Communism

“In the end we beat them with Levi 501 jeans. Seventy-two years of Communist indoctrination and propaganda was drowned out by a three-ounce Sony Walkman. A huge totalitarian system . . . has been brought to its knees because nobody wants to wear Bulgarian shoes. . . .”

-- P. J. O’Rourke (b. 1947), U.S. journalist. “The Death of Communism,” in Rolling Stone (New York, Nov. 1989)

Substantive Testing: Financing & Investing Cycle

Completing the Audit Field Work

Substantive Testing: Financing & Investing Cycle

Borrowing Investing Stockholder’s Equity

Financial and Investing Cycle-Summary of Processing Steps

B orrow in g

R ecord in g R ep aym en t

R ep aym en t o f L oan

A cc ru a l o f In te res t

R ecord in g L oan

D ep os it o f F u n d s

R ece ip t o f F u n d s

A p p rova l o f B orrow in g

B eg in

In ves tin g

R ecord in g C o llec tion

C o llec tion o f N o te an d In te res t

A cc ru a l o f In te res t

R ecord in g L oan

D isb u rsem en t o f F u n d s

A p p rova l o f L en d in g

B eg in

S tockh o ld ers ' E q u ity

R ecord P aym en t

P ay D ivid en d

R ecord D ivid en d D ec la ra tion

D ec la re D ivid en d s

R ecord Tran sac tion

Issu e , R eacq u ire , o r R e tire S tock

A p p rove S /E Tran sac tion

B eg in

Substantive Testing: Financing & Investing Cycle

General/Subsidiary Ledger Reconciliation Physical Examination Confirmation Other Documentary Evidence Hearsay Evidence/Meeting Minutes Analytic Procedures

Substantive Testing: Financing & Investing Cycle

Risk Assessment– Related Party Transactions

• Legal Form vs Economic Substance

– Loan Collateral, Defaults, Restructuring– Derivatives– Segment Disposal

Completing The Audit Final Analytic Procedures Review

Analytical Procedures as part of Audit Review Compare with prior year’s audited data

– Trend analysis

– Proportional analysis Compare budget and audited actual

– Calculate variances

– Analyze variances Compare ratios with industry averages Questions:

– Are all suspicions resolved?

– Is audit evidence adequate?

Completing The Audit Final Analytic Procedures Review Materiality Reevaluation Subsequent Events Review

– Type 1 vs Type 2

Types of Subsequent Events Type I: Evidence of conditions existing at

the balance sheet date– Requires adjustment if material

Type II: Evidence of conditions not existing at the balance sheet date– Does not require adjustment– May require disclosure

Subsequent Events Time Dimensions

Balance Sheet End field work Report date (report date) issuance

date Dec. 31 Mar. 1 Mar. 15 |---------------------------------------------------------|----------------------|

|<-----------------------------Subsequent events------------------------>|

|<------------Subsequent events period--------->|

Completing The Audit Final Analytic Procedures Review Materiality Reevaluation Subsequent Events Review

– Type 1 vs Type 2

Cash Flow Statement Review Workpaper Review Clear Open Items (p. 556)

Completing The Audit

Auditor/Client Conference Audit Committee Communication Communication of Internal Control Matters

– Reportable Conditions Letter (Significant Internal Control Deficiencies, p. 562)

– Management Letter (All Weaknesses & Recommendations, p. 563)

Letters Required as Audit Evidence (to the Auditor)

Lawyer’s Letters (p. 504-6)– Describes litigation

Client Representation Letter (p. 560-1)– Management’s assurance regarding conformity

with GAAP

Letters Required as Audit Evidence (from the Auditor)

Reportable Conditions Letter– Significant control structure deficiencies

Communication with Audit Committee– Audit adjustments, management/auditor disagreements,

changes in accounting policy, etc.

Management Letter– Covers all weaknesses and broader improvement

suggestions

Auditor’s Responsibilities in Completing the Audit

C O M P L E TIN G TH EF IE L D W O R K

P erfo rm an a lytica lp roced u res

O b ta in c lien trep resen ta tion le tte r

O b ta in evid en cecon cern in g lit ig a tion ,

c la im s , an d assessm en ts

R ead m in u tes o fm eetin g s

M ake su b seq u en teven ts review

E V A L U A TIN GTH E F IN D IN G S

M ake fin a l review (s )o f w ork in g p ap ers

F orm u la te op in ion an dd ra ft au d it rep ort

M ake tech n ica lreview o f

fin an c ia l s ta tm en ts

M ake fin a l assessm en to f m ate ria lity an d

au d it ris k

C O M M U N IC A TIN GW ITH TH E C L IE N T

P rep are m an ag em en tle tte r

C om m u n ica te m atte rsp erta in in g to

con d u c t o f th e au d it

C om m u n ica te in te rn a lcon tro l s tru c tu re

m atte rs