the aicpa. we are required to be independent in mental attitude, thats independent in act. as well as being independent in appearance

Control Procedures

•Information processing controls -Compare PO number on BOL with company PO (to make sure they match w company) -Compare quantities against receiving report and purchase order (to make sure we're getting the amt we ordered and was approved) -Compare prices against quoted price or catalog listing (to make sure we're charged the appropriate amt) -Recompute vendor's invoices (to ensure computed correctly) -Determine when to pay invoice (considering discounts and due dates) -Properly prepare voucher •Separation of duties -Authorization of the purchase is done by the purchasing department. (not by requesting dept) -Custody of the inventory item(s) is held by the receiving department and, ultimately, the requesting department. (not by whoever is doing the recording) -Transactions are recorded by general accounting (control account) and accounts payable department (subsidiary accounts). -Reconcile liabilities to customer statements and general ledger account. -Bids are received by someone independent of the purchasing decision. •Physical controls -Prepare a receiving report upon initial receipt of inventory -Count and verify inventory quantities upon delivery to the inventory warehouse -Restrict access to inventories by keeping them in a secured location •Performance reviews -Compare purchases data to data from previous years or expected purchases data -Review bids to ensure that documentation exists regarding the selection of the vendor and that that was done correctly

Contents of Written Representations

•Information related to financial statements -Management's responsibility for F/S and internal control over financial reporting -Appropriate disclosure, presentation, and reasonableness of items -Statement that uncorrected misstatements are immaterial • list out Information provided to auditors by management throughout the audit that are deemed material by the auditor and that may have only been represented verbally throughout the audit and its also going to state that mgmt is responsible for: •Internal control over financial reporting (for public entities) so if the client is publicly traded then they're going to refer to items related to IC over fin reporting here as well

Procedures for Litigation, Claims, and Assessments

•Inquiry of clients •Review minutes of meetings of stockholders, directors, and committees looking for discussions of contingent liabs •Review contracts, loan agreements, and correspondence from taxing and governmental agencies looking for discussions of disagreements •Obtain information concerning guarantees from bank confirmations. when we confirm to the bank we want to look and see if theres any indication there that theres some potential problem •Review documentation related to legal services to figure out who which lawyers are they paying and for what •Attorney's letters to any lawyer that they may have relied on in the period

Uncollectible Accounts

•Inspect customer files for collectability •Recalculate allowance and bad debt expense (to make sure theyre within what the auditor seems to be a reasonable amt) •Verify reasonableness of allowance and bad debt expense (based on our expectation) •Inspect documentation for appropriateness of accounts written off (make sure client following their procedures for writing off accts) -Inspect documentation for additional collection procedures (what they do after written acct off do they sell it what do they do w it) -Inspect documentation for appropriate authorization

General Approach for Other Matters

•Issue unmodified opinion but add paragraph to report to discuss the matter that we want to talk about. 2 types -Emphasis-of-matter paragraphs provide information related to users' understanding of F/S so this is when we want to emphasize something to the user to make sure that they understood this about the FSs -Other-matter paragraphs provide information related to users' understanding of audit, auditors' responsibility, or auditors' report.., not to their understanding of the FSs -typically add emph or other para. •Situations in which we would do this: -lack of Consistency between this yr and last yr -Going-concern issue where we think the client may not continue another yr in bus -Other Information that we feel that the FSs need to know -Required Supplementary Information that we want to provide to the users or -if we want to Emphasis of a matter

Adverse Opinion

•Issued when F/S do not present fairly according to GAAP (the actual financial position with the company) (i.e., a serious, material, pervasive departure from GAAP). •Report Modifications: -Add paragraph preceding the opinion paragraph explaining the departure and detailing $ amounts involved and -Change opinion paragraph ("financial statements do not present fairly")

Qualified Opinion

•Issued when departure is material, yet not pervasive •Report Modifications: -Add paragraph preceding the opinion paragraph explaining departure and detailing $ amounts involved and -Modify opinion paragraph ("In our opinion, except for the matter discussed in the preceding paragraph,...."), FS are in accordance w gaap

