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BobAnderson UCSB INTRO CHAPTER1 1 COURSEINTRO CHAPTER 1 WELCOMETOECON132 AUDIT BobAnderson UCSB WHOAMI BOBANDERSONUCSBGraduateof1992SeniorManager KPMG LLP 1993 2004RAFS Inc Interests BobAnderson UCSB Whyarewehere LearnfoundationinAUDITING whichisusefulfor DoingyourJOB CPAExamUnfortunatelylotsoftheory BobAnderson UCSB OVERVIEWOFTHECOURSE WhatisauditingandotherservicesofferedbyCPA sThecurrentenvironmentRegulationandrulesgoverningauditSarbanes OxleyActAuditEvidencePlanninganAudit 7P s InternalcontrolA RandRevenueOperationsandcompletingtheauditAuditor sreports BobAnderson UCSB CourseApproach Mutuallywellprepared LecturestobeanexpansionofwhatisinthebookRealWorldInterestingandLayman sterms BobAnderson UCSB AdministrativeMatters NOTE AllofthefollowingisinsyllabusWeb Pageaddressisecon ucsb edu andersonStudentpreparationforclassesClasspresentationsonthewebforreview printingbeforeclassQuizzesandHomeworkwillcombinefor10 ofyourcoursegradeOnedropallowedGradePosting YoumustprovidemeareleaseformandIwillperiodicallyposttothewebMyoffice NH3039 HoursPostedonSyllabus BobAnderson UCSB PROTECTEDCONTENT USERNAME andersonPASSWORD xxxxxx BobAnderson UCSB POINTS EXAMSMAKEUP83 OFYOURCOURSEGRADECombinationofmultiplechoice shortanswerandproblemsolving Gradeallocation 1 000points Exam 125 5 Exam 225 5 FinalExam 25 cumulative 32 0 Homework Quiz12 0 Simulations5 0 BobAnderson UCSB LANDSCAPE HISTORY ENRON GLOBALCROSSING ETC PRESSUREON Financialreporters management certificationsAuditors SOX404 fraudresponsibilitiesSEC FASB Rushingtorelease Sarbanes OxleyActof2002Creatednewrulesforpubliccompany sandtheirauditors ThePublicCompanyAccountingOversightBoard PCAOB isundertheSECandoverseesallfirmsregisteredtoauditpubliccompanies BobAnderson UCSB KEYNOTES 90 OFTRANSACTIONSARE ROUTINE ANDCANBEACCURATELYREPORTEDBYASTRONG SYSTEM InternalcontrolsTheother10 iswhatyoureadaboutinthepapers That10 Does didandalwayswillrequireapplyingJUDGMENT AccountingisNOTthestereotypical beancounter BobAnderson UCSB Financialstatements Peopleworkveryhardfortheirmoney Theyneedtofeel assured thatinformationthattheyarelookingatinmakingdecisionsaboutwhattodowiththathardearnedmoneyisreasonablyaccurate BobAnderson UCSB GAAP Becauseoftheimportanceofqualityfinancialstatements thereareruleswhichshouldbeadheredto suchthatthosestatementsbereliable reasonable comparable etc THEREFOREwehavegenerallyacceptedaccountingprinciples GAAP BobAnderson UCSB GAAS Becauseoftheimportanceofthereliabilityoffinancialstatements theygetaudited Theauditingprofession similarly isregulatedby GenerallyAcceptedAuditingStandards Whichstandardsareapplicabledependonthetypeofentitybeingaudited Publicvs Non publicentities BobAnderson UCSB TheAccountingProfession sCredibilityCrisis 2000 ThePanelonAuditEffectivenessmadeavarietyofsuggestionstoimproveaudits 2001 EnronBankruptcy2002 WorldComFraud2002 Sarbanes OxleyAct2003 PublicCompanyAccountingOversightBoardbeganoperationsLate2003 BobAndersonleavespublicaccounting Auditors SOX404 fraudresponsibilitiesandmanagementcertifications BobAnderson UCSB AICPA Historically andstillfornon publiccompanies GAASdeterminedbytheAICPA TheAICPA Establishesauditingstandardsofnon publiccompanies ViaitsAuditingStandardsBoard AdministerstheCPAexam Eachstatelicenses Promotescontinuingprofessionaleduc CPE ContributestoselfregulationYep self regulated INTEGRITY BobAnderson UCSB INTRODUCING PCAOB Sarbanes OxleyActof2002grantedextendedpowerstotheSEC creatingthePublicCompanyAccountingOversightBoard PCAOB pronounced peekaboo AppliesONLYtofirmsauditingpubliccompaniesandtheauditsofpubliccompanies Asyouwillseebelow NOMORESELFREGULATION overpubliccompanies SpecificallythePCAOB Registersaccountingfirmswhichplantoauditpubliccompanies InspectsregisteredaccountingfirmsConductsinvestigationsanddisciplinesSanctionregisteredfirms