Simply Soups Inc. Background and Case Introduction Electronic Confirmation Process Simply Soups Inc. Background and Case Introduction edu.Confirmation.com © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

Session ONE Case Study Kick-off © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

Objectives: Audit Objectives To develop critical think skills by identifying risks in the confirmation process To evaluate the persuasiveness of confirmation responses and recognize alternative audit procedures for confirmations Practical Objectives To utilize an electronic confirmation platform Regulatory Objectives To understand the proposed confirmation standard To understand the audit documentation standard Share the objectives of the case study. Technical Objective To understand the steps necessary to evaluate a third party intermediary’s control environment © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

External Confirmation “ Audit evidence obtained as a direct written response to the auditor from a third party in paper form, or by electronic or other medium. ” Define the confirmation process. Source of definition: ISA 505 in agreement with interim proposed standard on confirmations by the PCAOB. Consistent with AU 330. © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

External Confirmation The confirmation process includes: Selecting items for confirmation Designing the request Communicating the request to the appropriate third party Obtaining the response Evaluating the information received, including its reliability Source: AU 330.04 Explain that confirmations are used extensively on audits. They are used during substantive test-work and can provide reliable evidence for one or many assertions, depending on their design. The process for confirmation test-work remains the same whether they are paper-based or electronic. Guidance for confirmations: AU 330-The Confirmation Process (SAS 67) AU 9330-The Confirmation Process: Auditing Interpretations of Section 330 PCAOB Statement on Proposed Auditing Standard Related to Confirmation ISA 505-The Confirmation Process Per the proposed standard: Paragraph 18- The auditor should design confirmation requests to establish direct communication between the confirming party and the auditor to minimize the possibility that the audit evidence resulting from the confirmation procedures might not be reliable as a result of interception, alteration, or fraud. © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

The Confirmation Process Auditors should … Exercise professional skepticism Authenticate responding entity Validate authorized respondent Maintain control Directly communicate with the respondent © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

Electronic Confirmations The ASB and IAASB state that electronic confirmations can be considered reliable audit evidence if the auditor is satisfied that… The process is secure and properly controlled There is direct communication The information is obtained from a third party who is the intended respondent Note that even though the following guidance applies to paper based as well as electronic confirmations, there are unique factors to consider when using the electronic process. The auditor should design confirmation requests to establish direct communication between the confirming party and the auditor to minimize the possibility that the audit evidence resulting from the confirmation procedures might not be reliable as a result of interception, alteration, or fraud. The auditor should assess the reliability of confirmation responses. Any confirmation response carries some risk of interception, alteration, or fraud although such risks are mitigated by properly designing confirmation requests and properly performing confirmation procedures. Such risk exists regardless of whether a response is obtained in paper form or by electronic or other medium. Factors that the auditor should take into account in assessing the reliability of confirmation responses include, but are not limited to, whether confirmation responses: Are returned to the auditor indirectly because the confirming parties forwarded the confirmation responses to the company. Appear not to have come from the originally intended confirming parties. Contradict other information obtained during the audit. Come from addresses other than the address to which the auditor sent the confirmation requests. Are not the original confirmation requests that were sent to the confirming parties. Do not include the signatures of or acknowledgements by the confirming parties. Reflect local customs that may affect the confirmation responses, such as customs that create an environment in which confirmation responses are inherently unreliable. © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

Electronic Confirmations: RISKS Reliability Risks Process might not be secure or properly controlled Respondent is not authorized to respond Integrity of the transmission might have been compromised Discuss the unique risks of using electronic confirmations as compared to the traditional paper-based approach. The audit standard tells us in order to use electronic confirmations, we must assess the controls that the provider has in place to verify the authenticity of each financial institution and vendor as well as maintain control/security over the process. © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

Electronic Confirmation Controls If an intermediary is used to facilitate confirmations, the AUDITOR should obtain an understanding of the controls over the procedures used by the intermediary to process the confirmation requests and responses. Tell the students that we will be working with edu.Confirmation.com. This is the educational platform created by Confirmation.com specifically for use with these case materials.   Confirmation.com is the web-based audit confirmation provider and creator of electronic audit confirmations that helps bring efficiency and security to the electronic confirmation process. Security is the cornerstone of the electronic process and confirmation.com must meet certain security requirements needed for the auditor to maintain control over the process and protect sensitive information © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

AS No. 3: Audit Documentation The written record that provides the support for the representations in the auditor's report should: Demonstrate compliance with the standards Support the basis for conclusions reached Demonstrate that the underlying accounting records agree or reconcile with the financial statements Audit documentation is the written record that provides the support for the representations in the auditor's report. It should: Demonstrate that the engagement complied with the standards, Support the basis for the auditor's conclusions concerning every relevant financial statement assertion, and Demonstrate that the underlying accounting records agreed or reconciled with the financial statements. Discuss how these objectives are achieved during confirmation test-work. Examples of typical audit documentation for the confirmation process would include: Memos or narratives describing significant risks, assertions being tested and sample selection. Control Logs Confirm responses received from third parties Resolution of responses Documentation of alternate procedures Conclusion of test-work © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