Scope Limitation: Qualified Opinion

•Issued when scope limitations are material, but not pervasive •Report Modifications: -Add paragraph preceding the opinion paragraph describing the scope limitation and -Modify opinion paragraph ("In our opinion, except for")

May issue disclaimer if:

•Lack of independence •Associated with financial statements •Material and pervasive going-concern uncertainty

Accrued Liabilities

•Major differences between accrued liabilities and accounts payable -Examples include interest, property taxes, wages, and income taxes payable -These payables are not normally invoiced or evidenced by the receipt of goods •These differences may make it more difficult to detect unrecorded accruals even more so than unrecorded ap

Revenue Recognition (main concern of this cycle)

•Must be (1) realized or realizable and (2) earned •SEC guidance (SAB 104) -Persuasive evidence of an arrangement exists; -Delivery has occurred or services have been rendered; -The seller's price to the buyer is fixed or determinable; and -Collectability is reasonably ensured. if any of these dont exist, dont recognize revenue

Procedures to Identify Subsequent Events

•Obtain understanding of procedures management performs to identify subsequent events •Inquire of management and those charged with governance about any identified subsequent events •Read minutes of meetings of owners, management, and those charged with governance to look for their discussion about subsequent events •Review entity's interim financial statements looking for items that get recorded that might have been something that should have been recorded in an earlier or any monthly fin stmts or even quarterly depending on when we issue our report sometimes we even hear about subsequent events through news articles

Appendix 8C: The Payroll Cycle

•Often processed by service bureaus or outsourced to a company like adp bc costly to do payroll by urself. •Balance sheet accounts usually small bc employees paid on regular basis so accrual portion only shows up as a paybale. as an exp its usually one of the largest exps on the is, internal controls are usually strong bc of the regulatories. can rely on controls usally here so we can: •Rely on tests of controls/substantive tests of transactions. iC are usually strong because of the regulatory restrictions of the IRS and dept of labor, and the self-policing nature of payroll (if something is wrong, your employees WILL let you know).

Audit Evidence in Management Reports and Data Files

•Open purchase orders •Unmatched vendor invoices •Unmatched receiving reports •Accounts (vouchers) payable trial balance •Purchases journal •Fixed asset reports

Audit Evidence in Management Reports and Data Files

•Pending order and back order master file (initiated but not complete) (ordered but never shipped) review items in this file for completeness to see if something is shipped •Customer master file (keeps up to date customer inffo. auds may test samples to ensure credit limits are up to date regulary. •Price list master file (feeds prices for products directly into the invoicing sys. auditors can compare pricing files to an official price source for accuracy. prices may change many times during yr use approp price list to make sure price on ivoice currect. price list for given period of time. especialy careful w older incoices. •Sales detail (journal) file (has detailed sakes entries which corresponds w issuance of invoices ti customers. should also include shipping references and dates. can be scanned by computer assisted audit techniques for entries w/o shipping references which would potentially indicate fictitious sales or for matching recording dates with shipping dates recorded b4 the shipment occured which shouldnt happen. clients should compare daily credit sales totals to total debits posted to AR and this is 1 of those files that theyre gonna do it w. •Sales analysis report (various (sales by product, employee, region)) •Accounts receivable listing and aging (lists amts owed lsited by customer. clients will balance this acct w/o control total periodically. it is from this file that we select accts for confirmation and perform an aging to assess allowance 4 dbtful accts. auditors ensure that calculation of the aging is accurate, we dont just rely on the clients aging. we'd get the raw data and do our own aging. •Cash receipts listing (contains all details for cash deposits and credits to various accts. it contains population of entries that should show up as credits to AR when the customer pays. it may also contain adjusting and correcting entries from the bank reconciliation. •Customer Statements (one of the best controls we have over whether cash is received and recorded as a reduction in a customers ar is a monthly stmt. so the monthly stmt lists beg balance, all additions or new sales, all pmts and the ending bal still due for a given customer. we mail this to our customer and it basically is a check. great way to check if mail clerk is stealing.

Payroll Cycle: Activities

•Personnel authorization forms are used to authorize all payroll-related transactions. Employees should record their hours worked using time sheets. •Supervisory personnel review time sheets and verify the distribution of hours worked on various jobs. •Payroll department processes payroll and prepares a payroll register and payroll checks. •Cash disbursements/Treasurer should review the payroll register and compare it to the payroll checks. •Payroll checks should be signed by an authorized party and distributed directly to employees.