BobAnderson UCSB What sanaudit Non Public WehaveauditedtheaccompanyingbalancesheetsofACompany Inc asofDecember31 20X2and20X1 andtherelatestatementsofincome stockholders equityandcomprehensiveincome andcashflowsfortheyearsthenended ThesefinancialstatementsaretheresponsibilityoftheCompany smanagement Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits WeconductedourauditsinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement Anauditincludesexamining onatestbasis evidencesupportingtheamountsanddisclosuresinthefinancialstatements Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement aswellasevaluatingtheoverallfinancialstatementpresentation Webelievethatourauditsprovideareasonablebasisforouropinion Inouropinion thefinancialstatementsreferredtoabovepresentfairly inallmaterialrespects thefinancialpositionofACompany Inc asofDecember31 20X2and20X1 1 andtheresultsofitsoperationsanditscashflowsfortheyearsthenendedinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica BobAnderson UCSB What sanaudit Public ReportofIndependentRegisteredPublicAccountingFirmWehaveauditedtheaccompanyingconsolidatedbalancesheetsofBOBSMONEYMAKERCorporationandsubsidiaries theCompany asofDecember31 2004and2003 andtherelatedconsolidatedstatementsofoperations stockholders equity andcashflowsforeachoftheyearsinthethree yearperiodendedDecember31 2004 TheseconsolidatedfinancialstatementsaretheresponsibilityoftheCompany smanagement Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard UnitedStates Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement Anauditincludesexamining onatestbasis evidencesupportingtheamountsanddisclosuresinthefinancialstatements Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement aswellasevaluatingtheoverallfinancialstatementpresentation Webelievethatourauditsprovideareasonablebasisforouropinion Inouropinion theconsolidatedfinancialstatementsreferredtoabovepresentfairly inallmaterialrespects thefinancialpositionofBOBSMONEYMAKERCorporationandsubsidiariesasofDecember31 2004and2003 andtheresultsofitsoperationsanditscashflowsforeachoftheyearsinthethree yearperiodendedDecember31 2004 inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStates Wealsohaveaudited inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard UnitedStates theeffectivenessofBOBSMONEYMAKERinternalcontroloverfinancialreportingasofDecember31 2004 basedoncriteriaestablishedinInternalControl IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission COSO andourreportdatedMarch10 2005expressedanunqualifiedopiniononmanagement sassessmentof andtheeffectiveoperationof internalcontroloverfinancialreporting BobAnderson UCSB Auditing Overview Whoseresponsibilityisittopresentmateriallyaccuratefinancialstatements MANAGEMENTWhoseresponsibilityisitto Opine onthefinancialstatements AUDITORSWhatdowecalltherulesgoverninghowtoaccountforactivity GENERALLYACCEPTEDACCOUNTINGPRINCIPLES GAAP Whatdowecalltherulesgoverningperformanceofanaudit GENERALLYACCETPEDAUDITINGSTANDARDS GAAS ApublicCompany It sauditorsmustconformtoadditionalgovernance prescribedby THESECURITIES EXCHANGECOMMISSION SEC THEPUBLICCOMPANYACCOUNTINGOVERSIGHTBOARD PCAOB WHICHISANEXTENTIONOFTHESEC BobAnderson UCSB WhatisanAudit Doesanauditprovideabsoluteassurance NOIsanauditdesignedtodetectFraud NOAnauditisdesignedtoprovideassurancetotheuser viaanopinionfromtheauditor thatthefinancialstatementsare freeofMATERIALmisstatementfromGAAP THINKHARDABOUTWHATANAUDITORSOPINIONACTUALLYSAYS BobAnderson UCSB AUDITING WHATISIT BalanceSheetApproach Ifyoutestaccountsreceivable whatareyousimulteneouslytesting SALESWeusea dual entry system whichmeansthatthereisaconsequencesomewhereelsetoeverythingyoupost Fraudweis Inc isbeingaudited Theyhavefraudulentlyinflatedtheirsalesbyrecordingafalseentry