AS No. 3: Audit Documentation Remember Unless you properly DOCUMENT AND RETAIN EVIDENCE of your work, others will not be able to rely on the testing performed. Explain to the participants that unless their work is properly documented and retained in accordance with AS 3, others will not be able to rely on the testing performed. Per AS 3, the following groups are likely to rely on another auditors documentation to understand and evaluate the work performed: New auditors Supervisors on the engagement Engagement quality reviewers Successor auditors Internal and external inspection teams Other advisors © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

Why Confirm Cash? Provides audit evidence to address the risk of material misstatement due to fraud and because of the importance of cash to a company’s liquidity and ongoing operations. High profile fraud cases involving the overstatement of cash: Olympus – Billions of dollars in cash overstated and hidden for 14 years due to hidden guarantees Parmalat - $4.9Billion of cash overstated due to fraudulent cash confirmations over 10 year period Healthsouth - $400Million of cash overstated, hidden in lots of small accounts because audit procedures called for confirming only large account balances © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

Case Study You: Audit Staff Firm: Putnam and Jacobs LLP Client: Simply Soups Inc. Year End: December 31, 2013 Task: Complete the audit step “Confirm Cash Balances” Use: Positive blank confirmations Service: edu.Confirmation.com Explain the “positive confirmation” to the class. A positive cash confirmation request can be defined as a “request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information. (ISA 500, 411) Per the PCAOB proposed standard, a risk associated with positive confirmations is “that a confirming party will reply to the confirmation request without verifying that the information is correct”. To reduce this risk, a blank confirmation can be sent to the confirming party. When confirming the cash accounts, you should include the account number but do not fill in the balance or amount on the confirmation request. Instead, you rely on the confirming party to fill in the amount. © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

edu.Confirmation.com https://edu.confirmation.com/home.aspx Before giving the students the logistics of the cash study : Watch the tutorial for edu.Confirmation.com in class. (if the link does not work you can cut and paste into a browser.) edu.Confirmation.com. Refer to the professor’s instruction guide for suggested points to stress during the tutorial. https://edu.confirmation.com/home.aspx © 2013 Professor Brian Fox. Edu.Confirmation.com Used with Permission. All rights reserved.

Case Study Materials Download from: edu.Confirmation.com Includes: Simply Soups Inc. Case Study Audit Procedure Checklist Confirmation Testing Workpaper and Memo Client Audit Materials Trial Balance Cash Lead Sheet Bank Reconciliation Summary Bank Account Listing Instructional Guide for Student A true step-by-step handbook edu.Confirmation.com Shortcuts Trouble Shooting Checklist Technical Guide Students should download the case materials directly from the edu.Confirmation.com website. © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

177 Washington Lane, Cherry Hill, NJ 08034 Trial Balance Simply Soups Inc. PBC 177 Washington Lane, Cherry Hill, NJ 08034 609-555-5555 Trial Balance As of December 31, 2013   Debit Credit Cash - Acct. 10000 10001 Fifth Federal 478,921.54 A 10002 Sparkasse-Frankfurt 235,087.29 10003 American NorthWest Bank 144,019.83 10004 BNY Federal 477,832.15 10005 Tenth National Bank 301,015.18 10006 Bank of Citizens 348,701.60 1,985,577.59 Accounts Receivable - Acct. 11000 Tick Legend The sum of this balance was agreed into the Balance Sheet without exception, W. Downey (Intern) Prepared by client See the professor’s instructional guide for suggested details on each document. The Document is represented as EXHIBIT 1.

Cash Lead Sheet Tick Legend Cash Lead Sheet TB Agreed to 12/31/2013 Trial Balance without exception. Simply Soups Inc. PQ Agreed to 9/30/2013 Trial Balance without exception. As of December 31, 2013 PY Agreed to 12/31/2012 Trial Balance without exception. Account Balance 12/31/13 TB Balance 9/30/13 PQ Change from 9/30/13 to 12/31/13 ($) Change from 9/30/13 to 12/31/13 (%) Balance 12/31/12 PY Change from 12/31/12 to 12/31/13 ($) Change 12/31/12 to 12/31/13 (%) 10001 Fifth Federal $478,922 $492,531   ($13,610) -2.76% $489,120 -$10,198 -2.09% 10002 Sparkasse-Frankfurt $235,087 $229,791 $5,296 2.30% $231,686 $3,401 1.47% 10003 American NorthWest Bank $144,020 $151,675 ($7,655) -5.05% $149,277 -$5,257 -3.52% 10004 BNY Federal $477,832 $462,403 $15,429 3.34% $469,513 $8,319 1.77% 10005 Tenth National Bank $301,015 $311,653 ($10,638) -3.41% $316,987 -$15,972 -5.04% 10006 Bank of Citizen $348,702 $309,243 $39,458 12.76% $311,785 $36,917 11.84% See the professor’s instructional guide for suggested details on each document. The Document is represented as EXHIBIT 2.