Payroll Cycle: Management Reports and Files

•Personnel files: establishes person's existence & employment records •Payroll register: special journal, contains a row for each employee with columns for gross pay, gross overtime pay, income tax withheld, Social Security & medicare, other deductions, and net pay. Transfer the net amount to the imprest bank acct for payroll at the end of each pay period •Labor cost analysis: links payroll to cost accounting. Payroll data flows from hiring process to timekeeping function into payroll dept then to cost department, then to entry into system. •Clearing accounts: BEWARE. Temporary storage places for transactions awaiting final accounting. They should have zero balances by the end of the acct period, otherwise there are amounts that have not been classified properly. •Government and tax reports: Large fines and mounting interest or business closure/forclosure are possible consequences when a business does not pay their taxes on an accurate and timely basis. Payroll is complicated and the rules and tables change each time the tax law changes, at least once a year. •Year-to-date earnings records: cumulative subsidiary records of each employee's gross pay, deductions, and net pay. YTD updated each time an employee is paid. Sum should equal costs and expenses for payroll in the FS. •W-2 reports: annual report of gross salaries and wages and income, social security, and medicare taxes withheld. Copies filed with SSA and IRS, adn its sent to employees so they can prepare income tax returns at the end of each yr

Scope Limitation: Disclaimer of Opinion

•Pervasive scope limitation, usually client-imposed -Significance of the limitation is such that auditors cannot gather sufficient appropriate evidence to form an opinion so basically cant give an opinion •Report Modifications: -Introductory paragraph: ("We were engaged to audit ...." not that we auditied) -Modify Auditor's Responsibility section: •Note that auditors were not able to obtain sufficient appropriate evidence and •Delete paragraphs describing an audit and indicating that the audit provides a basis for the opinion bc we werent able to do those and -Add paragraph preceding the opinion paragraph describing the scope limitation and -Modify opinion paragraph ("...we do not express an opinion....")

Payroll Cycle: Control Activities

•Physical Controls •Segregation of Duties •Performance Reviews

Types of Confirmations

•Positive Confirmations used when (send a request and expect a response. ex: according to records u owe company this amt. then we ask them to confirm if its true and matches their records and if not, what is the discripancy) -small number of accounts are involved -large number of errors are anticipated •Negative Confirmations used when (send confirmation w dollar amt and ask if the customer only respond if they disagree w the amt. dont know for sure if they received it or not tho) - the combined assessed level of inherent and control risk is low -a large number of small balances is involved - the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration. •Blank Confirmations should be used if the recipient is likely to return a positive confirmation without verifying the accuracy of the information.(expect a response.doesnt include dollar amt and ask customer to look up the balance and write it in. gives us more comfort response rates are highest for negative bc a nonrespinse is considered a response. pos is middle. lowest response rate is w blank confirmations--used when we're in an area of high inherent and control risk so we're going to get the most level so assurance from blank confirms than pos than neg

Other Accounts in Cycle

•Prepaid Expenses •Accrued Liabilities. like accrued taxes can be one of the largest FS numbers reported, tax laws can vary greatly by state or country. •Expenses. smaller expenses may be tested using AP •Inventory. have to purchase inventory, how much is reported in inventory can also be impacted by the count of inventory, inventory cost flow assumption, etc. •Property, Plant, and Equipment (mgmt makes assertions about existence, completeness, rights and obligations and valuation and allocation related to ppe and this is something that we want to make sure we consider) .

