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Understanding an Audit. Texas Tech University - ALC January 22, 2008. Agenda. Grant Thornton overview Breakout #1 Changes in the audit profession Criteria for accepting new clients Breakout #2 Audit process Breakout #3. Our guiding principles… R I P L.
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Understanding an Audit Texas Tech University - ALC January 22, 2008
Agenda • Grant Thornton overview • Breakout #1 • Changes in the audit profession • Criteria for accepting new clients • Breakout #2 • Audit process • Breakout #3
Our guiding principles…R I P L • Universal Respect for firm policies and each other, guaranteeing a unified direction • Fierce commitment to Integrity • Professional excellence in all our efforts • Leadership in the accounting profession, the business community and within our firm
The Grant Thornton Experience for Our People Offer meaningfuland challenging work Foster aculture of prideby enhancingour reputationin the marketplace Providecareer developmentto support ourprofessional growth The Grant ThorntonExperiencefor Our People Create an environmentwhere we feelconnected and appreciated Recognizewhat we doand pay us fairly
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Agenda • Grant Thornton overview • Breakout #1 • Changes in the audit profession • Criteria for accepting new clients • Breakout #2 • Audit process • Breakout #3
Breakout #1 Why are audits needed? What does an audit entail? Why would anyone want to be an auditor?
What is the value of an audit? What is the value of an audit? • Provides independent assurance on information • Increases the reliability of information for users • Public, stockholders, investors, lenders, government Why do we need audits? • To obtain sufficient relevant and reliable audit evidence in order to afford a reasonable basis for our opinion on the client’s financial statements
Changes in public accounting….. • accounting rules and regulations have become more complex(i.e., revenue recognition, derivatives, special purpose entities, etc.) • accounting industry has been moving to more of a fair valueof accounting, which is much more difficult to estimate than historical cost • Sarbanes-Oxley Act signed into law July 2002 • expectationsof CPAs continue to increase with regards to integrity, competence and fraud discovery
Who are these individuals and why are they significant to public accounting? 1 2 3 5 4 6
Criminal Penalties Sarbanes-Oxley Certification 10 to 20 years Escaping from prison 1 to 2 years Kidnapping involving ransom 3 to 5 years Second degree murder 11 to 14 years Air piracy 20 to 25 years
Agenda • Grant Thornton overview • Breakout #1 • Changes in the audit profession • Criteria for accepting new clients • Breakout #2 • Audit process • Breakout #3
Criteria for accepting new clients • industry environment • future growth of the company • material litigation and ongoing investigations • management integrity • international structure • satisfactory engagement economics • reasons for leaving current auditors, if applicable
Agenda • Grant Thornton overview • Breakout #1 • Changes in the audit profession • Criteria for accepting new clients • Breakout #2 • Audit process • Breakout #3
Not black and white… Podco Manufacturing - Background • high-techmanufacturing company • signedsales agreement with i-pod to manufacture part for 4th generation i-pod • company has no cash flow • stock based payment because limited cash • company is family-owned and well known in the community • company founded 3 years ago and are looking for a new auditor • company is involved in significant litigation regarding patent infringement • company has incurred double digit growth for two years • intends to go public in 3 years
BREAKOUT #2Bidding on an Audit Proposal What factors would you consider when deciding if you should accept Podco Manufacturing as a new client? What are the risks?
Agenda • Grant Thornton overview • Breakout #1 • Changes in the audit profession • Criteria for accepting new clients • Breakout #2 • Audit process • Breakout #3
Audit process Audit process can be broken down as follows: • Planning • Preliminary • Final Fieldwork • Issue the Report • Engagement Wrap-up
Agenda • Grant Thornton overview • Breakout #1 • Changes in the audit profession • Criteria for accepting new clients • Breakout #2 • Audit process • Breakout #3
Breakout #3Audit process Determine which stage the following audit procedures are performed. The stages of an audit are as follows: • Planning • Preliminary • Final Fieldwork • Issue the Report • Wrap-up
The audit engagement team • Partner- Overall responsibility for services provided • Senior Manager\Manager - Supervises the audit work • Senior Associate - Responsible for day-to-day conduct of the audit • Staff/ Associate - Perform procedures as assigned • Intern - Perform procedures as assigned • Concurring reviewer - Quality Assurance
Step 1 – Planning • risk assessment • fraud risk factors • changes in IT systems • impact of new accounting pronouncements • turnover of top management • prior year issues • gather knowledge of the business • design and develop appropriate audit procedures, based upon risk assessment 30
Step 2 – Preliminary Stage Testing and evaluation of controls • staff and senior complete tests of controls • audit significant transactions • perform some analytical work • vouch property additions • continuous job training and feedback for Staff and Seniors 31
Step 3 – Final fieldwork • perform substantive test of account balances • perform legal circularization • draft financial statements • perform search for unrecorded liabilities • feedback for Staff and Seniors 32
Step 4 - Issue the Report • quality control reviews • review client- prepared financials • issue audit opinion • issue Internal Control Letter • archive files 33
Step 5 – Engagement wrap up • time analysis by area • formal evaluations of staff and seniors • audit team analysis of planning ideas for next audit 34
Questions A passion for the business of accounting