My Ssec Capstone Project To observe is to select what to obseve and the complexity of what not to observe

To observe is to select what to obseve and the complexity of what not to observe

To observe is to select what to obseve and the complexity of what not to observe!
Who is the observer? And what are the distinctions?-is credible-

Who is the observer and its not necesarily an indiviual-it could be a corporation-network-an insititution-and if so how does the insistution observe? Or New York times.
What is observed?
How is the relationship between the observed and the observer established?-You would A if you could find that out! Email could maybe be a relaionship and a a way to make a new sysytem, is create new enviroment like emial. Its a system and can get a new enviroment! See
Audits could have emails! Directly and it make s a new system. Just to look.
It could I just wanted to consider it. What if we had a new system-
—audit A!
and how are those observations carried out.

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And who oberves the observer and the obervation. C observes A who observes B! HMMM. Give

Deconstruction disects observations of others. See how the obervations of others are 1, 2, 3.
Nicholas Luman The Reality of the Past Medium in his book, is what —who and how—one will analyse mutiple orders of observations and the reseacher ust navigate the landscape of obsersations and see the layers of observations.

pull—> observer
Systems anaylisis-mathmatics-chemistry-see internet-see?? See examples, ancronyms, terminologies. System analysis applies to law as well-to focus here! Look

The Sarbane Oxleys Starts-
Sarbanes Oxley

1. Remember that all the information in this section, and Sarbanes Oxley in general, applies to PUBLIC companies. Some provisions of the act apply to private companies
2. “issuer” means a public company
3. The PCAOB is responsible for:
a. Establishing auditing standards
b. Registering accounting firms that will audit public companies
c. Inspecting accounting firms that will audit public companies
4. Sarbanes Oxley
a. The quality review partner and the engagement partner must rotate every 5 years
b. Registered public accounting firms that audit over 100 issuers must be inspected ANNUALLY
c. Registered public accounting firms that audit less than 100 issuers must be inspected EVERY 3 YEARS
d. Requires the report to be titled “Report of Independent Registered Public Accounting Firm”
e. In the scope paragraph it is required to reference “the standards of the Public Company Accounting Oversight Board”
f. In the opinion paragraph there has to be a reference to “U.S. generally accepted accounting principles”
g. Auditor must add city and state along with their signature
h. Public accounting firms must retain audit documentation for 7 years from the report release date
i. The final documentation completion date is 45 days after the report release date
j. In evaluating whether a material misstatement exists, the auditor focuses on materiality at the financial statement level
k. The auditor must communicate in writing all material weaknesses identified during the audit to management and the audit committee
l. When one or more material weaknesses exist, the auditor should express an adverse opinion
m. Remember that there is nothing wrong with related party transactions, they just have to be disclosed appropriately
n. The auditor should add an explanatory paragraph to the audit report to identify a material change in accounting principle

Audits use-
1. GAAS General Standards
a. Training
i. The auditor must have adequate technical training and proficiency to perform the audit
b. Independence
i. The auditor must be independent in all matters relating to the audit
c. Due Professional Care
i. The auditor must perform due professional care during the audit and in preparing the audit report
2. Standards of Field Work
a. Planning and supervision
i. The auditor must adequately plan and properly supervise any assistants
b. Internal control
i. The auditor must obtain a sufficient understanding of the entity, its environment, its internal controls, in order to assess the risk of material misstatement whether due to fraud or error, and to design the nature, timing, and extent of further audit procedures
c. Audit evidence i. The auditor needs to obtain sufficient and appropriate audit evidence through the audit procedures performed in order to form an opinion on the financial statements

3. Standards of Reporting
i. The auditor is expressing an opinion on whether the financial statements comply with GAAP or not
b. Consistency
i. In the audit report the auditor must identify circumstances when GAAP has not been consistently applied in relation to prior periods
c. Disclosure
i. If an auditor decides that the disclosures are not adequate, the auditor must state this in the auditor’s report
d. Opinion
i. The auditor expresses their opinion, or that they are not able to give an opinion. When the auditor can’t give an opinion, they need to state the reasons in the audit report.
e. Principles Underlying an Audit
i. The purpose of an audit is for the auditor to express an opinion on whether the financial statements are presented fairly and in accordance with GAAP or the applicable framework.
ii. An audit is conducted on the premise that management and those charged with governance have the responsibility:
1. For the preparation and fair presentation of the F/S
2. To provide the auditor with all information relevant to the preparation and fair presentation of the F/S
iii. Auditors are responsible for having the competence and capabilities to perform the audit and maintaining professional skepticism
iv. In order to express an opinion, the auditor needs to obtain reasonable assurance that the financial statements are free from material misstatement
v. To obtain reasonable assurance- which is a high but not absolute level of assurance- the auditor:
1. Plans adequately and properly supervises staff
2. Determines the appropriate materiality levels
3. Identifies and assesses risks of material misstatements
4. Obtains appropriate audit evidence
vi. The auditor is not able to obtain absolute assurance that the F/S are free from material misstatements because of inherent limitations related to:
1. Nature of financial reporting
2. Nature of audit procedures
3. The audit needing to be performed in a reasonable time period that balances benefit and cost
vii. The auditor expresses an opinion based on the audit evidence obtained during the audit. Or, the auditor states that an opinion cannot be expressed. This is all in the auditor’s report
4. Professional Standards
a. GAAS has been superseded by ‘Statements on Auditing Standards’ (SASs)
i. There are two types of ‘professional requirements’
1. Unconditional requirements: These must be complied with without exception
2. Presumptively mandatory requirements: Compliance is expected but rare exceptions are permitted (usually the word “should” is used”
5. Quality Control Standards
a. These are statements issued by the AICPA’s Auditing Standards Board
b. They apply to everything about accounting and auditing engagements, and are like general guidelines for implementing a quality control system
i. 6 Elements to a quality control system
1. Leadership responsibilities such as “tone at the top”
2. Relevant and ethical requirements
3. Acceptance and continuance of clients and specific engagements
4. Human resources
5. Engagement performance
6. Monitoring- meaning ongoing quality control efforts
c. The engagement partner is responsible for overall audit quality
6. Overview of the Audit Process
a. Audit planning
i. Decide to accept the engagement
ii. Perform risk assessment to address the risks of material misstatements
iii. Evaluate requirements for staffing
iv. Prepare the audit programs for each audit area
b. Internal Control Considerations
i. Obtain an understanding of the client’s internal controls
ii. If relying on certain internal controls to reduce substantive testing, need to perform “tests of control” to make sure those controls are operating as intended
c. Substantive Audit Procedures
i. Substantive procedures are procedures performed “to verify”. You’re gathering audit evidence to verify what’s been put on the financials and to detect any possible misstatements.
1. Analytical procedures: These are comparisons to expectations or industry benchmarks in order to get reasonable assurance that the accounts being tested are fairly stated
2. Tests of details
a. Tests of ending balances: This is testing what makes up an ending balance in an account.
b. Tests of transactions: Testing transactions that cause a balance to change from beginning of year to end of year
d. Reporting
i. Conclusions reached are expressed in the form of an opinion, which is on the audit report
7. Overview of the Auditor’s Report
a. Under the Clarified Standards, there are now 4 main sections:
i. First section identifies the nature of the engagement and the entities financial statements involved – this is 1 sentence
ii. Second section is labeled “Management’s Responsibility for the Financial Statements”. This states that management is responsible for the fair presentation of the financial statements and the implementation of internal control
iii. Third section is labeled “Auditor’s Responsibility” which states how an audit is performed
iv. Fourth section is for the opinion: it expresses the auditor’s opinion.
1. The term “unqualified” has been replaced with “unmodified” under the Clarified Standards
8. Different Types of Engagements Besides Audits
a. When the engagement is for either a compilation or a review for a private entity, then the Statements on Standards for Accounting and Review Services (SSARS) apply.
b. When an accountant provides assurance on management representations or subject matter other than traditional financial statements, the “Statements on Standards for Attestation Engagements” (SSAEs) apply.
c. Levels of assurance within an engagement
i. Positive assurance: This is the highest level of assurance and is the type of assurance provided under an audit
ii. Negative assurance: This is a moderate level of assurance associated with a review

Gaps in Audit
A fraud is a gap, that you don’t have to find it, therefore CIA and CPA are to find correct reporting and use GAAP with audit. A problem is not finding fraud and the person working on the audit is not garenteed to find fraud nor is it the purpose that an audit have anything wrong. The audit is for assurance with Financial Staments, Form 10-K, risk evaualtion, with thrid party users.