Using Confirmations

•Primarily for verifying existence. answers ur q does ur client have the right to collect from customer. used as substantive test of detail, primarily for verifying existence, and sometimes for comfort over completeness and rights and obligations •Factors likely to affect the reliability of confirmations -Previous audit experience -Intended recipient of the confirmation -Type of information being confirmed •Auditor may confirm entire balances or individual transactions -Type of confirmation being sent

Types of Subsequent Events

•Provide new information about conditions existing at date of the financial statements (Type 1). so, we are saying, even tho we didnt find our about it until after the fiscal year end, it affects the numbers as of the fiscal year end. we would require adjustment to fin stmts to reflect the new info -Adjust financial statements to reflect new information (to alloance for doubtful accts if ar client) •Involve events that arose following the date of the financial statements (Type 2) that we think is material and something that should be disclosed, but that didnt actually exist as f the bs date so we would just require: -Disclose in financial statements and not an adjustment

Written Representations

•Provided by management to auditors •Dated using date of auditors' reports (audit completion date) •Broad purpose -Impress upon management its primary responsibility for the financial statements -May establish auditors' defense if a question related to inquiries subsequently arises bc we have it in writing from client. th auditor dictates what things mgmt should discuss but the letter comes from mgmt and is signed by mgmt if the mgmt refuses to provide a written representation at the end of the audit that is sufficient enough to: •Qualify or disclaim an opinion if not provided by the client. this is pretty significant!

Consistency

•Relates to: -Change in accounting principles or -Adjustments to correct misstatements in previously issued F/S •Type of changes in accounting principles: -Accounting principles (one GAAP method to another GAAPmethod either bc gaap changed or changed methods within gaap life accounting for inventory from fifo to lifo). both still gaap compliant, but not consistent. necessary so FS users can appropriately compare FSs across yrs so we want to make sure theyre aware of the differences -Form of reporting entity (other than change resulting form transaction or event) -change Accounting principles (non-GAAP to GAAP). this is considered to be an adjustment to correct a misstatement in previously issued FSs from non gaap to gaap -Accounting principle inseparable from changes in estimates.

Analytical Procedures

•Sales Revenue -Comparisons with previous periods -Comparisons with industry avgs •Allowance for Doubtful Accts, Bad Debt Expense -Bad Debt Expense as a percentage of Sales -Allowance for Doubtful Accounts as a percentage of Gross Receivables and see if they seem reasonable compared to last yrs •Accounts Receivable -Days Sales in Accounts Receivable -Accounts Receivable Turnover to evaluate reasonableness of collections

Lack of Independence

•Scenario: Auditors begin engagement but independence subsequently compromised and they dont have independence anymore we issue a disclaimer of opinion •Report -Single paragraph -Indicates auditors are not independent -Does not indicate why independence lacking. dont have to explain it. disclaim any kind of opinion on that

Regulation and Quality Control

•Self-Regulatory Discipline (prof orgs made up of professionals just as us. disciplined by them so self regulated). -AICPA (u are subject to their rules if u join the aicpa or st cpa below) -State Societies of CPAs there is an adjoint enforcement program where the aicpa can refer complains against cpas to the state society or the state society can refer them to the aicpa ethics committees hear the complaint and they can either acquit the accused, they can find them in violation of rules and issue a letter of corrective action or hey can refer the serious cases to the aicpas trial board. the trial board has the power to hear the case and acquit it. they can admonish the participant. they can also suspend membership in state societies and aicpas for up to 2 yrs or they can expel an individual from the sscpas or aicpa. bylaws of the aicpa result in automatic expulsion from the aicpa for committing a felony, failure to file a tax return, or aid in the prep of a fraudulent financial tax return. this does not prevent a person from practicing accounting. only discipline they can do is kick u out of ur club basically. •Public Regulation Discipline (more teeth in this discipline) -State Boards of Accountancy (ones that licensed cpas in a state. each st has its own sba and they set up what it takes to be a cpa within our st and maintain that lciense and they issue the lcienses. they have reules of conduct and trial board panels and they can admonish a license holder, suspend or revoke the license to practice (means they can no longer use the title of cpa and cannot sign auditors reports). their disclipline can have some significant teeth bc they can take away ur cpa lciense -SEC (can deny temporarily or permanently the priviledges of practice b4 the sec to any person engaging in unethical or improper professional conduct so basically they can no longer sign off on financial stmts audits that come to the sec. the sec has a quasi-judicial role as an admin agency here. they can bar an accountant from signing any docs submitted to the sec and that its actually the way that the sec disciplined arthur anderson that led to their demise. they could have chosen to say these particular partners within AA can no longer submit anything to us they can no longer sign off on audit reports. they could have done it by office or they could have said well this office in texas that has all these scandals can no longer do it but instead the sec chose to prevent all of AA all aprtners from signing off on reports issued to the sec. and that is what caused their downfall) -PCAOB (handles disciplinary actions involving accountants and their firms who are engaged to audit publicly traded companies may identify matter requiring investigation they conduct the investigation and they recommend disciplinary proceedings if necessary the pcaob board can suspend or permanenetly bar an accountant from auditing any pub comps they can suspend or revoke a firms registration the meaning that firm can no longer do audits of pub traded comps. can appoint a monitor to oversee a firms practice or they can impose monetary penalties require additional continuing prof edu for the firmm, or impose other sanctions permitted under pcaob rules. definite teeth and discipline is in sec and pcaob and irs and is enough to keep most ppl doing what they need to do. -- sec and pcaob conduct public disciplinary actions. their authority comes from the rules of practice. -IRS

