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AUDIT PRESENTATION

Transcript: ERUDITE - COMPLEX BUSINESS MODEL - PRICE INSTABILITY - TECHNOLOGY RISK BUSINESS RISK - Ensure that the company is operating efficiently in the sake of the stakeholders -Ensure that the internal control is efficient - Determine the business strategies and plans RESPONSIBILITIES OF BOARD OF DIRECTORS RESPONSIBILITIES SPE The independence issues arise when an auditor provides external auditing, internal auditing and management consulting services include whether or not the auditors can be independent and exercise good professional judgement in appearance to both services, auditing and consulting. AUDITOR INDEPENDENCE - Rules-based provide detailed rules that must be followed - Principles-based avoid rules and use professional judgment PRINCIPLES-BASED VS RULES-BASED Define as a surge of individuals withdrawing funds from a financial institution due to fear that the entity will become insolvent in the near future. RUN ON THE BANK The withdrawal of the shares and loss of confidence by trading partners and customers possibly speed up the collapse Might be hard for them to maintain the good relationship with the client. Losing revenues gain by the main services and ad on services CONFLICT Conflict between client or public's interest INTEGRITY - Bad examples portrayed by Enron and Anderson regarding integrity - It is important for an individual to live an act in with your values Sarbanes-Oxley Act of 2002 Public Company Accounting Oversight Board (PCAOB) Restore public trust in auditing and financial reporting RESTORE THE PUBLIC TRUST

Audit Presentation

Transcript: Other Risk Factors * Analyze and understand your company’s financial records * Identify key areas for improvement in your company * Assess risks, economy, efficiency and quality * Evaluate new technology * Uncover fraudulent or other illegal activities within your company * Reinforce and strengthen internal control 28.82 Walmart Items To Select Audit Risk Model Items with large dollar value & randomly selected items 1.23 Recognizes sales revenue net of sales taxes and estimated sales returns at the time it sells merchandise to the customer Purchases of shopping cards are not recognized as revenue until the card is redeemed for purchases Sam’s Club membership fees recognized over term of membership (12 months) Documentation Costco Specialized Accounting Treatments ... small -.006 (cc) image by anemoneprojectors on Flickr Completeness Completeness 6.23 .200 12.67 Earthquake in Japan Effect of inability to estimate value of damages and insurance recovery from event "...do not believe that any damages would be material to our financial position." Social Matters Earnings per Share Occurance .883 1.14 Physical Examination Classification % Change From 2011 Existence 3.43 -.1685 How to Manage Business Risk Industry 1.95 Times Interest Earned Transactions with large dollar value & randomly selected items Applying Analytical Procedures Subsequent Events Return on Assets % Change From 2011 Walmart Gross Margin Inventories: primarily lower of cost or market LIFO Sam's Club: weighted-average LIFO Walmart International: FIFO Recording markdowns Estimating Shrinkage - inventory losses based on physical inventory counts recorded as % of sales .466 Mostly undrawn lines of credit from 28 financial institutions totaling $11.5 billion Strictest covenants limit maximum amounts in secured debt and long-term leases Application of Evidence to Decisions Sample Size Items to Select Balance sheet date .470 .587 Ability to Meet Long Term Debt Obligations Management Assertions 4.52 Valuation & Allocation In the first quarter of fiscal 2011, certain information systems' expenses previously included in unallocated corporate overhead have been allocated to the segment that is directly benefitting from those costs. 6.12 Occurance and rights and oblications Accuracy Posting & Summarization Balance sheet date Existence Puerto Rico Segment Realignment -.061 Inventory Turnover Walmart 11.43 Segment Reporting Timing Net deferred tax liabilities has greatly risen from $891 million on Jan 31, 2010 to $1.695 billion on Jan 31, 2011. Accounting Risk Considerations 1.16 Completeness Compare invoices to purchase orders and general ledger accounts 4.28 Possible Effects of Audit/Examinations on Income Tax Positions Client Business Risk Walmart and Its Industry FY 2011 Company Review Understanding the Client Business & Industry Audit Evidence Decisions Cash and Cash Equivalents Investments with maturity ≤ 3 months Credit/Debit card transactions and EBT (electronic business transactions) to be processed within < 7 days 8.70 Auditing Walmart Presented by: Walmart Business Risks Transactions with large dollar value & randomly selected items 58.61 Classification (cc) photo by medhead on Flickr Retail Method of Accounting Current Ratio Management Assertions Transaction-Related Objectives 1.71 Audit Objectives .059 Audit Objectives Walmart Balance-Related Objectives Audit Procedures Collecting Audit Evidence Factors affecting business risk can be internal or external Examples: fluctuations in the economy, performance/addition of competitors, success/failure of client’s strategies and operations 21.03 Liquidity Activity Ratios Net Sales: $419 billion Total Assets: $181 billion Employees: 2.1 million worldwide 1.4 million in the U.S Assets and liabilities: translation using exchange rates at balance sheet date Income statements: translated using average exchange rates for the respective period -.0269 Walmart -.0095 Compare cash balances to bank statements, & credit card purchases to A/R Expansion strategies risk Worldwide operations Natural disasters Legal proceedings .105 Completeness Completeness Rights & Obligations U.S: 4,400+ stores International: 4,000+ stores Audit Evidence .099 Walmart Sample Size Identifying Key Risk Areas Costco Legal & Regulatory Matters Accuracy Linking Management Assertions to Audit Objectives Accuracy & Evaluation Management's responsibility to address business risks Disclosed in MD&A in 10-K for investors Auditors perform analytical procedures Address liquidity, profitability, etc. Residual risk Balance sheet date Audit Objectives Timing .077 Type of Evidence Timing Occurance and rights and oblications Labor law Anti-discrimination laws International trade laws Predatory pricing Products must meet federal regulations short term debt deferred taxes inventory .126 .081 Management’s Report to Shareholders (Low Risk) Days to Sell Inventory Classification & Understandability Target Profit Margin Cassandra Salcedo Max Weinstein Maurine