An example of what went wrong with not finding fraud:
The problem could explain H. Rosenblum, Inc. v. Adler1 TOUCHE ROSS & CO. the Big 4 is not fraud specialty. For this case it feels opposite, not needing to find fraud is one point, though to examine fraud, negligence, gross negligence, and breach of warranty is the case. For there to be the complaint alleging fraud, negligence, gross negligence, and breach of warranty had severe effects to the merger of another company. “Plaintiffs filed an amended complaint in four counts alleging (1) fraud, (2) negligence, (3) gross negligence and (4) breach of warranty. Defendants filed an answer and among the defenses raised asserted lack of privity of contract between plaintiff and defendant. Defendants moved for a partial summary judgment dismissing the plaintiffs’ negligence claim insofar as it was based upon the 1971 audit of Giant, contending that since there was no privity between plaintiffs and defendants at the time the 1971 audit was performed there was no duty owed plaintiffs by defendants.”2

Surveys and Statistics
1. reality is a good area to survey. Good surveying and audit include Heights Community Congress v. Hilltop Realty, Inc., 629 F. Supp. 1232, 1983 U.S. Dist. LEXIS 112643 and these 3 things 1. 2. 3.
2. Survey Seabron v. Am. Family Mut. Ins. Co., 2012 U.S. Dist. LEXIS 5151, 2012 WL 1228294
Have documents and communications through Seabron v. Am. Family Mut. Ins. Co., 2012 U.S. Dist. LEXIS 5151, 2012 WL 122829 and for the audit they use interigation, camera, and audtis for studying a camera release


With analytics, there are also 4 types of ratios that will be used:
1. Liquidity ratios: these measure a company’s ability to meet its obligations
2. Profitability ratios: measure of a company’s operating performance for a period of time
3. Activity ratios: these measure the company’s effectiveness in putting its assets to use
4. Coverage ratios: this measures the company’s ability to meet its obligations over time

Observe these in audit to find in accounting for each observed-this
Test of details

Substantive analytics-4 key considerations:
Natureof the assetain
predictability of the relionship
the reliability of the data
The precision of the expectation

With audit analytical there are 4 types of ratios:
Liquidity ratio-measure a companies ability to meet its obligations.
Do 11 of these
1. In a forensic audit, accountant explained Securities and Exchange Commission v. Mark David Shapiro, et al; 2008 Jury Verdicts LEXIS 498705 The SEC brought suit against defendants in the U.S. District Court for the Eastern District of Texas On Sept. 15, 2005. In this case, the SEC argued the payemnt of $135,000 for: violation of the Securities Act of 1933 (Securities Act), Section 17(a); violation of the Securities Exchange Act of 1934 (Exchange Act), Section 10(b) and Rule 10b-5; violation of the Exchange Act, Section 13(b)(5) and Rules 13b2-1 and 13b2-2; aiding and abetting Fleming’s violation of the Exchange Act, Section 10(b) and Rule 10b-5; aiding and abetting Fleming’s violation of the Exchange Act, Section 13(a) and Rules 12b-20, 13a-1 and 13a-13; and aiding and abetting Fleming’s violation of the Exchange Act, Sections 13(b)(2)(A) and 13(b)(2)(B). This is interesting because the SEC is making liquidity with this problem. Fraud is a crime that is used to alter revenue statement,s with obtaining bogus side letters from vendors that Fleming Companies, Inc. used to improperly accelerate accounting recognition of the vendors’ up-front payments, which inflated the company’s earnings. In turn, the inflated earnings allowed Fleming to meet external analyst expectations and thereby prop up Fleming’s stock price. There was liquidity problems and chapter 11 bankruptcy. Its the liquidity that was noted, as not to use 43 percent of the company’s 2001 earnings, 45 percent of Fleming’s first quarter 2002 pre-tax earnings and over 60 percent. Scott A. Barnes testified forensic audit and accounting to the case for $135,000 Civil Penalty and bankruptcy pay to SEC.

2. Focusing on forensic accounting, a Fraud Class Action Suit is for Lehman Brothers’ and Bankruptcy, to settle for $ 417,000,000.00. The Lehman Brothers Securities and ERISA Litigation; 2011 Jury Verdicts LEXIS 2014376 and in these court trial the Lehman Brothers Holdings Inc. is not able to keep going or get further.

3. A liquidity issue7 In re: Eastman Kodak ERISA Litigation; 2016 LexisNexis Jury Verdicts ; Settlements 68
4. Arnlund v. Deloitte ; Touche Llp, 199 F. Supp. 2d 461, 2002 U.S. Dist. LEXIS 8874, Fed. Sec. L. Rep. (CCH) P91,9148 A scienter is manipultive and decietful at fraud so to use it is under the Securities Exchange Act 1934. Its a Implied Private Rights of Action, Deceptive ; Manipulative Devices and Civil Liability Considerations, Securities Litigation Reform ; Standards.
5. SEC v. Conaway, 698 F. Supp. 2d 771, 2010 U.S. Dist. LEXIS 4254, Fed. Sec. L. Rep. (CCH) P95,5809

Profitability ratio-measure a companies operating performance.
Do 12 of these
1. This one had everything how to do it -try to explain how to do it. World Radio Lab. v. Coopers ; Lybrand, 251 Neb. 261, 557 N.W.2d 1, 1996 Neb. LEXIS 22510
2. Try Kalish v. Franklin Advisers, Inc., 742 F. Supp. 1222, 1990 U.S. Dist. LEXIS 9178, Fed. Sec. L. Rep. (CCH) P95,36711
3. Another Swope v. Siegel-Robert, Inc., 74 F. Supp. 2d 876, 1999 U.S. Dist. LEXIS 1597312
4. World Radio Lab. v. Coopers ; Lybrand, 251 Neb. 261, 557 N.W.2d 1, 1996 Neb. LEXIS 22513
5. Archer Daniels Midland Co. v. United States, 917 F. Supp. 2d 1331, 2013 Ct. Intl. Trade LEXIS 71, 35 Int’l Trade Rep. (BNA) 1543, SLIP OP. 2013-66, 2013 WL 245083114
6. In re Browning-Ferris Indus. Sec. Litig., 876 F. Supp. 870, 1994 U.S. Dist. LEXIS 2041615
Activity ratio-measure the companies effectiveness inputting its assets to use.
Activety ratios are accoutning ratios to convert accounts to their balance sheet. In a company, knowing that the activety ratio is for finding cash and sales that turn the products and productivety to revenues.
Coverage ratio-measure company abily to meet its obligations.
1. Total Tax Increment Income/Total Outstanding Debt = Debt Service Coverage Ratio16
2. he coverage ratio is 1 % to…use in example In re Revco D.S., Inc., 1990 Bankr. LEXIS 296617
3. To get this audit ratio is with(work on it there is what to say) Paloian v. LaSalle Bank Nat’l Ass’n (In re Doctors Hosp. of Hyde Park), 507 B.R. 558, 2013 Bankr. LEXIS 4244, 2013 WL 5524696 18
4. How to. SEC v. City of Victorville, 2017 U.S. Dist. LEXIS 20960719
5. .
6. .
7. Have an A with this—. VFB LLC v. Campbell Soup Co., 2005 U.S. Dist. LEXIS 19999, 2005 WL 223460620
8. .
9. .


1. Funds of the Payroll are audit defendant. Plaintiff is the one who is owed the money. In this case Trs. of the United Health & Welfare Fund v. N. Kofsky & Son, Inc., 2015 U.S. Dist. LEXIS 1277, 2015 WL 5917321had made this case study to include audit of payroll is for ERISA and for not paying United Health and Welfare Fund (“Fund”), that is bringing action to have the Employee Retirement Income Security Act of 1974 (“ERISA”), and the Labor Management Relations Act of 1974 (“LMRA”),and is against the defendants N. Kofsky & Son, Inc. (“NKS”), Kofsky & Son, Inc. a/k/a Kofsky & Son Plumbing (“KSI”), Richard Kofsky and Stephen Kofsky. ERISA is required. An audit examined payments through payroll-which are—put all the ERISA stuff:…
5.Underpayment in net funds. Ethridge v. Masonry Contractors, Inc., 536 F. Supp. 365, 1982 U.S. Dist. LEXIS 11744, 3 Employee Benefits Cas. (BNA) 151722
6. Pension Cent. Pa. Teamsters Pension Fund v. Power Packaging, Inc., 2004 U.S. Dist. LEXIS 9914, 33 Employee Benefits Cas. (BNA) 143223

Thinking about it— put 3 lines

The research investigation will be guided by audit and the procedures! The audit is going
to need the start procedures and I want to learn ways to try my own procedures. There are
some problems that I need to understand:
? Surveys, interviews, observations, experiments with procedures to audit, what I
like is to recalculate and learn why the audit had that issue. An important issue I
have, is learning to know what risk is, and I want to study familiarity of past risks!
1. Study on surveys for audit and procedures of audit! In the audit the minamum amount of work includes
2. .
3. .
4. In this survey the rents are included for Sonoma Apt. Assocs. v. United States, 134 Fed. Cl. 90, 2017 U.S. Claims LEXIS 138324. There is requirements to audit, and the requirements of the section 515 program submit the annual financial reports, with properties in the section annual third-party audits. So this is the process, application for rents, with verification process and survey for income then rental survey is having average monthly rent for one, two, and three-bedroom units, the average square footage of each unit type, the average rent per square foot. The auditor also is needing to visit the seven apartment complexes as the survey is a CPA and must see inventory and locations to figure
7. MCLS § 21.45 Public accountants are having autis to require audit in accordance with generally accepted auditing standards (GAAS), and with the auditing standards from the state treasurer.
Audit filed with the state treasureer is also for county audits and a CPA will finish an accoutning audit25.
8. . K.S.A. § 46-1106
9. .
10. .
11. Serveys are what is needed. Owensboro Health, Inc. v. Burwell, 2016 U.S. Dist. LEXIS 106722, 2016 WL 4361527 is needing reimbursement specialized examination!

