Exam 1 Notes

the industrial revolution

auditing as a profession, since the owners of the business were separated from the actual management of the business

Chartered accountants (CPAs in the UK) came to the US to verify investments etc.

-Page 26 in textbook
-Skip definitions in AU-C
-AU-C 200.17 A.22-.26
-AU-C 200.18 A.27-.31
-AU-C 200.19 A.32-.56
-AU-C 200 A.49
-AU-C 200 A.51-.53
-AU-C 200 A.56
-AU-C 250.06
-AU-C 315 .A133
-AU-C 500.A2
-AU-C 500.A32
-AU-C 500.A16-21+
-AU-C 500.A23
-AU-C 500.A25
-AU-C 570 A.65
-AU-C 580.A35
-AU-C 580, Apppx B (Au-C 500.A36)
-AU-C700.A81, illus. 1
-AU-C 705.A38 illus. 1, 3, 4, 6 and 8
-AU-C 705.06
-AU-C 705.09
-AU-C 705.11-14
-AU-C 706 A.7
-AU-C 706 A.14
-AU-C 708 A.8
-Textbook problem chapter 3 25
-ZZZZ Best: A case study in fraud (WILL BE ON EXAM)
-Page 172 in textbook
-Page 187 in textbook is clarified in course packet page 100
-Page in textbook 494-499 (block and haphazard selection)

-You need a strong business case (if there's multiple oil partners, you probably won't be one)
-Technical skills
-Soft skills
-Bringing in new business and clients helps at the margins

Tremendous technitians, super good with audits and does consulting when there's a problem, they'll come to you.

You're verifying a dollar amount

A partner who understands the industry, that hasn't engaged in the audit, who will review the audit to make sure everything is correct.

the setting of auditing standards. by a long shot. people don't get excited over auditing standards.

Income in an opinion. Cash flows is a fact.

approve the standard

disapprove the standard (which hardly happens anymore)

in total, you are voting for it, even if there's some things you don't like about the standard. but not enough to dissent.

performing selective testing, direct less audit effort to less risky areas. setting a scope, but also checking a few items under scrope.

the risk auditor is willing to take that once we finish the audit, we miss something big, whether it due to error or fraud. could be 5%...for example, typically.

cpa reciprocity...you can get cpa certificate in another state provided you met any requirements met where you got yours as well as additional ones for that new state you live in (dont have to take exam again).

to avoid having the liabilities of partners in the case of fraud or illegal activity. (even retired partners would contribute to lawsuits and settlements).

sarbanes oxley was due to people getting upset over bad audits (the audit standards were largely fine and accepted, but it was the way a particular firm was applying them improperly ...*cough* anderson *cough*). politicals lead to people getting congress to do something about it.

must register with PCAOB, and pay annual fees and annual quality reviews by the board. auditors now report to audit committees, not management as before!

key accounting policies and practices used, existence of alternative gaap (if any), and disagreements between management and the auditor.

give an opinion on the quality of internal controls (forces firms to document their controls and test said controls)

because of the fees to join and stay in the pcaob, many firms might have dropped out of providing public company audits. which lowered competition.

information systems design and implementation, internal audit outsourcing, bookkeeping, management or HR services, appraisals or valuation services, ...etc.

they all have in common being management decisions and consulting for their own management.

each committee member shall be an independent board member (cannot be involved in management functions of the business or be an officer of the busines).

must establish procedures for taking complaints.

liability pitfalls (recruiting board members, what are their liabilities now?)

CEO and CFOs required to certify their 10-k and 10-Q

penalties for knowingly and willfully misrepresenting these include: civil charges of up to 5 million, imprisonment of up to 20 years (no penalties before this)

new disclosure requirements: clear disclosure of all material off-balance sheet transactions. timely disclosures in "plain english". ....management must issue internal control report acknowledging resposibility for maintaining adequate internal controls (sec. 404 of SOX).

eom always references a client's footnote to financial statements. eom does not modify whether the underlying opinion was ...use? oom references other things NOT in the footnotes of the financials themselves??

dont give a going concern if you dont have to, as it could be a self-fulfilling prophecy (saying theyre in trouble, banks will demand repayment immediately, for example). you can include an eom that references a footnote without having to make a going concern...just referencing it passively.

change in estimate does not REQUIRE an EOM. you can still have one, but it isnt required. EOMs are not a substitute for issuing opinions or key disclosures (rare).

disclosing group (lead) partners name is allowed, but not required if in SEC statement(s)...i think

-complicated revenue recognition issues
-valuation of intangibles (e.g. goodwill)
-accounting estimates such as alloances for bad debts, inventory write-down reserves, product liability warranty accruals, bank or S&L loan loss reserves
-accounting for income taxes and deferred taxes

part 1 has to list in order:
-business
-risk factors
-properties
-legal proceedings

now auditors need to get information about these side deals to account for them due to sarbanes oxley.