Audit Presentation

Transcript: Change group members regularly Have protocols in place to reach decisions Individual interviews Consider outside opinions a) Audit Risk b) Control Risk c) Materiality d) Attestation Groupthink Definition - The mode of thinking when individuals in a group are so focused on cohesiveness that they override alternative courses of action. Subsets of Groupthink: Polarization Cascades Examples: Pearl Harbor, Bay of Pigs, Mini Case Study Overestimation of the Group Illusion of Invulnerability Inherent Morality Close Mindedness Rationalization Negative Stereotypes of Outsiders Pressure toward Uniformity Self Censorship Direct Pressure Mind Guarding What is the term for the Magnitude of an omission or misstatement? Auditors must understand the Control Environment AU 316.15 • ...include a consideration of the known external and internal factors affecting the entity that might... indicate a culture or environment that enable management to rationalize committing fraud. Groupthink and Audit a) AICPA b) PCAB c) AACPA d) PCAOB Main player: CEO Bernie Ebbers Inflated Assets by $11 Billion Ebbers did not work alone, 400 accounting/finance employees were terminated after the scandal Overcoming Groupthink Auditing Standard 10 p. 5 • b) Partners must direct engagement team members to bring significant accounting and auditing issues to the attention of the partner and other engagement team members. every team member has a responsibility to bring issues to the attention of a partner and other team members. Auditing Standard 12 p. 52 • ...exchange of ideas, or "brainstorming," among the engagement team members Q & A Auditors Must Identify Groupthink Tone of the organization... Manager: “these documents are sensitive and confidential and should not be distributed outside of the department without advising myself first” Employee: “Opps! I sent it to AA [Arthur Andersen]. IT’S A JOKE. I fully agree with your concerns” Manager: “smart a**. Just trying to be dramatic and liven things up a bit” Groupthink and WORLDCOM Cont. WORLDCOM Pressure The SEC said that “Ebbers created the pressure that led to the fraud. He demanded the results he had promised, and he appeared to scorn the procedures and people that should have been a check on misreporting” Rationalization CFO Scott Sullivan had a misguided reputation among employees for his integrity many believed that the strange accounting practices were new methodologies or loopholes in GAAP Groupthink and WORLDCOM Who sets audit standards for public companies? Groupthink leading to poor judgments One More Example Which of the following is part of the fraud triangle? a) Ability b) Rationalization c) Reason d) Ignorance Which of the following is not a part of the Audit Bucket? a) Risk Assessment Procedures b) Substantive Analytical Procedures c) Substantive Tests of Transactions d) Test of Controls e) Test of Details