Through surveys and audit, the audit is Freedom of Information Act (“FOIA”) on October 16, 2006, has forty-five hospitals! In this there is an audit and serveying. Problems are finding the audit information for original costs.
Information for Medicare Program is charging actual cost and regardless of the actual cost incured, hospitals are working too differently that the original costs attributed to overbilling. Is this correct? Which formula should we work on-
put 4 formulas

there are issies including:
Through Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395 et seq. problems are

For each area,surveying the occupational three years, has included,

Banking Accoutning
The GAAS for banks includes
1. Forensic Accoutning may apply Paloian v. LaSalle Bank Nat’l Ass’n (In re Doctors Hosp. of Hyde Park), 507 B.R. 558, 2013 Bankr. LEXIS 4244, 2013 WL 552469626. The audit applied forensic specialist Edward McDonough, a Managing Director at Alvarez & Marsal’s Dispute Analysis ; Forensic Services, LLC.
With the annual financial statements that were audited by KPMG with audited financial statements contain yearly comparative balance sheets, income statements, and cash flows. Also in the audit was percentages, and ratios through

for hospital financial statements and watch with the audited financial statements with bankruptcy and bank pass through-for many accounts through
In this case Paloian v. LaSalle Bank Nat’l Ass’n (In re Doctors Hosp. of Hyde Park), 507 B.R. 558, 2013 Bankr. LEXIS 4244, 2013 WL 5524696 the Generally Accetped Accoutning Pricipals (GAAP) regular hospital fees Medicare and Medicade rule is GAAP only reacurring expensies are opperating expenses through hospitals audited financial statements. Not recognized and not on a regular basis reaccuring, balance sheet expeneses could see normal removal expense and are expense to be removed and might be extraodinary expenses through audit Paloian v. LaSalle Bank Nat’l Ass’n (In re Doctors Hosp. of Hyde Park), 507 B.R. 558, 2013 Bankr. LEXIS 4244, 2013 WL 552469627 in this case.

? More interest for the PROCEDURES
Audit procedures and go through this one-
for good thinking
For Arnlund v. Deloitte ; Touche Llp, 199 F. Supp. 2d 461, 2002 U.S. Dist. LEXIS 8874, Fed. Sec. L. Rep. (CCH) P91,914 is explaining what scienter is and where! To prove scienter plaintiff must demonstrate knowing or intentional misconduct on part of defendant, or intent to deceive, manipulate, or defraud investors 15 USCS § 78j28
Scienter, the ownership mattered for—with vid
Learn about Scienter is a big problem. The problem begins with Arnlund v. Deloitte ; Touche Llp, 199 F. Supp. 2d 461, 2002 U.S. Dist. LEXIS 8874, Fed. Sec. L. Rep. (CCH) P91,91429 and this may be premediated. To have a scienter it must prove that the defendant acted intentionally for the scienter to be wrong.
Scienter are in fraud cases because the scienter violates anti-fraud Securities Exchange Act SEC Act) and a scienter is a state of mind that has intent and knowledge to do wrong but the defendant may not know and this is an interesting point that is scienter can perpetrate the premeddition state of mind to do it!
Law is able to 1. negligence 2. premedication and 3. scienter. For the problem is
and scienter is intent or knowledge of wrongdoeing. It means offending party has knowledge of the wrongness of the event prior to committing it. It has desire to know and seperate one thing from another
Is there a difference? These could exlplain more foreclosures. Who has ownership and why is it going on for audit, could explain the . Bankruptyc court and forensic auditors are finding foreclosure problem, with Arnlund v. Deloitte ; Touche Llp, 199 F. Supp. 2d 461, 2002 U.S. Dist. LEXIS 8874, Fed. Sec. L. Rep. (CCH) P91,91430.

Talk for 10 pages abou this
The problems with audits include

Audits are part

Audits are having Health Care forensic examinations and in these put five points

Nursing and personal care facilities are using auditing

The Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act 1995

For accotig DUBELKO v. ABDALLA, 2006 Cal. App. Unpub. LEXIS 9493 31


Conducting Survey, Audit, and Tracer Services of Training and Ed; Onvia RFP Opportunity Database34

? Analytical assertians.
Internal Controls
1. The auditor is required to document their understanding of the client’s internal control structure
a. This includes a written audit plan for gathering sufficient audit evidence (the audit program)
b. It also includes an engagement letter that summarizes the timing and extent of procedures to be performed, as well as outlining management’s responsibilities with regards to the audit
c. The whole point of “gaining an understanding” of internal controls is to get the knowledge of the client necessary to plan the audit
d. The main thing the auditor is interested in about the internal controls is whether they affect the financial statement assertions
2. “Obtaining an understanding of internal controls” involves evaluating the design of the control, and determining whether the control has been implemented. The auditor performs “walkthroughs” of key controls to verify that the controls have been implemented
a. The auditor should focus on the substance of the procedures (are they working and effective?) instead of their form, because management might have appropriate controls on paper, but they might not be being enforced
3. For accounts that are immaterial, AND have a low inherent risk, the auditor does NOT need to perform procedures to evaluate internal controls
4. Sometimes an auditor will make a flowchart to document a client’s accounting system, and this depicts the auditor’s understanding of the system
5. Preliminary Evaluation
a. The auditor first considers the adequacy of controls, or the “design effectiveness”, which is how effective they are on paper
i. Consider any errors that could occur with the controls, and any kinds of procedures that could prevent or detect these errors
ii. Then evaluate the implications of any weaknesses identified
b. If the auditor decides to rely on internal controls to reduce substantive audit procedures, then the auditor will perform “tests of controls” to make sure that the ‘design effectiveness’ of the controls is also working like they’re supposed to (operating effectiveness)
c. If the auditor is NOT going to rely on controls, then the audit plan will be “wholly substantive”, which means the auditor will test the account through substantive procedures and will not rely on the internal controls
i. A primary criteria of any system of internal control is the cost-benefit relationship. The cost of a company’s internal controls should not exceed the benefits
ii. If the auditor questions management’s integrity, the audit could not be conducted and the auditor would withdraw from the engagement
d. Remember the formula IR x CR x DR = audit risk
i. The auditor assess control risk and inherent risk because it affects the level of detection risk that the auditor can accept
ii. The auditor is NOT required to assess operating effectiveness of controls. This will only be done if the auditor decides to perform “tests of controls” in order to reduce substantive testing
6. Assertions
a. The “assertions” are key to the whole audit process. The assertions are basically the underlying claims made by management about the financial statements
b. It helps a LOT to just “think” about the meaning of the words, especially in the context of the question being asked. For example, “completeness”… this includes procedures or tests to determine if a population is complete- or if everything has been included that should be included.
c. They are grouped into 3 categories:
i. Account balances (4 assertions)
1. Existence: This assertion means that all the assets, liabilities, and equity actually exists
2. Completeness: That all assets, liabilities, and equity that should have been recorded, have been recorded. That nothing has been left out
3. Rights and Obligations: That the entity holds or controls the rights to its assets, and the liabilities are that of the entity. Any restrictions on either need to be disclosed
4. Valuation and Allocation: That the assets, liabilities, and equity are included in the financial statements at the proper amounts
ii. Presentation and disclosure (4 assertions)
1. Occurrence and Rights & Obligations: That the disclosed events and transactions have actually occurred and pertain to the entity
2. Completeness: That all disclosures that should have been included have been included. Nothing left out.
3. Classification and Understandability: That the financial information is appropriately presented, described, and clearly expressed
4. Accuracy and valuation: That the financial information is disclosed fairly and at the appropriate amounts
iii. Classes of transactions and events (5 assertions)
1. Accuracy: That amounts and other data have been recorded appropriately
2. Occurrence: That transactions and events recorded actually occurred
3. Completeness: That all transactions and event that should have been recorded have been recorded. Nothing left out
4. Cutoff: That the transactions have been recorded in the proper period
5. Classification: That the transactions have been recorded in the proper accounts
iv. Read through the assertions until you understand them. This makes everything about AUD easier to understand
7. Internal Control Standards
a. Definition
i. Internal controls are processes effected by those charged with governance or management designed to provide reasonable assurance about the achievement of the entity’s objectives with regard to financial reporting, effectiveness of operations, and compliance with laws
ii. Internal control consists of 5 elements:
1. Control environment
a. This is made up of the policies and procedures to establish overall control of the organization (the tone at the top)
2. Risk assessment a. The policies set to identify and analyze relevant risks so that they can be managed
3. Information and communication systems
a. The policies and procedures to identify, capture, and exchange relevant information so that employees can meet their responsibilities in a timely manner
4. Control activities
a. The policies and procedures set so that management’s objectives will be achieved
b. This includes segregation of duties, physical controls, and authorization
5. Monitoring
a. The policies and procedures to measure the effectiveness of internal controls as time goes on
b. Risk assessment procedures: These are what the auditors do to assess the ‘risk of material misstatement’
i. Inquiries of management and others
ii. Observation and inspection of documents
iii. Analytical planning procedures
iv. The review of information from prior periods
v. Audit team discussing about the risks identified. Discuss how the risks affect specific areas of the audit
c. Documentation: Certain things the audit team is required to document
i. Audit team discussion about RMM and the key elements about the entity, its environment, etc
ii. The assessment of RMM at the financial statement level and at the relevant assertion level
iii. Identified significant risks and the related controls the auditor obtained an understanding of (walkthroughs)
d. Other considerations:
i. The best way to compensate for lack of segregation of duties at a small company is to have greater management oversight of overlapping duties
ii. The auditor is NOT obligated to search for significant deficiencies in the design or operation of internal control. But, if they are found, the auditor is required to communicate them to those charged with governance
iii. If documentary evidence of certain controls does not exist, the auditor can test the controls by observation and inquiry
iv. Remember that an auditor is required obtain an understanding of the client’s internal controls, AND document their understanding of the controls
1. The auditor is NOT required to:
a. Perform tests of controls (but can if necessary)
b. Search for significant deficiencies in internal controls (but they may find them)
c. Determine whether controls are suitably designed to prevent or detect material misstatements (the auditor does this, but ONLY to controls related to significant assertions and accounts, NOT all controls)
v. Regardless of the assessed level of control risk, the auditor will always perform some substantive tests to lower detection risk for significant transaction classes
vi. When the auditor assesses control risk below the maximum level, the auditor is required to document BOTH their basis for this conclusion, and their understanding of the internal control elements
vii. If there is substantial risk that there has been intentional misapplication of accounting principles or management override of controls, the auditor would likely conclude that the audit cannot be performed
e. Required Communications
i. There are 2 things an auditor must communicate with regard to the design or operation of internal control:
1. Any identified “material weaknesses”
a. A deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, detected, or corrected on a timely basis
2. Any identified “significant deficiencies”
a. A deficiency in internal control that is less severe than a material weakness but important enough to be communicated to those charged with governance
ii. The auditor has to decide if a deficiency is a material weakness or a significant deficiency
iii. Any identified significant deficiencies or material weaknesses are then communicated to management and those charged with governance. This communication is to be made within 60 days of issuing the audit report. There should also be a restriction on the distribution of this communication. It is only for the audit committee, those charged with governance, and management
iv. The communication should also include a paragraph stating that the purpose of the audit was to report on the financial statements and not provide assurance on internal control. The deficiencies in internal control happened to be found as a result of auditing the financial statements
v. If no significant deficiencies are found, the auditor does NOT report that none were found. There is simply no communication about significant deficiencies if none are found
f. Using an Internal Auditor
i. If a client has internal auditors that are competent and objective, they can be used to perform tests of internal controls and substantive tests
1. To assess the internal auditors’ competence, the CPA should obtain info about their educational background, professional experience, and professional certifications
2. To assess the objectivity of the internal auditors, the CPA should determine the organizational level to which the internal auditors report
ii. BUT, the external auditor cannot allow judgment from the internal auditor on materiality of misstatements, or the evaluation of accounting estimates. The internal auditor can be used to help test internal controls and perform substantive tests, but the final conclusions must be made by the external auditor
iii. An internal auditor’s work would NOT likely be used in areas requiring significant auditor judgment such as valuation of intangible assets, valuation of related party transactions, valuation and existence of contingencies, or significant estimates

