Financial Statements Assertions: Ensuring Accuracy and Reliability

1. Unit 15 October 7, 2019

2. Financial Statements

3. Assertions • Existence/Occurrence • Completeness/Period • Valuation/Allocation • Rights/Obligations • Presentation/Disclosure Management is assumed to make these five assertions about the financial statements ANY AND EVERY TIME Financial Statements ARE PROVIDED TO OUTSIDERS

4. Management Assertions MANAGEMENT is responsible for the accuracy and reliability of the financial statements. The Sarbanes-Oxley Act of 2002 is very clear and unambiguous. Management must design, implement, operate, maintain, and monitor an Internal Control System.

5. Management Assertions MANAGEMENT is responsible for the accuracy and reliability of the financial statements. Management must also periodically test the Internal Control System, and report the results of those tests in the Annual Report Management must design, implement, operate, maintain, monitor, an Internal Control System.

6. DEFINITION OF INTERNAL CONTROL Internal control is broadly defined as a process, effected by an entity's Board of Directors, Managementand other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations. Reliability of financial reporting. Compliance with applicable laws and regulations. (From the 2013 Update of the COSO 1992 Internal Control Integrated Framework)

7. Objectivesof the Internal Control System • Promote accuracy and reliabilityof accounting records, info, and statements • Promote efficiency and effectivenessof the organization’s operations • Measure compliancewith laws, regulations, management policies and procedures

8. Components of the Internal Control System • Control Environment • Risk Assessment • Control Activities • Communication and Information • Monitoring COSO Integrated Framework of Internal Control, 2013

9. COSO Cube

11. Common Control Activities • Segregation of Duties, Checks and Balances • Using Documents and Records • Pre-numbered Documents and check-off lists • Written policies and procedures • Authorizations and Chain of Command, Responsibility • Background checks, drug tests, employment policies • Employee Training Programs • Performance Evaluations, feedback, quick accountability • Fidelity Bonding of Employees • Mandatory vacations • Employee Termination procedures • Mandatory Use of Technology • Physical Controls and Physical Security

12. COSO ERM Framework Enterprise Risk Management Internal Control GOVERNANCE BODIES BOARDS OF DIRECTORS RISK CONTROL OFFICERS MANAGEMENT ACCOUNTANTS AUDITORS

13. Questions about internal control?

16. Private Company vs. Public Company Shares of Ownership Issuance of shares is highly regulated Shares traded on the open market Subject to SEC and related federal regulations which require Public Reporting and annual audits. Shares of Ownership Issuance of shares is relatively unregulated Shares bought and sold privately Relatively private reporting, no legal audit requirement. (*) * -- private companies with more than 500 shareholders and $10 million in assets must file with the SEC but do not have to make their reports public.

17. Public Company Reporting Requirements SEC registration required before Initial Public Offering (IPO) Annual Report 10-K must be filed with the SEC every year. Some companies are subject to quarterly filings: Form 10-Q All SEC filings are publicly available via the SEC’s EDGAR database. Electronic Data Gathering, Analysis, and Retrieval database Publish an Annual Report to Shareholders

19. Annual Report to Shareholders Financial Statements (Income Statement, Balance Sheet, Cash Flows, and Owner’s Equity ) Footnotes (Disclosure Notes) to the Financial Statements Management’s Discussion and Analysis (MD&A) List of Board Members and Executive Management Management’s Report on the Internal Control Tests Financial Auditor’s Report on the Internal Control Tests Report of the Independent Financial Auditors

20. Annual Report to Shareholders Financial Statements (Income Statement, Balance Sheet, Cash Flows, and Owner’s Equity ) Footnotes (Disclosure Notes) to the Financial Statements Management’s Discussion and Analysis (MD&A) List of Board Members and Executive Management Management’s Report on the Internal Control Tests Financial Auditor’s Report on the Internal Control Tests Report of the Independent Financial Auditors

21. Auditors gotta audit….

22. Page 333: The role of the auditor 1. Examine the financial statements and underlying accounting records 2. Assume legal/professional responsibility to the public as well as the client. 3. Determine if statements are materially correct, not absolutely correct. 4. Express an opinion as to whether the financials adhere to GAAP. 5. Maintain confidentiality, except for legal obligations to report fraud and malfeasance.

23. Auditor Eligibility: Independence Independent from the company in all respects Independent in fact and appearance No consulting or bookkeeping services, nor any other goods or services No close friendships, no gifts, no favors, scrutiny of social relationships and interactions Auditors’ families must have no material interest or dealings with the company Auditor is selected by Audit Committee of the Board of Directors Auditor selection is often ratified by the shareholders by vote

24. Auditor’s Responsibility Legal Responsibility to the public: the shareholders (current and future) Secondary Fiduciary responsibility to the company (to use professionalism) Inspect and Test the Internal Control System for design and operational adequacy Examine the financial statements prepared by management Examine underlying records used to compile the financials Determine whether the recording processes and financials follow GAAP Express an opinion as to whether the financials materially reflect the financial position of the company and the results of operations for the period. Maintain client confidentiality

25. Auditor’s Confidentiality Not written in law, as is legal and clergy confidentiality Auditor’s Code of Ethics Prevents disclosure of findings to outside parties without permission of client company Confidentiality principle does not prevent sworn testimony in a Court of Law Requires reporting of suspicion of fraud to management, and the Board of Directors Requires reporting of mis-reporting to management and the Board If management and the Board do not handle and correct the situation, the auditor must withdraw from the engagement and not express an opinion at all.

26. Types of Opinions Unqualified Opinion It is our opinion that the recordkeeping and financials adhere to GAAP and reflect, in all material respects, the financial position of the company and the results of operations. Qualified Opinion … with the exception of ---- Adverse Opinion It is our opinion that the recordkeeping and financials do not adhere to GAAP and/or do not reflect the financial position of the company and/or the results of operations. Disclaimer We were unable to form an opinion

27. Questions? Don’t forget Homework 15