Download
slide1 n.
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 1 Management’s Assertions PowerPoint Presentation
Download Presentation
Chapter 1 Management’s Assertions

Chapter 1 Management’s Assertions

115 Views Download Presentation
Download Presentation

Chapter 1 Management’s Assertions

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

  1. Chapter 1 Management’s Assertions

  2. PCAOB RELEASE NO. 104-2005-119 • When auditing the completeness, existence and valuation assertions for deferred revenue, the sample of items tested by the Firm was inadequate because the Firm used the wrong method of sampling.

  3. PCAOB RELEASE NO. 104-2005-119 • The issuer accounted for lease incentives received from landlords as a reduction of depreciation expense, rather than as a reduction of rental expense as is required by EITF No. 88-3, Rental Concessions Provided by a Landlord and FASB Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases. This treatment resulted in an understatement of depreciation expense and an overstatement of lease expense, as well as an understatement of deferred liabilities and fixed assets.11/ The Firm should have identified and addressed the incorrect accounting.

  4. Chapter 2 Generally Accepted Auditing Standards GAAS Auditing Standards of the Public Companies Oversight Board Auditing Standards of the PCAOB

  5. PCAOB RELEASE NO. 104-2005-119 • On the audit of this issuer, the Firm represented that it relied on the work of internal audit related to the portion of the issuer's loan portfolio that is serviced by third parties; however, the Firm failedto perform, or failed to include evidence in the work papers that it had performed, the following: procedures to understand and evaluate the internal controls at the service organizations, Chapter 2 GAAS

  6. PCAOB RELEASE NO. 104-2005-119 • In this audit, the Firm failed in several respects to obtain sufficient competent evidential matter to support its audit opinion – Chapter 2 GAAS

  7. PCAOB RELEASE NO. 104-2005-119 • . the Firm failed in several respects to obtain sufficient competent evidential matter to support its audit opinion – Chapter 2 GAAS

  8. PCAOB RELEASE NO. 104-2005-119 • the Firm failed in several respects to obtain sufficient competent evidential matter to support its audit opinion – Chapter 2 GAAS

  9. Chapter 12 Reports on audited Financial Statements

  10. PCAOB RELEASE NO. 104-2005-119 The Firm's evaluation of the issuer's ability to continue as a going concern was inadequate. The Firm's conclusion that the issuer had the ability to do so was based, in part, on the availability of the issuer's revolving credit facility. As a result, the Firm did not include a going-concern paragraph in its report on the issuer's 2003 financial statements. The issuer's access to the revolving credit facility, however, was dependent on the issuer's compliance with all the debt covenants, and the Firm failed to assess adequately the likelihood that the issuer would be able to meet one of these covenants, the 12-month trailing revenue covenant, for the first quarter of 2004. Specifically, although actual revenues for 11 of the 12 months to be used for measuring compliance with this covenant were available before the end of field work, and these amounts appeared to indicate that revenues for the 12 months would fall short of the amount that would allow the issuer to meet the covenant at the end of the first quarter, the Firm did not specifically evaluate the issuer's ability to meet this covenant for the first quarter, nor did it evaluate how the issuer would be able to continue as a going concern should it not meet the covenant.13/ In addition, the Firm did not obtain a management representation covering projections and assumptions related to the covenant. Chapter 12 Reports

  11. Chapter 5 Internal Control Evaluation

  12. PCAOB RELEASE NO. 104-2005-119 The Firm relied on certain controls, in particular general computer controls, automated application controls and security controls, without performing, or without documenting in the work papers the performance of, sufficient testing to support reliance on those controls. Deficiencies included: (1) the Firm's documented testing of certain controls only covered activities occurring outside the audit period, (2) the Firm's work papers indicated that it used reports generated by the payroll department to perform certain tests of controls, but the Firm did not document any test work over the completeness of those reports, (3) the Firm did not document the sample sizes, or how they were determined, for the testing of certain controls, Chapter 5 Internal control evaluation