Audit Presentation

Transcript: Increase maximum amount available from $10M to $20M Double repay period by extending the maturity date for another 3 years Reduce interest rate on amounts drawn from LIBOR+7.5% to LIBOR+3% Reduce commitment fee on undrawn balance from 2% to 0.5% Non-recognized subsequent event -- Evidence about conditions that did not exist at the date of the balance sheet Disclose to keep the financial statements from being misleading Shakespeare paid $10 million on March 10, 2011, to acquire competitor company Hamlet. On the basis of its initial assessment from the Company’s due diligence (that started shortly before the balance sheet date), management’s best estimate of the allocation of the $10 million purchase is as follows: $2 million of current assets $5 million of identifiable noncurrent assets $2 million of intangible assets $1 million of goodwill. The estimated purchase price allocation has not been finalized and is expected to be after the financial statements are issued. How, if at all, is the acquisition of Hamlet recognized or disclosed in the financial statements? Records the incurred but not yet reported (IBNR) costs as the estimate of medical benefits payable Third party estimates Historically accurate Continuously check for reasonableness Claims received within 2 months Estimate balance was $1.75M as of 12/31/10 Claims were $0.75M as of 3/18/11 855-10-25-3: An entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued. Let's Look at GAAP 855-10-50-3: An entity also shall consider supplementing the historical financial statements with pro forma financial data. Occasionally, a non-recognized subsequent event may be so significant that disclosure can best be made by means of pro forma financial data. Such data shall give effect to the event as if it had occurred on the balance sheet date. In some situations, an entity also shall consider presenting pro forma statements, usually a balance sheet only, in columnar form on the face of the historical statements. 805-10-50-2: To meet the objective in the preceding paragraph, the acquirer shall disclose the following information for each business combination that occurs during the reporting period: a. The name and a description of the acquiree b. The acquisition date c. The percentage of voting equity interests acquired d. The primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree Do not recognize Disclose terms and date of modifications under the subsequent event note No financial impact directly from modifications Note: Items (e) through (h) do not apply to Shakespeare's acquisition of Hamlet Let's Look at GAAP Disclosure Change as an SEC Filer Medical Benefits Payable cont. 855-10-55-2: The following are examples of nonrecognized subsequent events addressed in paragraph 855-10-25-3: Medical Benefits Payable Group 7 - Charlie Blackstock, Kori Gibbs, Kate Harris, Tracy Liu, Yanni Ma, and David Weber Let's Look at GAAP Review Subsequent Events Subsequent Events Disclosure Date Let's Look at GAAP Let's Look at GAAP GAAP ASC 855-10-25-1A: the entity shall evaluate subsequent events through the date the financial statements are issued Financial statements are issued: when they are widely distributed to shareholders and other financial statement users for general use and reliance in a form and format that complies with GAAP What should Shakespeare do? Assuming that the company will issue their financial statements on the planned date, they should disclose the date of March 20, 2011 in the footnotes Shakespeare could choose to do this, but since the purchase price allocation isn't finalized, maybe don't do this. Events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. Following ASC 855-10-50-1, they must disclose: (a) the date through which subsequent events have been evaluated March 18, 2011 (b) that date is when the financial statements were available to be issued They were available to be issued at that time, but not issued until March 20, 2011 a. Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued Shakespeare follows the above and makes as many disclosures as is practicable. Shakespeare might choose to disclose its initial purchase price allocation if it feels that is relevant/reliable. Acquisition of New Publishing Company Line of Credit Modification Let's Look at GAAP a. The nature of the event b. An estimate of its financial effect, or a statement that such an estimate cannot be made b. A business combination that occurs after the balance sheet date but before financial statements are issued or are available to be issued (Topic 805 requires specific

Audit presentation

Transcript: AUDITING Presentation by Kashika Laul 118120 INTRODUCTION INTRODUCTION Auditing is an important professional task carrying heavy responsibility and calling for equivalent skill and judgement . Auditing is an intelligent and critical scrutiny of books of accounts of a business with the documents and vouchers from which they have been written up, for the purpose of ascertaining whether the working results of a particular period as shown by Profit and Loss Account and also the financial position as reflected ERRORS Errors either major or minor are made unknowingly (also called mistakes) by anyone who lacks knowledge or due to oversight on the part of the individual, which if caught, can be corrected by taking appropriate measures to prevent it from happening again. Click to edit text TYPES FRAUDS Fraud is really a false representation or entry which is made intentionally with some mischievous objectives. Fraud occurs when someone purposefully produces deceptive data.Fraud can take the form of the falsification or alteration of accounting records or the financial statements. TYPES FRAUDS ERROR VS FRAUDS PRINCIPLES AND TECHNIQUES Audit principles are the basic rules and involve all those procedures which are completed during the course of the examination .Techniques are the devices which are adapted in applying these principles. Techniques TECHNIQUES 1 Vouching Confirming 2 3 Reconciling 4 Analysing Testing 5 PRINCIPLES Principles 1 Confidentiality 2 Materialistic 3 Impartiality 4 Evidence 5 Planning CLASSES OF AUDIT Classification According to organisational structure Internal Audit Government Audit Statutory Audit Private Audit From practical point of view ANNUAL OR PERIODICAL AUDIT BALANCE SHEET AUDIT CONTINUOUS AUDIT Cash Audit