8. Internal Control Transactions
a. Segregation of duties is best tested by observing employees as they apply control procedures. Segregation of duties involves separating duties so that employees aren’t in a position to both commit fraud and then be able to cover it up
b. Internal Control Objectives for Sales
i. Segregation of duties: The 3 main types of tasks that should be separated are:
1. Authorization (execution) such as granting credit
2. Access (custody) such as custody of the prenumbered sales invoices or the goods being handled by the shipping department
3. Accounting (recordkeeping) such as entering customer’s order form and dealing with receivables and collections
ii. Physical controls:
1. Computer passwords and different account types within the system with different levels of permissions
2. Custody of cash receipts and inventory should be handled by employees without access to recordkeeping
iii. Authorization
1. Transactions should be authorized
2. Adjusting journal entries should be reviewed and approved by management
iv. Review
1. Monthly statements should be sent to customers
2. Related documents such as the sales invoice, sales order form, and shipping documents should be compared

3. Cutoff should be verified to make sure transactions have been recorded in the proper period

v. Information processing
1. Focus on the entity’s records regarding the “audit trail”
2. All key documents should be pre-numbered and the sequence should be accounted for
3. Aged trial balance should be reconciled to the general ledger periodically

c. Internal Control Objectives for Receipt of Cash
i. When cash (checks) are received, they are posted to a remittance log which is a listing of all cash receipts
ii. The transaction is also posted in the cash receipts journal, and all cash receipts will be posted to that month’s receipts in the general ledger
iii. Different employees should open the mail, do the accounting activities, prepare the deposit of checks, and reconcile the bank accounts
iv. Each cash receipt should be listed immediately when the mail is open
1. The best control over cash receipts is a bank lockbox system- then employees never touch cash receipts
v. Employers will “bond” employees that handle cash receipts. Bonding insures the company against loss from illegal acts by employees, and this reduces the risk of dishonesty by employees because the bonding company must approve the employees in the first place, and if employee theft happens, the bonding company does an investigation before paying the company back. So, bonded employees know they will be highly scrutinized if theft occurs.
vi. Lapping is when cash received from a customer is stolen and the shortage is hidden by crediting the first customer’s account with cash received from a second customer. To prevent this, two different people should be receiving cash, and posting payments received to the accounts receivable ledger
d. Internal Control Procedures for Expenses/Disbursements
i. The purchasing department should make the purchases using pre-numbered purchase orders ii. The receiving department takes possession of deliveries
iii. The accounts payable department should handle the accounting function and approve payments
iv. Only designated employees should be able to make purchases for the company
v. Checks should require dual signatures
vi. For both receipts and disbursements bank reconciliations should be prepared on a timely basis
vii. Again, all key documents should be pre-numbered and the sequence should be accounted for as well
viii. Supporting documents such as invoices should be canceled as “paid” as soon as they are paid

e. Internal Control Procedures for Payroll

i. Process consists of employee timecards, time sheets, or time sheets for salary employees taken and then payroll is prepared and recorded in the payroll journal. Then checks are given to employees, and the month’s payroll is posted to the general ledger

1. The approval of time cards by an employee’s direct supervisor is one of the best controls for making sure employees only get paid for work performed
ii. HR keeps records that contain pay rates and personnel files. Certain HR employees should be the only ones who have access to these files
iii. The treasury issues the checks and signs them and distributes the checks
iv. Payroll department calculates payroll and does the record-keeping each period

