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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)
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Substantive Testing: Financing & Investing Cycle
Completing the Audit Field Work
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Substantive Testing: Financing & Investing Cycle
Borrowing Investing Stockholder’s Equity
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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
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Substantive Testing: Financing & Investing Cycle
General/Subsidiary Ledger Reconciliation Physical Examination Confirmation Other Documentary Evidence Hearsay Evidence/Meeting Minutes Analytic Procedures
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Substantive Testing: Financing & Investing Cycle
Risk Assessment– Related Party Transactions
• Legal Form vs Economic Substance
– Loan Collateral, Defaults, Restructuring– Derivatives– Segment Disposal
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Completing The Audit Final Analytic Procedures Review
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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?
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Completing The Audit Final Analytic Procedures Review Materiality Reevaluation Subsequent Events Review
– Type 1 vs Type 2
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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
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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--------->|
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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)
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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)
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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
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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
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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