  13. PCAOB RELEASE NO. 104-2005-119 the Firm assessed control risk for revenue as below the maximum, without having performed sufficient tests of the issuer's general computer controls to support that assessment. The issuer's information system processing environment relies heavily on processing of orders through an electronic data interchange that links with an enterprise system that interfaces with a separate accounts receivable system. The Firm failed to perform tests of the electronic data interchange system or the financial statement system. In addition, for the controls that the Firm did test, the work papers did not provide evidence that the systems tested and relied upon during the audit continued to operate effectively throughout the period of intended reliance. Chapter 5 Internal control evaluation

  14. PCAOB RELEASE NO. 104-2005-119 the Firm assessed control risk in one area as "low" without having performed sufficient tests of controls to support that assessment. The Firm's controls testing relied on system-generated reports, without the Firm having tested the underlying data, general IT controls, or related system application controls to gain assurance that the reports were accurate and complete. Chapter 5 Internal control evaluation

  15. PCAOB RELEASE NO. 104-2005-119 There was also no evidence in the work papers to indicate that the Firm (1) audited the income tax provision beyond comparing the issuer's tax schedules to the financial statement disclosures; (2) obtained testing results that supported the Firm's assessment of control risk as below the maximum; (3) considered the effects of distributor agreements on revenue recognition, even though sales to third-party distributors contributed 64 percent of net sales in 2003; or (4) performed required journal entry testing or look-back testing of significant estimates. Chapter 5 Internal control evaluation

  16. PCAOB RELEASE NO. 104-2005-119 PCAOB standards require the auditor to test internal controls before relying on them for the purpose of designing and performing the substantive audit procedures. In 13 instances involving the audits of 10 issuers, the Firm failed to test, or failed to perform sufficient tests of, controls that the Firm relied on in designing and performing its substantive audit procedures. The instances included the following: Chapter 5 Internal control evaluation

  17. PCAOB RELEASE NO. 104-2005-119 • The Firm relied on information technology ("IT") application controls that had not been tested for several years. Chapter 5 Internal control evaluation

  18. PCAOB RELEASE NO. 104-2005-119 The Firm relied on IT system-generated data without testing the IT general computer and/or application controls. Chapter 5 Internal control evaluation

  19. PCAOB RELEASE NO. 104-2005-119 ... the Firm inappropriately relied on the IT general controls at a service organization that managed and operated the infrastructure for the issuer's centralized general ledger system, without sufficient testing of those controls. Chapter 5 Internal control evaluation

  20. PCAOB RELEASE NO. 104-2005-119 • The Firm assessed control risk as "high" for expenses, but ....., failed to perform sufficient substantive procedures on expense balances. Chapter 3 audit risk model

  21. PCAOB RELEASE NO. 104-2005-119 • the Firm failing to obtain, or failing to document in the work papers that it had obtained, sufficient competent evidential matter to support its audit opinion. Those deficiencies included the following:. Chapter 4 work paper documentation

  22. Chapter 11 Completing the Audit

  23. PCAOB RELEASE NO. 104-2005-119 Chapter 11 – completing the audit

  24. PCAOB RELEASE NO. 104-2005-119 Chapter 11 – completing the audit

  25. PCAOB RELEASE NO. 104-2005-119 Chapter 11 – completing the audit

  26. PCAOB RELEASE NO. 104-2005-119 Chapter 11 – completing the audit

  27. PCAOB RELEASE NO. 104-2005-119 Chapter 11 – completing the audit

  28. PCAOB RELEASE NO. 104-2005-119 Chapter 11 – completing the audit

  29. PCAOB RELEASE NO. 104-2005-119 Chapter 11 – completing the audit

  30. PCAOB RELEASE NO. 104-2005-119 Chapter 11 – completing the audit

  31. PCAOB RELEASE NO. 104-2005-119 Chapter 11 – completing the audit