1. Valcarcel v. Soc. Dev. Comm’n, 2010 U.S. Dist. LEXIS 88563, 2010 WL 3386592 35 It is interesting that the auditor was said to(and write 3 things).
? Mathmatical! Need more understanding of why we need the mathmatical evaluations!
Gathering “Audit Evidence”
1. Audits are planned, auditing is risk assessment, and the different audit areas are with auditor is focusing on substantive approach with tests, for tests of controls reduce amount of substantive testing for any given audit area-
a. Substantive testing can be either substantive analytics, or tests of details
i. Substantive basically means “to substantiate”, which is what an audit is… verifying what management has put in the financial statements
ii. “Tests of details” can either be testing what makes up the ending balances of accounts, OR tests of transactions during the year
iii. For substantive analytics, there are 4 key considerations:
1. Nature of assertion
2. Predictability of relationship
3. Reliability of data
4. Precision of the expectation
iv. With analytics, there are also 4 types of ratios that will be used:
1. Liquidity ratios: these measure a company’s ability to meet its obligations
2. Profitability ratios: measure of a company’s operating performance for a period of time
3. Activity ratios: these measure the company’s effectiveness in putting its assets to use
4. Coverage ratios: this measures the company’s ability to meet its obligations over time
2. Sufficient Appropriate Audit Evidence
a. Sufficient refers to the quantity of audit evidence
i. This relates to the risk of misstatement. The higher the risk, the more evidence is needed
b. Appropriate refers to the quality of evidence in terms of its relevance and reliability. Reliability is affected by the source:
i. Evidence obtained by the auditor is more reliable than evidence obtained indirectly (such as an auditor actually observing controls vs viewing the list of controls provided by the client)
ii. Evidence is more reliable when obtained from independent sources (such as bank confirmations)
iii. Evidence obtained from the client is more reliable when the internal controls are effective
iv. Evidence is more reliable when it is documented such as on paper or in electronic form
v. Evidence provided by original documents is more reliable than a photocopy
c. The auditor is using audit evidence to support the applicable assertions for any given account. Re-read the “assertions” section above
(To Math)3. Misstatements
a. A misstatement is any difference between the amount, classification, presentation, or disclosure of what’s reported on the financial statements, and the amount, classification, presentation, or disclosure of what is required in order to be in accordance with the applicable accounting framework. In other words, differences the auditors find in what management has on their financials and what is correct
b. Misstatements are accumulated as the audit progresses, and the auditor evaluates whether the audit strategy needs to be changed based on the misstatements found
i. The auditor decides what amount is “clearly trivial”, and any misstatements below this threshold are ignored and not accumulated
ii. The auditor does NOT tell management the amounts for materiality and what is trivial
iii. Differences between the auditor and management about accounting estimates are not usually considered misstatements. This is because judgment or “educated guessing” is involved
1. However, management’s unreasonable accounting estimates for something like the amount of bad debt allowance would be a “judgmental misstatement”
c. Misstatements should be communicated with management as they are found, and management can either book the adjustments, or if management refuses to make the adjustment, the auditor needs to evaluate the effects of not making the change on the financial statements
i. The auditor needs to decide whether the uncorrected misstatements are material, either individually or all added together, based on their size and nature, and any effects of uncorrected misstatements in prior periods
ii. Even if management makes the entry to book a misstatement, the auditor still records all non-trivial misstatements found
4. Documentation
a. Audit documentation includes the workpapers and the record of audit procedures performed and audit evidence obtained
b. The main point with audit documentation is to document everything performed to the extent that any experienced auditor with no association with the engagement could come back through and obtain a “clear understanding of the work performed”
c. Significant abstracts or copies of significant contracts should be retained as audit documentation
d. Any significant audit findings should be documented
e. The final engagement file is to be completed within 60 days after the report release date. PCAOB (public clients) requirement is 45 days
i. Audit documentation is to be retained for 5 years. PCAOB is 7 years
5. Other Audit Evidence
a. Negative confirmations are when the recipient of the confirmation is asked to return the confirmation ONLY if there is a difference. If the confirm is not received, it is assumed the balance is correct. But, these types of confirmations rarely provide significant explicit evidence
b. Positive confirmations ask the recipient to respond whether or not they agree with the client’s recorded amount
c. The auditor is should maintain control over the confirmation requests and responses
d. For accounting estimates, the auditor’s objective is to evaluate whether accounting estimates are reasonable in the circumstances
i. When evaluating an entity’s accounting estimates, the auditor should focus on estimates that are susceptible to bias
ii. The auditor evaluates estimates by gaining an understanding of how management develops its estimates
e. For evaluating fair value estimates, the best indicator of “fair value” that the auditor can rely on is published prices in an active market (such as stock prices)
i. The auditor is NOT required to engage a specialist for evaluating management’s fair value estimates. The auditor may choose to do so if the auditor doesn’t have the necessary skill and knowledge, but it is not a required audit procedure
f. The auditor sends the client’s attorney an “attorney letter” to corroborate information regarding contingent liabilities or pending or threatened litigation against the company being audited
i. It is still management’s responsibility to provide the information about pending litigation to the auditor. The primary purpose of the attorney letter is to corroborate what management has said regarding pending litigation
g. The auditor is required to obtain written representations from management to corroborate management’s verbal responses to important questions from the auditor
i. This is called the “rep letter” or the representation letter
ii. The date of the rep letter should coincide with the date of the auditor’
iii. It usually includes the following:
1. That management is responsible for the fairness, internal control, significant assumptions, and related party transactions as they pertain to financial reporting and the financial statements
2. That any uncorrected misstatements are immaterial
3. That the effects of any litigation or claims against the company have been properly accounted for and disclosed
4. That all relevant financial records were made available to the auditor
5. There was no fraud involving management or employees with significant financial reporting responsibilities