Revenue and Collection Cycle: Key Control Procedures

•Separation of Duties -Separate functions for recording, authorization, custody •Authorization of Transactions. must be good controls around: (have strong auth!) -Write-offs -EDI transactions -Credit checks prior to approval of sale -Pricing •Access to Assets -make sure Shipping department handles plysical possession of the goods and controls that carefully making sure any changes in possession are appropriately authorized and shipping depts shouldntbe doing the recording and authorization -Lock box account •Adequate Documents and Records -Pre-numbered sales orders, shipping documents (bills of lading), sales invoices -should be using Remittance advice (at bottom of bill, cust sends in after paying w their numbers •Independent Checks on Performance -A/R subsidiary ledger to general ledger -send Monthly statement to customer high level procedures imapct it too

Virtue Ethics (Aristotle)

•Setting self-focused standards for instilling intra-personal excellence and building character (empahsises the role of an individual's character in the deciison making process): - emphasize Virtues such as honesty, openness, integrity, etc. -Behavior you would be proud to have widely reported. -While cheating would always be considered wrong under Kant's categorical imperative approach, under the Aristotelian virtue ethics approach, one would consider whether cheating was most aligned with the person the student aspired to be. these philosophies provide important background to consider when faced w an ethical dilemma. as an auditor ur required to adhere to the prevailing code of conduct in all of ur duties. the code cant cover all possible problems u will face. in situations where the rules do not provide a clear cut asnwer, u must consider which type of philosophy u want to apply in determining ur ultimate action

Procedures Following Audit Report Release Date

•Subsequently discovered facts •Omitted procedures •Communication with those charged with governance •Management letters

Auditing Accounts Receivable

•Test Accounts Receivable Aged Trial Balance (to make sure the allowance for dbtful accts is sufficient and reflects clients actual collection history) •Confirm ar balances (w a client w the clients customers) •Perform analytical procedures (where possible to create efficiencies within our audit. can use substantive analytical procedures in the rev cycle) •Test sales cut-off (to ensure that the client didnt leave their books open to inflate sales past year end)

International Ethics Standards Board for Accountants (IESBA) Code

•The IESBA Code must be followed by auditors whenever an audit engagement is completed for a multinational client. •The importance has increased dramatically in recent years with the globalization of companies and their audits.coming into play more frequently now •There are some differences between the IESBA Code and the AICPA Code of Ethics, but the codes are quite similar. •Given the increased importance of the international standards, the AICPA revised its Code of Conduct to better align (converge) the two codes.

Philosophical Principles in Ethics

•The Imperative Principle •The Principle of Utilitarianism -Act-utilitarianism -Rule-utilitarianism •The Generalization Argument •Virtue Ethics

Matters Related to Confirmations

•There are three sets of circumstances that could justify the omission of the confirmation of a client's accounts receivable: -Not material to the financial statements (bounced checks) -If the risk of material misstatement is low (assessed level of evidence from tests is sufficient to reduce risk to acceptable level bc ir and cr are low. or if confirmation of receivables may be inefficient so if its easier for me to get evience in a diff way that is less time consiming then u can do that when risk of material misstatement is low) •the assessed level of evidence from analytical procedures and other tests of details is sufficient to reduce audit risk to an acceptably low level •confirmation of accounts receivable may be inefficient -Confirmation of accounts receivable is expected to be ineffective (based on previous years' audit experience we know that ar confirms are not respionded to by these ppl and we'll have to go to alternative ppl we'll just skip it. ex: fashion industry) has to be documented in ur justifiable reason if u dont check AR!