Audit Presentation

Transcript: Parmalat Italian Dairy Manufacturer Revenue= 4,538,000,000 euros 14,000 employees International Company Operate in: Botswana, Canada, Cuba, Mozambique, Paraguay, Russia, Venezuela, and Romania Listed on Italian Stock Exchange since 2005 #1 Stockholder=Sofil SAS (82%) CEO: Yvon Guerin with Parmalat since 1990 Deloitte-->PWC Due to fraud & Bankruptcy in 2002-2003 PWC since 2005 annual report 2011 Annual Report: true & fair view of financial position after being reissued due to closure of pending litigation 1.6 million euros in fees Analytical Procedures Inventory: Weighted Average Cost Method PPE/Intangibles: Straight Line Amortization and Depreciation Recognize foreign transactions using exchange rate at date of transaction for revenue/expenses Estimations: made by directors using subjective evaluations based on historical data Amendment IFRS7: Financial Instruments Disclosures-Transfers of Financial Assets No effect Parmalat Background Audit Committee Welcome to Parmalat Greatest Audit Risk Lactalis bought Parmalat in 2012 for $4.8 billion Worldwide leader in dairy products Prior to purchase: Lactalis was Parmalat's largest shareholder nominated and secured 9 out of 11 seats on Parmalat's boards CONSOB: Auditing Standards Regulation for Companies listed on the Italian Stock Exchange IFRS vs. GAAP Financial Periods required Layout Presentation Classification Disclosures Related Party Transactions Estimates of Depreciation and Allowance for Doubtful Accounts/ Bad Debt Expense Medium Inherent Risk History of fraud Recent merger and public dissatisfaction Low Control Risk Medium Acceptable Audit Risk Tolerable Error: 3,000,000 euros Materiality Levels: 1% of revenue Specialist in currency exchange calculations Traditional audit committee responsibilities are designated to: The Internal Control, Risk Control, and Corporate Governance Committee President: Marco Reboa Assist BOD Approve annual audit plan Communicate with external auditor about accounting policies Lauren Wachi Rachel Horrigan ACCT 4160 Growth in Milk & Milk Derivatives Division Leader in Industry ROA=0.4 NWC=154,500,000 euros Current=3.7 Competitor: Lactalis Lactalis market share: 26% Parmalat market share: 29.5% European Food Safety Administration Questions? U.S. vs. International Reporting Compare prior year to current year content Investments in associates (from 3.3->60.1) Trade Receivables (from 484->529) Compare Parmalat to other firms in the industry Analyze financial and nonfinancial data Compare revenues to square feet of manufacturing plants Confirmations regarding related party transactions Evaluate estimates useful life of PPE for depreciation Parmalat Background cont. Audit Report Financial Accounting Standards Change in Auditors Parmalat & Lactalis Merger Accounting 0 + - = 9 8 7 1 2 3 4 5 6 c

Audit Presentation

Transcript: Wells Fargo Where was the Internal Audit? Fraud Triangle Incentives Incentives 1 Evoked verbatim by the Consumer Financial Protection Bureau (CFPB) statement, "Spurred by sales targets and compensation incentives, employees boosted sales figures..." Opportunity 2 Opportunity Bankers at even the lowest level were apparently empowered to: Covertly open accounts Transfer funds without authorization or consent Rationalization 3 Rationalization It becomes quickly apparent from the scale of this failure that there was a pervasive workplace culture permitting this behavior. 5,300 people lost their jobs, 2% of Wells Fargo's workforce. (This wasn't some isolated incident) Non-ironic quote from CEO during all of this, “Our entire culture is centered on doing what is right for our customers.” Do you think the internal auditors intentionally failed to detect this? Question: The Question

Audit Presentation

Transcript: Computer-Assisted Audit Tools and Techniques Application Control APPLICATION CONTROL INPUR CONTROL Source document controls Data coding controls Batch controls Validation Controls Input error correction Generalized data input systems INPUT CONTROL PROCESSING CONTROL OUTPUT CONTROL Testing Computer Application Computer-Assisted Audit Tools and Techniques

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