h. Related party transactions
i. Procedures to identify related party transactions include:
1. Inquiry of management, or requesting a list of all related parties to the entity
2. Reviewing board minutes
3. Inspecting large, unusual transactions. This would be something like seeing a large note payable with a 1% interest rate
ii. All related party transactions need to be disclosed as such, and the auditor should perform procedures to understand the business purpose and financial statement effect of these transactions
1. The auditor’s main focus once related party transactions are identified, is adequate disclosure by management
i. Subsequent events
i. Subsequent events are events that happen after the date of the financial statements, but before the date of the auditor’s report
1. Financial statements might be dated as Dec 31, 2014 and the auditor’s report isn’t issued until March 2015. So it would include any events that happened during that time
ii. 2 types of subsequent events:
1. Events that require adjustment. If the event provides better information about conditions as of the balance sheet date, it will be included
2. Events that require disclosure: If the event doesn’t relate to conditions as of the balance sheet date, but is still material, it will be disclosed
iii. The auditor’s responsibility for the audited financial statements ends when the auditor’s report is issued, UNLESS the auditor becomes aware of additional information that existed as of the balance sheet date. If this happens, the auditor must evaluate whether the information would affect the current report
iv. The main ways that the auditor reviews subsequent events is by reading the latest interim financial statements, the latest board minutes, inquiring with the client’s attorneys regarding any pending litigations, or asking management specific questions
j. Going Concern
How the hell would you check a going concern? First-
i. The auditor evaluates whether there is “substantial doubt” that the entity will be able to continue as a going concern
1. Indicators of substantial doubt
a. Recurring losses, recurring negative cash flows, working capital deficiencies
b. Default on debt agreements, violations of debt covenants, restructuring of debt
c. Dependence on a few large customers
d. Economic downturn for the industry
ii. When the auditor does have substantial doubt about a client’s ability to continue as a going concern, the auditor is required to consider the financial statement effects, and evaluate the adequacy of the disclosures of the possible inability to continue as a going concern
6. Auditing Cash
a. The main procedure for auditing cash begins with viewing the bank reconciliations for all material bank accounts. To audit cash include-
i. The bank rec lists items that make up any difference between the client’s book balance and the bank’s balance, such as deposits in transit or outstanding checks
ii. The auditor obtains a bank statement for the period following the balance sheet date (or a “cutoff statement” which is about 10 days of the following period), such as a January statement for a Dec 31 audit, and compares:
1. The deposits from the “deposits in transit” on the Dec 31 bank rec to see if they were actually deposited in January (or whatever the following period is)
2. The checks processed on the following period statement that have December dates to make sure they were listed on the bank rec. This is testing for completeness
iii. Material cash accounts are confirmed by sending the banks confirmations (liabilities with banks are also confirmed)
b. “Check kiting” is when cash if “created” by transferring money between different banks. This is evidenced by a high level of deposits compared with a low average balance because as deposits are made, checks are written to remove the funds. Kiting always results in an inflated cash balance
7. Auditing Accounts Receivable
a. The big assertion with AR is existence. You can say someone owes you a million dollars but does that receivable really exist?
b. Usually the material AR accounts are confirmed
i. If a confirmation doesn’t come back, then “alternate procedures” are performed
This includes verifying subsequent cash receipts, meaning to verify that the receivable was paid, OR, inspecting the underlying documents such as a sales agreement, invoices, etc
iii. If the accounts receivable confirmations received back are far less than the amount sent out, this would be a big indicator of a possible overstatement of AR and thus a possible material misstatement
c. Completeness is another main assertion with AR, and this is tested by performing a “cutoff test” which looks at sales transactions before and after year-end to make sure sales are being recorded in the proper period
d. Rights and obligations is another AR assertion. The auditor should inquire or inspect documents to see if any AR has been pledged as collateral for debt
+8. Audit Inventory
a. Perform audit inventory, before field work begins!
i. To observe inventory, test:
1. Comparing inventory actually on hand during the observation to the records is a good internal control procedure
2. The observation is also used for gathering evidence for substantive testing of the dollar balance of inventory
3. The auditor performs “test counts” instead of trying to count everything
ii. Some companies use “count tags” for their inventory count. The tags should be pre-numbered, and the sequence should be accounted for
1. Auditor performs test counts and compares the items tested to the client’s
2.The auditor verifies the reasonableness of the client’s cost per unit
3. The auditor uses the quantity x cost per unit to agree the dollar amount of items on client’s listing
b. For completeness of inventory, the auditor performs a sales cutoff test by inspecting shipments for last few days of period and the first few days of the next period and compares to the entries in the sales journal
c. Also for completeness, a purchases cutoff test is performed by the same procedure except by examining the shipments received for items purchased for inventory
d. For rights and obligations, the auditor inquires/views documents regarding any inventory used as collateral for debt, also inquire about inventory on consignment
e. For valuation, the auditor should perform analytical procedures to identify excess inventory. Also inquire/observe excess or obsolete inventory
i. Another valuation consideration is making sure that inventory is valued at the lower of cost or market.
+9. Auditing Investments in Securities
a. Investments are accounted for with equity method, and primarily use the audited financial statements, for evidence. —are you needing evidence—with and then say something
b. Publicly traded stock, has an auditor test the number of shares owned by confirming the amount with the independent custodian of the shares. It tests assertions! Also the tests include for existence, rights, and obligations.
c. To learn when to use these, the auditor has completeness. Its complete to order how investments and income from investments, do use analytical procedures, and create an expectation of investment income for comparidion with actual. Investment income with analysisation is for any significant differences and will be investigated!
10. Auditing Fixed Assets
a. For existence, the auditor will use tests of transactions which is testing the debits and credits that changed the balance from the prior year
i. For additions to PPE, the auditor would inspect documentation verifying
ii. For deletions from PPE, the auditor would trace proceeds from selling the equipment to the cash receipts journal and/or the bank statements
b. For completeness, the auditor would review the “repairs and maintenance” expense account to look for anything that should have been capitalized i. The auditor would also review lease agreements for anything that should be capitalized
c. For rights and obligations, the auditor would inquire/inspect records for any PPE used as collateral for debt
d. For valuation, the auditor would recalculate depreciation expense and inquire about any impairment to PPE
11. Auditing Current Liabilities
a. The assertion the auditor is most concerned with for accounts payable is completeness
i. For completeness and cutoff, the auditor performs a search for unrecorded liabilities by reviewing cash disbursements after year-end, and looking at the supporting documentation to make sure no payables that related to the year under audit were excluded. This would understate liabilities
b. Other current liabilities such as wages and salaries payable are usually audited using analytics
12. Auditing Long-Term Liabilities
a. The major issue with long-term liabilities is again, completeness… making sure that liabilities are recorded on the financial statements
b. For decreases in balances, the auditor should review any loan repayment schedules, trace cash disbursements to the bank statements, and examine any canceled notes that were paid off
c. For increases in balances, the auditor would review the new loan agreements or amendments to existing loans, verify the authorization of the new debt in the board minutes, and trace the receipt of cash to the bank statements
i. Copies or abstracts of an entity’s significant contracts such as lease or debt agreements should be kept in the “permanent file” for that client
d. For existence, the auditor should inspect loan documents, or confirm debt balances
e. For valuation, the auditor will use analytics to test the reasonableness of interest expense, and read any loan agreements for term
13. Auditing Stockholders’ Equity
a. For existence, if there is an external registrar, the number of outstanding shares should be confirmed
i. Verify that any issuances comply with the articles of incorporation and were approved in the board minutes
b. For completeness, review the board minutes for any authorization of issuances and account for the numerical sequence of stock certificates
c. For rights and obligations, verify par or stated value through comparison with stock certificates or the board minutes where stated value was established
i. Compare stock option plans to actual agreements for compliance to such agreements
ii. Inquire about any restrictions on retained earnings available for dividends
d. For valuation, trace cash receipts and disbursements to accounting records and/or bank statements
i. Again, verify authorization through the board minutes
14. Auditing Payroll Transactions
a. Payroll transactions are income statement transactions, and these are tested primarily through analytics
i. The auditor usually evaluates expenses through a comparison with the prior year. Payroll expense in the prior year can be used to create an expectation for the current year, and if there is a large difference in the expectation and actual current year expenses, it could indicate a material misstatement
ii. Usually control risk for payroll transactions will be set as low, and the main procedures will be analytics and recalculating year-end payroll accruals
15. Audit Sampling
a. Sampling is used in auditing to test populations, without having to test every transaction that makes up a population
b. There are 2 main approaches:
i. Non-statistical or ‘judgmental’ sampling
1. With non-statistical sampling, the auditor “haphazardly” chooses transactions to make up the sample
ii. Statistical sampling
1. Statistical sampling has the advantage of providing objectivity to the sample, instead of the auditor “haphazardly” picking transactions to test
c. Sampling Risk
i. Sampling risk is the risk that the sample might not be representative of the population. This means that the auditor might make an incorrect conclusion by relying on the results of the sample
ii. There are 2 types of errors:
1. Type 1 errors: This is when the auditor sets control risk too high, and runs the risk of “incorrect rejection” which means thinking a misstatement exists when there really isn’t a misstatement. The auditor over-tests, and will probably come to the correct conclusion but it was not “efficient”
2. Type 2 Errors: This is when the auditor sets control risk too low, and runs the risk of “incorrect acceptance” which means accepting the result of a sample when there might in fact be a misstatment. This is worse because the auditor doesn’t test enough of the population because control risk is set too low, and the auditor might reach the wrong conclusion. This deals with “effectiveness”
d. Non-Sampling Risk
i. This is when errors are made in sampling by the auditor that don’t relate to sampling risk
1. This would be inspecting a transaction and misinterpreting the results
2. OR, performing the wrong audit procedures
16. Attribute Sampling
a. Attribute sampling is the type of test used to perform a “test of controls”. With attribute sampling, the auditor is looking at transactions to determine if a control was either performed or not performed.
b. First step is to identify what the objective of the test is, such as testing the population of cash disbursements for proper authorization
c. Then the auditor defines what a “deviation” is based on the test, such as a disbursement that wasn’t properly authorized
d. Then the auditor defines and acquires the population, such as all cash disbursements during the year
e. Then the auditor chooses the sampling method
i. Either statistical sampling which is usually random number (best approach) or systematic (every 20th transaction for example)
ii. OR judgmental sampling such as haphazard (arbitrarily selecting transactions just by looking at the population)
f. The auditor then chooses a sample size. The sample size will be based on AICPA tables and will be provided in questions on the exam
g. Once the sample is selected, the transactions are tested, and any deviations are identified
i. Then the auditor can calculate the deviation rate, for example if the sample size was 20 and 1 deviation was found, the deviation rate is 1 in 20 or 5%
ii. The auditor determines a “tolerable deviation rate” which just means how many errors can be found and still rely on the internal control. A “confidence interval” for the achieved upper precision limit is calculated based on the deviations observed. Again, tables are used for this
iii. Then the upper precision limit is compared to the deviation rate. The internal control can only be relied on if the deviation rate is less than or equal to the stated tolerable rate
h. The auditor then decides if any other factors have implications on the decision to rely on the control or not. If not, and the deviation rate is lower than the tolerable rate, the auditor will determine that the control can be relied on
i. Population size has little to no effect on the sample size. This is counterintuitive, but the tables for sample size are based on an assumption of very large populations, so a change in population size has very little impact on the sample size. You will see questions about this
j. Formula for accept/modify questions:
i. The ‘sample error rate’ is the number of deviations actually found in a sample. So 3 deviations in 100 is a sample error rate of 3%
ii. You then ADD the ‘allowance for sampling risk’ rate to the ‘sample error rate’ to get your ‘upper error limit’. If the allowance for sampling risk is 2%, you add this to the sample error rate found, which would give you a 5% upper error limit in this example
iii. Then compare this to your tolerable rate. If the tolerable rate was 5%, you can rely on the internal control in this example. If the tolerable rate was 4%, then you need to “modify the planned level of control risk”, which means you cannot rely on the internal control
17. Variables Sampling
a. Variables sampling is used for substantive testing of populations, usually to test an ending balance in an account
b. The steps are essentially the same as listed above for attribute sampling, except for these key differences:
i. Since transactions in variables sampling will be dollar amounts, the auditor tests all transactions that are individually material. These amounts are not being sampled… they are tested 100%, so they and their amounts are not considered part of the population being sampled
ii. The basic formula for variable sampling is:
1. n = (S x Z-coefficient x N/A)^2
a. n is the sample size
b. S represents the estimated standard deviation for the population
c. Z-coefficient is the measure of reliability (confidence interval)
d. N is the size of the population
e. A is the ‘allowance for sampling risk’
c. Other concepts
i. Stratification: This is separating a population into groups of transactions that are similar, such as all transactions over a certain dollar amount. Stratifying a population can decrease sample size
ii. Remember that falsely concluding that a material misstatement does not exist based on a sample is “incorrect acceptance”. This is a “type 2 error”
iii. An increase in ‘tolerable misstatement’ would decrease the sample size, and vice versa. In other words, if more mistakes are allowed, the sample size can be smaller. If less mistakes are allowed, a larger sample needs to be tested to gain assurance a lower amount of mistakes exist
iv. If the ‘assessed level of control risk’ increases, then the sample size needs to be larger, and vice versa. This means if an auditor thinks a population has a high risk of material misstatement, then the sample size will be larger

Southern Pacific Transp. Co. v. Commissioner, 75 T.C. 497, 1980 U.S. Tax Ct. LEXIS 11. 36 Audit records started and are kept. Put like 6 things about it. How they were using math was so different, they were using special audit procedures in —go through this whole one-talk about all of these.
3. Stanley L. Bloch, Inc. v. Klein, 45 Misc. 2d 1054, 258 N.Y.S.2d 501, 1965 N.Y. Misc. LEXIS 2066 37

? Exponential Average. Find that—



Also known as moving averages,
? Go over GAAP-generally accepted accounting principals.
1. THE9 LTD; 20-F41 for the way to use GAAP.
? The methods use survey and a data meathod! I will try so hard to say more about
? Test of Account transactions.
All I want to work on is the procedures and need examples from Audit Case Studies with

3. In these Gustafson v. Alloyd Co., 513 U.S. 561, 115 S. Ct. 1061, 131 L. Ed. 2d 1, 1995 U.S. LEXIS 1804, 63 U.S.L.W. 4165, Fed. Sec. L. Rep. (CCH) P98,531, 95 Cal. Daily Op. Service 1458, 8 Fla. L. Weekly Fed. S 603
Problems include what was the issue 3
Audit had Financial Statements reveal audit had a practice that is estimate and variance through end of year finacial statments.
4. Ask what audit is needed to schools and who would get these audits? A school that needed one is getting audited and was needing more agreement for
Lemon v. Kurtzman, 403 U.S. 602, 91 S. Ct. 2105, 29 L. Ed. 2d 745, 1971 U.S. LEXIS 19
5. Audit under Due Prcess Law is
6. A grant to school that is Agostini v. Felton, 521 U.S. 203, 117 S. Ct. 1997, 138 L. Ed. 2d 391, 1997 U.S. LEXIS 4000, 65 U.S.L.W. 4524, 97 Cal. Daily Op. Service 4765, 97 Daily Journal DAR 7843, 37 Fed. R. Serv. 3d (Callaghan) 1051, 11 Fla. L. Weekly Fed. S 76 was a religios grant and is to start how? What are they doing and