Sales Cutoff Procedures

•Used to verify whether Sales/Revenues recorded in the correct accounting period -is client Holding the books open? •Examine sales invoices and shipping documents shortly prior to and after year-end (looking to make sure items shipped before or during invoiced •Examine returns after year-end (to make sure theres an appropriate allowance within the context of our client)

Purchase Cutoffs

•Verify cut-offs for purchases -Examine receiving reports and vendor sales invoices occurring around year-end to ensure inventory received is included in the appropriate period. Clients have an incentive to push those expenses and liabilities into the next year if given the chance.

Alternative Procedures (used if customer hasnt responded after 2nd or 3rd request)

•Vouch subsequent cash collections -usually sufficient evidence of existence, valuation •Examine shipping documents -Especially BOL (third-party evidence) •Examine client-generated supporting documentation, such as invoices -Depends on internal controls as to how much reliance we can place on them •Inspect correspondence files between client and customer to see if theres proof about that aparticular procedure

of theres Non-F/S Information accompanying auditing FS stmts we need to consider how we disclose that. ex: mda from annual report that is not audited

•if Other Information Accompanying F/S that our report is related to: -Auditors required to ensure additional information consistent with F/S. make sure other numbers in other information are consistent with the numbers in the audited FSs -If not consistent, either revise opinion on F/S or add emphasis-of-matter paragraph tht will describe the fact that that info is not consistent w the FSs that we audited •some acc standard bodies may Required clients to provide Supplementary Information that is not part of the basic FSs. ex: fasb requires energy comps to present oil, gas and other ereserve info as supp info -Auditors required to perform limited procedures and expand report on F/S to address that required supp info. when we do that, we'll: -Add other-matter paragraph to identify information, describe procedures performed, and identify any issues w that that we find. this would be an other amtter para not empahsis para bc we are talking ab what we did in te audt to record this required supp info thats beyond what gaap requires

Subsequently Discovered Facts discovered following the audit report release date

•if we find out ab a subsequently discovered fact Following audit report release date (find out something in FSs is misstated): If facts would result in revision of auditors' report or F/S (if its material and we would have to issue a diff report or the FSs would have been materially diff and we know individuals are relying on F/S then wed have to: -Notify individuals relying on F/S and - ask our clients to Issue revised F/S which provide disclosure of facts and are not materially misstated. if our client refuses to do that, then we would be responsible for notifying everybody that we know has relied on those FSs to tell them not to rely on our audit report

Comparative F/S (mulitple yrs data in their FSs. lots of clients liek to do this). sec requires public comps to provide BSs for 2 yrs and stmts of income, changes in shareholders equity, and CFs for 3 yrs in a comparative side by side format for sec's registrants.

•if we were Continuing auditors for all yrs presented. easiest. -Report should address all years presented in comparative form. we can say presenting all info in report for opinion. we would: -Update opinion by considering if previously issued opinions still appropriate based on info we find in the current yr. so its possible that our opinion may changed based on this yrs info so we do have to consider that. -If previously issued opinions not appropriate, revise opinion in current report (other-matter paragraph) and empahsize that w other matter para. so last yr we gave qualified opinion but client made changes this yr, so that qual is no longer there, we could change a previously issued qual opinion to unqual. if we find something this yr that makes last yrs stmts materially wrong we change last yrs unqual to qual

Audit Documentation Review. all audit review is done multiple times

•some done by Audit supervisor/senior: they look to make sure what was in the plan was done and that it was referenced and documented well. •Audit manager and partner -look at Is the overall scope of the audit adequate? -Do overall conclusions support the opinion? (that our evidence supports the opinion) •Reviewing partner -ask Is the quality of audit work and reporting consistent with quality standards of the firm? •Engagement quality review. this is done and required by the standards and this is typically done by a partner that is not part of the engagement and is usually from another office. they do a final overall reasonableness check to make sure that nothing was overlooked and since theyre coming in w a fresh set of eyes they can be very independent on that