Ifyoucreateafalseentrytosales thenthelogicalotherplaceisa r Ifweareauditorsandareauditingallmateriala r wouldn twewonderwhythisreceivable ages aswelookatA R Iftheydebitsomethingobscure itwilllookout of placewhenwearelookingtheretooinour balancesheet approach BobAnderson UCSB SOMETERMINOLOGY GeneralLedger A Ledger ofalloftheactivityforaspecifiedperiodoftime verydetailedTrialBalance orsummarytrialbalance Takesthe activity outofthegeneralledgerandshowsjusttheendingbalances activity asofaspecifieddateandperiod Sub Ledger Schedules Somedetailedlevelofpresentinganitemofthegeneralledger accountsreceivableaging ordetailedaccountspayablelistingareexamples Lead Sheet Listingofitemscomprisingasingleline itemonatrialbalance muchlikeasub ledger TheRoleofthePublicAccountantintheAmericanEconomy BobAnderson UCSB MORETERMINOLOGY Assurance Providingsomeconfidenceorcertainty Attestation Provideassurance Soanaudit whichprovidesassurance isthereforeanattestationengagement BobAnderson UCSB Attestation Therearethreebroadcategoriesofattestation Examination auditwhereauditorrendersanopinion called opining orto opine Review Lessinscopethananaudit Issues negativeassurance whichmeans nothingcametotheattentionofthereviewer Agreed uponprocedures Noopinionorreport justasummaryoffindingsbasedonapplyingprocedureswhichwereagreeduponatthebeginningoftheengagement IMPORTANTNOTE THESEMUSTRESTRICTTHEDISTRIBUTION BobAnderson UCSB ATTESTATIONCONT D Inorderto attest theremustbesomesuitablecriteriatocompareto ForinstanceanaudithassuitablecriteriacalledGAAP AreviewalsohasGAAPtolookto Agreeduponprocedureswillstatewhatthecriteriaandproceduresare ALLOFTHISISTOLENDCREDIBILITY Thepurposeofwhichistoreducetheamountof InformationRisk toauseroftheunderlyingdata SomedegreeofinformationriskisinherentAuditreducesinformationrisk butnothingcanELIMINATEinformationrisk BobAnderson UCSB FRAUD Whatdoestheauditor sopinionsayaboutfraud NotexplicitSowhatistheauditor sresponsibilitytodetectfraud IfitproducesamaterialmisstatementBUT TherearerulescalledGenerallyAcceptedAuditingStandards GAAS whichactuallyincreasetheresponsibilityofanauditorbeyondwhattheiropinionstates BobAnderson UCSB TheAttestFunction Management SubjectMatter SuitableCriteria TheCPA GathersEvidence SubjectMatter TheAttestReport IssuesReport Maybemanagement sassertionaboutthesubjectmatter BobAnderson UCSB AttestationEngagements TypeofEngagement LevelofAssurance NatureofReport Procedures Examination Highest Expressesopinion Sufficienttolimitattestationrisktolowlevel BobAnderson UCSB AttestationEngagements TypeofEngagement LevelofAssurance NatureofReport Procedures ExaminationReview HighestModerateorLimited ExpressesopinionExpressesnegativeassurance SufficienttolimitattestationrisktolowlevelGenerallylimitedtoinquiry analyticalprocedures BobAnderson UCSB AttestationEngagements TypeofEngagement LevelofAssurance NatureofReport Procedures ExaminationReviewAgreed uponprocedures HighestModerateorLimitedVarieswithprocedures ExpressesopinionExpressesnegativeassuranceStatesfindings SufficienttolimitattestationrisktolowlevelGenerallylimitedtoinquiry analyticalproceduresProceduresagreed uponwiththespecifiedusers BobAnderson UCSB AuditofFinancialStatements Management PreparesFinancialStatements Criteria e g GAAP TheAuditors GathersEvidence FinancialStatements TheAuditors Report IssuesReport BobAnderson UCSB WhatCreatestheDemandforAudits Credibility aspreviouslydiscussed Financialstatementmisstatementsarisedueto AccidentalerrorsLackofknowledgeofaccountingprinciplesUnintentionalbiasDeliberatefalsificationortheftAuditsdonotdirectlyaddressbusinessrisk theriskthatacompanywillnotbeabletomeetitsfinancialobligationsduetoeconomicconditionsorpoormanagementdecisions BobAnderson UCSB TypesofAudits AuditsofFinancialStatementsComplianceAuditsOperationalAuditsNEW INTEGRATEDAUDIT Co