Trials and evidence is different than I thought.
In this trial Hoang v. Rosen, 2013 U.S. Dist. LEXIS 127759, 2013 WL 480482242 admission of approximately ninety exhibits to court.
Diamonds are a part of the trial with not able to recover as the account for the recovery of bankruptcy. Both diamond or reality have a value not explained, lengthy to examine trial and not exact, and to have
included in audit. It is interesting to not know where an item is, as diamonds are in another persons possession, like in Israel to play the bankruptcy money is not all explained easily and a forensic accountant was needed. Certified Public Accountant (CPA), Certified Fraud Examiner (CFE), and forensic accountant is used in these trials, for a case an accountant needs to understand

Audit Reports
1. Introduction
a. Remember that a clean opinion is not called an ‘unqualified opinion’ anymore. It is now called an ‘unmodified opinion’
b. Remember the “Standards of Reporting”
i. GAAP: The auditor states whether the financial statements are “in accordance with GAAP”
ii. Consistency: The auditor points out what GAAP principles have not been consistently applied in relation to the prior period
iii. Disclosures: If the auditor determines the disclosures in the financials are NOT adequate, the auditor needs to say so in the audit report
iv. Opinion: The whole point of an audit for is for the auditor to render their opinion. Different types of opinions will be discussed in a later section
c. Other key points:
i. If unaudited statements from a prior period along with audited statements for comparative purposes, the unaudited statements should be clearly marked,
1. AND, either the report on the unaudited financials should be reissued, or the audited financials should contain a separate paragraph describing the level of responsibility assumed for the unaudited statements
ii. If the auditor thinks there is only a REMOTE chance of a loss resulting from a uncertain matter, the auditor should still issue an unmodified opinion
2. Group Audits
a. This is an audit that contains a “group” of components whose financial information is reported in one set of statements
i. A component is an entity that has separate financial information that will be included in group statements
ii. A component auditor is an auditor who audits one of the components- this can be a member of the audit team, an auditor with an affiliated firm, or an auditor from an unrelated firm
b. The group audit partner is responsible for the supervision and performance of the group audit engagement
c. The group audit encompasses the same strategy and responsibilities of a regular audit
d. The group audit team needs to determine materiality for the group financial statements as a whole, AND at the component level
e. If the group engagement partner decides to assume responsibility for the component auditor(s) work, then the component auditor will NOT be mentioned in the audit report
3. Emphasis of Matter Paragraph
a. This is a paragraph that the auditor adds right after the opinion paragraph to point out a matter that is crucial to the user being able to understand the financial statements.
i. This would be something like the auditor doubts the firm’s ability to continue as a going concern
ii. Or if the financials are prepared using a special accounting framework
iii. Or a change in accounting principle
b. The heading “Emphasis of Matter” must be used
c. There can also be a “Other Matter” paragraph

i. This will go after the opinion paragraph, or after the “Emphasis of Matter” paragraph if there is one
ii. Use the heading “Other Matter”
iii. This would be about something that the auditor considers relevant, but not crucial to the user’s understanding of the financial statements
4. Opinions
a. A “clean opinion”, meaning the auditor believes the financial statements are fairly stated and comply with GAAP, results in an “unmodified opinion”. This used to be called a “unqualified opinion”.
b. So, a “modified” opinion means there’s something wrong with the statements. There are 3 types of ‘modified opinions’:
i. Qualified opinion
1. 2 reasons for a qualified opinion:
a. Presentation- the financial statements are misstated (GAAP departure)
b. Scope- the auditor was not able to get “sufficient appropriate audit evidence”
2. What a qualified opinion really means is that the auditor is expressing reservations about the financial statements, but that they are still fairly stated because the scope limitation or misstatement is not “pervasive”
a. Pervasive basically means effecting multiple areas of the financial statements
ii. Adverse opinion 1. There’s only 1 reason for giving an adverse opinion:
a. When there are financial misstatements that are BOTH material AND pervasive
b. This means that there are misstatements that affect most areas of the financial statements. The financial statements are misleading because they are not fairly presented
iii. Disclaimer of opinion
1. This happens when the auditor is unable to obtain sufficient appropriate audit evidence, and the effects could be BOTH material and pervasive
a. So remember that a scope limitation happens for the same reason, but on a lesser scale, which results in a qualified opinion
b. But when the auditor can’t obtain audit evidence to the degree that the effects could be both material and pervasive, the auditor issues a ‘disclaimer of opinion’, which means the auditor is unable to even give an opinion
5. Supplementary Information
a. If the auditor is engaged to determine whether supplementary information is fairly stated in relation to the financial statements, the phrase is that the supplementary information if fairly stated “in all material respects in relation to the financial statements as a whole”
b. If the auditor is auditing supplementary information, the materiality levels used are the same as what was used for auditing the financial statements
c. Required supplementary information is information that a “designated standard-setter” has required to accompany the basic financial statements. Such as the AICPA establishing GAAP
d. The auditor is NOT required to “audit” supplementary information, but apply “certain limited procedures” to them and report any deficiencies in the information
6. Financial Statements Prepared Using Another Country’s Framework
a. The main responsibility of the auditor in this situation is to understand the accounting principles that are generally accepted in the other country
7. Other Types of Reports
a. If an auditor is engaged to report on the application of accounting principles to a specific transaction, the report should include:
i. A description of the transaction and the applicable accounting standards
ii. A statement that says the responsibility for the accounting treatment is with whoever prepares the financial statements
iii. A statement that any difference in the facts, circumstances, or assumptions may change the report
b. Financial Statements with Special Purpose Framework
i. ‘Special purpose frameworks’ are other reporting frameworks besides GAAP such as cash basis, tax basis, a regulatory basis, or a contractual basis
ii. The auditor’s report should describe the purpose of the financial statements, or refers to the note in the financials that describes the reporting framework (why they are in another framework besides GAAP)
1. This is done in an ’emphasis of matter’ paragraph, or an ‘other matter’ paragraph
iii. A common question type on the AUD exam is what an auditor should do if the statements are not “appropriately titled”, and the answer is that the auditor should disclose their reservations on the audit report and qualify the opinion. This just means that with certain reporting frameworks, the financial statements have certain titles other than just “balance sheet” or “income statement” and the auditor has to make sure they are titled according to the framework they’re using
c. Auditing a single financial statement
i. The auditor can express an opinion on a single statement, such as just the balance sheet, if access to the underlying information is not limited. This means the auditor still has to obtain ‘sufficient appropriate audit evidence’, which would mean they look at more than just the balance sheet
ii. If the auditor is engaged to report on financial data that are included in client-prepared information that contains audited financial statements, in the auditor’s report they should refer to the report issued on the audited financial statements
d. Reporting on Compliance
i. A “special report” is when engagements involve compliance with some type of regulation related to the financial statements. This would be something like testing a client’s compliance with Federal grant regulations
e. Service Organizations
i. If you’re auditing a company, and they use a payroll service for their payroll, that is a ‘service organization’. If you are unable to obtain appropriate audit evidence about the services provided by the service organization, then your opinion on the financials would be ‘modified’ for a scope limitation
1. “appropriate audit evidence’ for a service organization usually comes in the form a report called a “type 1” or “type 2” report, or through contacting the service organization to obtain certain information
f. Comfort Letters
i. Letters given to underwriters as part of the due diligence process to provide the underwriter with “reasonable grounds to believe there are no material omissions or misstatements in financial statements related to a securities offering”
ii. They are addressed to the client’s underwriter, and they are signed by the independent auditor
iii. Comfort letters do NOT address internal controls
iv. Comfort letters provide negative assurance on whether unaudited financial information complies with GAAP
v. A comfort letter provides an opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC
g. Government Auditing Standards
i. Referred to as “yellow book”
ii. Single Audits
1. State and local government agencies that spend at least $750,000 in federal funding must get a “single audit”
2. The point of a single audit to verify that federal funds have been spent according to the programs the funds were received for
3. Materiality for single audits is determined separately for each major federal financial assistance program
iii. Governmental auditing standards require a separate report on internal control that includes a description of the scope of the auditor’s work in obtaining an understanding of internal control. This report will also include any significant deficiencies or material weaknesses noted. BUT, the regular audit report and the report on internal controls can be combined
iv. A government audit will also include a report on compliance with laws, regulations, and the provisions of any grant agreements
1. So an audit subject to the yellow book standards includes 3 reports:
a. An audit report
b. A report on internal control
c. A report on any applicable compliance
v. In a government audit, the auditor is required to report any fraud or illegal acts to outside authorities IF:
1. Management fails to report the information as required by law,
2. OR, if management fails to take timely action to respond to the fraud or illegal act
h. SSARs
i. This stands for “Statements on Standards for Accounting and Review Services”
ii. These standards apply to “reviews”, “compilations”, and now “preparation of financial statements”
1. A review is an assurance engagement & an attestation engagement that provides “limited assurance” that there are no material modifications that should be made to the financial statements
a. The basics of a review are:
i. Possess knowledge of a client’s industry
ii. Apply analytical procedures
iii. Perform inquiries of management
iv. Obtain a representation letter
b. Each page of an entity’s financial statements that have been ‘reviewed’ should include the reference “See Accountant’s Review Report”
c. In a review engagement, the auditor is NOT required to obtain an understanding of internal controls
2. A compilation is basically assisting management to draft the financial statements, without providing ANY level of assurance. It is an attestation engagement but NOT an assurance engagement
a. An auditor does NOT have to be independent to do a compilation for a client since no assurance is provided. BUT, if the auditor is not independent, the accountant should disclose this fact in the compilation report
b. The compilation report explicitly states that the financial statements have not been audited, and that the accountant has compiled the financial statements
c. Just remember that a compilation is strictly drafting the financial statements for the client, and that no procedures whatsoever are performed on the data. The auditor is expected to understand the client and the client’s industry, but no audit procedures of any kind are performed since no assurance is being provided
3. Preparation of financial statements: this is what it sounds like. The accountant takes the information from management and prepares the financial statements
a. The accountant does NOT have to be independent for this type of engagement
b. There should be an engagement letter that outlines management’s responsibilities & the accountant’s responsibilities
c. Each page of the financial statements should include a statement that no assurance is provided