GAAP EPS is $1.75 (based upon correct accounting). sarbanes oxley requires firms to reconcile this difference to explain why X items have a differing EPS than proper GAAP EPS.

25% of peer reviewed firms first review have errors found from the review.

1. failure to follow gaap. gaap departure. material. qualified opinion "except for" ARFR departure.
?. failure to follow gaap. immaterial. unmodified opinion.
?. scope has been restricted. highly material. disclaimer opinion due to scope restriction. only unmodified opinion on balance sheet. (split decision)
2. scope restriction. material. disclaimer opinion on restriction in scope.
3. none. immaterial. unmodified opinion.
4. failure to follow gaap. material. qualified due to gaap departure.
5. none (change in estimtes, not accounting princilpe). immaterial. unmodified opinion. (if change in principles, unmodified with eom statement on the change with standard wording)

Chapter 6 outline in course packet (page 87) part 2 is MOST IMPORTANT - mark out part c. and d. For these parts, make sure to include "and related disclosures" to parts a. and b.

soc 1 (documents controls for payroll) soc 2 (documents testing of controls for payroll).

95% surety is usually a sample size of 45 or so transactions to test.

the basis for qualified opinion will follow this, rather than precede such as an unmodified opinion.

consider 2 dimensions when there is an internal control failure:
1. was this due to error or fraud?
2. is it likely this is isolated or is it pervasive and even systematic?

always grab additional transactions for the sample size (randomly) if you need to replace any samples or increase the sampling size. you wouldnt want to grab a random sample and then grab another "random" sample, it wouldnt be statistically viable.

if (an internal control failure) is due to fraud AND is systemic, it is extensive and outside counsel should be involved in the investigative process with management.

assertion type presentation
-aggregated example: loans for officers are booked with loan receivables from customers (they should be put together).
-disaggregated example: too many separate sales accounts (some should be combined)

Existence: confirm a sample of A/R at year end from customers
Rights and Obligations:
Completeness:
Valuation and Allocation: confirm a sample of A/R at year end from customers...look at an aging of A/R (audit and test it)...examine subsequent cash collection of most significant A/R at trial balance

most risky assertion to audit with a PUBLIC company: existence. wants to overstate income for bonuses.
most risky assertion to audit with a PRIVATE company: completeness. wants to understate income for less taxes due.

EXAM QUESTION? you can have a material departure from the ARFR, or a scope restriction that is leaning to be material or worse, and you tell the manageers and they realise oh, that must have been a mistake! and they give you appropriate evidence and resolve the issue and the you may issue an unmodified opinion.

confirmations (sent to auditor) can be used to obtain evidence about "side deals", such as agreements to repurchase sold items.

presumptively mandatory (this is NEW) are the analytical standards (you have to do analytics, unless you think another method will give you better evidence. you'll need to prove why the alternative is better.)

ZZZZ best (rug cleaning) case is an example of clients imposing huge restrictions and the auditors not acting on these scope restrictions. created fake earnings, fake buildings for restorations, etc. manipulated creditors for short-term loans and then stockholders after they went public. auditors' lack of industry knowledge didnt question the 66% profits in a competitive bid industry, as well as their earning the national amount of profits for the industry, within their one company. their contract for $7 million was contained to one page (red flag).

inventories are typically counted the weekend after year end date. inventory rollback has to be done to take purchases/sales out to make it accurate to year end.

13 standard provisions to a rep letter - know these. you might include additional provision(s) if it is relavent to the client. rep letters need to be dated at audit report date as well.

anytime you can find something a client hasnt done in the past, you want to get the client to do it to save time (and costs) on the audit.

bridging work paper = reference the paper, talk about the weakness, and then how you responded to it.

1. issue exists but is immaterial so its self limiting (obvi tell the boss,
2. there is a weakness here, but there compensitory internal controls that are present
3. indicate what audit procedures youd design and use to fix weakness

main rule in auditing - document, document docment!

adjustments past work paper are things we've come across that are wrong but theyre immaterial individually. but we still want a record or those, incase in the aggreagate they are material. (net all adjustments from the audit to see if it adds up to being material)

if an assertion about transactions (as a category), is significant or risky or material, we need to make sure we've audited that assertion. this links to audit procedure(s) to test the assertion(s).

C^3...O...A...P

C E R V P

if its a disclaimer, dont put scope restriction, since theyre all due to that. EOM references a footnote in FINANCIALS, going concern and change in accounting principles.