Planning Activities
1. Pre-Engagement planning activities
a. Only accept an audit engagement for a new or existing client when:
i. The auditor and management have a common understanding of the terms of the engagement
1. Management must be using an acceptable financial reporting framework (GAAP)
2. Management and those charged with governance have the responsibility to provide the auditor with all information relevant to the preparation and presentation of the financial statements
3. The auditor must obtain an engagement letter that addresses:
a. The objective and scope of the audit
b. Respective responsibilities of the auditor and management
c. A statement about the inherent limitations of an audit
d. A statement identifying the applicable financial reporting framework
e. Other matters based on auditor judgment such as fees or deadlines
b. Communications with predecessor auditor
i. Auditor is supposed to get permission from management to inquire of previous auditor
1. If management refuses or tries to limit communication, auditor should consider rejecting the engagement
ii. 5 matters to be addressed with previous auditor
1. Information about the integrity of management
2. Disagreements with management about accounting or audit issues
3. Communications to those charged with governance about fraud and/or noncompliance with laws/regulations
4. Communications to management about significant deficiencies
5. Previous auditor’s understanding about the reason for changing auditors

2. Audit Planning
a. The point of audit planning is to plan the audit so that it will be performed effectively.
b. The engagement partner and other key members of the audit team should be the ones involved in planning.
c. Preliminary engagement activities
i. The auditor needs to evaluate any quality control issues that could affect client acceptance
ii. The auditor needs to evaluate any potential independence issues
iii. The auditor needs to create an “overall audit strategy” in order to:
1. Identify characteristics of the audit that could affect its scope
2. Identify reporting objectives and required communications
3. Determine nature and timing of resources for the engagement
4. Communicate to those charged with governance to communicate the planned score and timing of the audit
5. Create an “audit plan”. These are called ‘audit programs’ in practice. These are the specific steps that will be taken to test balances and address risks identified during audit planning.
iv. The auditor needs to determine if the audit will require the work of a specialist. This could be appraisers, tax specialists, IT specialists, valuation experts, or others.
1. The auditor should be sufficiently knowledgeable to accomplish the objectives of the audit, but in some cases the work of a specialist will be required to complete certain audit procedures.
v. In the audit documentation, the auditor should include:
1. The overall audit strategy
2. The audit programs
3. Any major changes made to the overall strategy or audit programs during the audit, and the reasons for any such changes
3. Materiality
a. Materiality means an amount that if missing or misstated on the financials would likely lead a reasonable person to be influenced to make a different decision than if the amount had been correct.
i. Materiality really just means “big enough to matter”
b.Under the Clarified Standards, the focus is on “performance materiality”
c. Under the Clarified Standards, materiality needs to be documented at:
i. The financial statement level
ii. Materiality levels for specific transactions or account balances – “performance materiality”
iii. Any revisions to materiality during the audit
4. Audit Risk
a. This is the risk or probability that the auditor expresses a clean opinion when there is actually a material misstatement in the financial statements
b. The auditor’s basis responsibility is to plan and perform the audit in a way that obtains “reasonable assurance” that any material misstatements are detected. Reasonable assurance is a high level of assurance, which in turn provides a low level of audit risk
c. Audit risk model: It has 3 elements:
i. IR (inherent risk)
ii. CR (control risk)
iii. DR (detection risk)
iv. Audit Risk = IR x CR x DR
5. Analytical Procedures
a. These are evaluations of financial information based on relationships among both financial data and non-financial data
i. This can involve trends, comparing this year’s balances to last years, ratios, etc
b. Analytics are used in 3 ways:
i. They’re used in the planning stage for risk assessment
ii. They can be used as a substantive procedure but it’s not required
iii. They are used as a final review
1. Just remember that analytics are required in the planning and review stage
c. The auditor’s “expectation” is the key to effective analytics
6. Detecting Fraud
a. This will be asked in many forms on the exam, so the key words to remember is that an audit provides REASONABLE assurance that material errors or fraud will be detected
b. Also, audit procedures that are effective for detecting an unintentional misstatement still might not be able to detect an intentional misstatement (fraud) when collusion is involved
c. The idea of “professional skepticism” is a big topic- it means having a “questioning” mind and a “critical assessment” of audit evidence- NOT “assuming” that fraud is happening, but “questioning” assertions made by management
d. Types of fraud i. There is fraudulent financial reporting ii. And there is misappropriation of assets (actually physically stealing cash or inventory)
e. Risk factors that could lead to fraudulent financial reporting:
i. Pressure to meet expectations or requirements such as
1. Earnings projections
2. Debt covenants
3. Requirements for financing agreements
ii. The risk also increases if there is a large opportunity to manipulate financials such as the business model involves a lot of estimates that are hard to corroborate, or if there are many significant decisions being made by just a few key decision-makers
f. Risk factors leading to asset misappropriation
i. Pressures on employees such as personal financial problems
ii. Low employee morale or the attitude of “the company owes me” or “I’m underpaid”
iii. If assets are easy to access, such as employees that have access to the cash
g. Management Override of Internal Controls
i. One of the biggest risk factors for fraud is when management overrides the internal controls
ii. This could be a member of management pushing through a transaction that doesn’t have a real business purpose, or an unauthorized journal entry, or putting pressure on an employee to make a journal entry they wouldn’t normally make
iii. Procedures would include:
1. Examining adjusting journal entries
2. Especially JE’s close to beginning and end of reporting periods
3. Evaluate estimates for bias
4. Examine authorization for unusual transactions
iv. Communication
1. If fraud is found:
a. The auditor informs ‘those charged with governance when senior management is involved in the fraud, OR if the misstatement is material even if senior management is not involved
b. If the misstatement is NOT material, the auditor must inform the appropriate level of management (one level above where the fraud has occurred)
c. When does the auditor report fraud to an outside party?
i. When a subpoena has been issued
ii. When an SEC client is changing auditors
iii. As required by government auditing standards
iv. When an auditor has been authorized to communicate with the preceding auditor
7. Illegal Acts/Noncompliance with Regulations
a. Illegal acts can have 2 types of effects on the financial statements
i. A direct effect: if an illegal act or noncompliance with regulations has a direct effect on the financials, the auditor needs to obtain sufficient audit evidence
ii. An indirect effect: in this case the auditor performs specific audit procedures such as inquiry of management and inspecting correspondence with relevant authorities
b. If noncompliance is identified or suspected:
i. Discuss the matter with the appropriate level of management (one level above the noncompliance)
ii. Evaluate the effect on other audit areas (management integrity issues)
c. Reporting noncompliance
i. Report to those charged with governance
ii. Consider the effect on the auditor’s report
1. If the issue isn’t adjusted/corrected, issue a qualified or adverse opinion
8. Using a Specialist
a. This is when an auditor uses someone who is an “expert in a field other than auditing or accounting” to obtain sufficient audit evidence
b. Deciding when to use one is when specialized knowledge outside of accounting and auditing is required
c. Selecting a specialist
i. Consider their qualifications, credentials, and reputation
ii. The auditor is responsible for evaluating the adequacy of the specialist’s work and the conclusions reached
d. Reporting:
i. If the auditor is issuing a “unmodified report” (clean opinion), the auditor does NOT refer to the specialist in the report
ii. If the report is modified (such as a qualified, adverse, or disclaimer of opinion) report, the auditor may refer to the specialist to help the user understand why the report is modified
9. Required Communications
a. Those charged with governance is defined as the people overseeing the strategic direction of the entity. This usually means the ‘board of directors’, or the ‘audit committee’
b. In general, the auditors responsibility is to communicate any matters that are significant and relevant to the financial reporting process
c. In regards to the audit, the auditor should communicate:
i. Management’s responsibilities and the auditor’s responsibilities under GAAS (generally accepted auditing standards)
ii. The planned scope and timing of audit procedures (when the auditors are going to show up to do field work)
iii. Significant findings from the audit. These include:
1. Significant difficulties encountered during the audit
2. Disagreements with management over accounting matters
3. Uncorrected misstatements identified by the auditor
4. Independence issues
5. Management consultations with other auditors


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