Bank Reconciliation Summary Account Bank Balance 12/31/13 A Reconciling Items B Book Balance 12/31/13 TB 10001 Fifth Federal $508,219   $29,298 $478,922 10002 Sparkasse-Frankfurt $315,712 $80,624 $235,087 10003 American NorthWest Bank $121,987 ($22,033) $144,020 10004 BNY Federal $493,154 $15,322 $477,832 10005 Tenth National Bank $312,580 $11,565 $301,015 10006 Bank of Citizens $304,312 ($44,389) $348,702 Tick Legend Agreed to 12/31/2013 Bank Statements without exception. Reconciling items were tested without exception, see Bank Test Documentation (Audit Step 1000-3). Agreed to 12/31/2013 Trial Balance without exception. See the professor’s instructional guide for suggested details on each deliverable. The Document is represented as EXHIBIT 3.

Bank Account Listing Bank Name Bank Address Bank Manager Account Name Account Numbers Authorized Signer Fifth Federal 73 Union Street New York NY 10001 George Williams Checking 675-42223 Lou Jennings Sparkasse-Frankfurt Landstrasse 89-21 Frankfurt 60326 DE Helga Jones 44-322711 American NorthWest Bank 234 Market Street Milwaukee WI 53202 Richard Johnson 05-198305 BNY Federal 3621 Avenue De Lafayette Boston MA 02111 Betty Smith Savings 061-22031 Tenth National Bank 313 S. Chadwick Street Philadelphia PA 19103 Greg Fordham 26-798422 Bank of Citizens 3621 Union Ave Denver CO 80220 Denise Bentley 89-123661 Provides the students with the accounts that need to be confirmed through edu.Confirmation.com. All teams should enter the first 4 accounts. Students/teams doing the advanced confirmations will also set up the last 2 accounts. The Document is represented as EXHIBIT 4.

Overview of Steps Task Date Initial Register at edu.Confirmation.com Watch 3-minute tutorial Review client documents and audit workpapers Assess controls in place around the edu.Confirmation.com service Set up client Enable sharing for team members* Add bank accounts Request Client Authorization Code approval (client’s electronic signature) Initiate confirmations Evaluate responses Initiate second requests or reconfirmations Evaluate responses and complete deliverables Review the logistics of the case study listed on the slide. The Document is represented as abbreviated version of Appendix A. Register as a new user on edu.Confirmation.com. Remind students to use their school email. Encourage students to go through the tutorial again on their own. Examine the materials provided to them. Set up the client. REMINDER: if they are working in a group, only one member should set up the new client. Add the bank accounts from the information provided to them from the client. It is important that all confirmations are initiated at the same time. This will prevent the student from having trouble with the Authorization Code. The Authorization Code (also sometimes referred to as the AUD) is the client’s electronic signature. For control purposes, the Authorization Code is only valid for a limited time (usually 30 days) and number of initiations (usually 3). Remind the students that they are confirming as of 12/31/2013. When the confirm is initiated, the students will see an invoice that is charged to the engagement. They must accept the charge however this is NOT an actual charge to them. © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved. * This step is only necessary if teams are used.

Confirmation Testing Workpaper Simply Soups Inc. As of December 31, 2013 Account Reconciled Bank Balance as of 12/31/13 (per Client) A Confirmed Bank Balance as of 12/31/13 (per Bank)   Differences Noted 10001 Fifth Federal $508,219.33 10002 Sparkasse-Frankfurt $315,711.76 10003 American NorthWest Bank $121,987.17 10004 BNY Federal $493,154.12 10005 Tenth National Bank $312,580.29 10006 Bank of Citizens $304,312.43 Tick Legend A Balances were traced from Bank Reconciliation Testing Summary (WP 100-2). Deliverables and documentation of results; The Document is represented as Appendix B. See the professor’s instructional guide for suggested details on each deliverable. STUDENT WORKPAPER DELIVERABLE

Evaluating Responses Agree confirmed detail to the bank account listing on the key information summary; Agree confirmed balances to the reported bank balance on the bank reconciliation testing summary; Is the confirmation persuasive audit evidence? NOTE: If the confirmation is not persuasive audit evidence, additional confirmation requests may be sent or alternate procedures may be performed. Persuasive audit evidence: (PCAOB proposed standard paragraphs 22, 30-33 and 36-38). © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

Deliverables Completed Audit Procedure Checklist Completed Confirmation Testing Workpaper and Memo Workpaper: Evaluation of initial confirmations Evaluation of reconfirmations or second confirmations (where necessary) Any additional steps or risks Memo: Purpose for sending positive confirmations Reasons for using a third-party intermediary Risks involved in using a third-party intermediary Steps taken to gain comfort over such risks Assessment of whether the work performed provides the basis to reach a conclusion on the financial statement assertions tested Confirmation Log Received Confirmations Deliverables and documentation of results See the professor’s instructional guide for suggested details on each deliverable. 1 Completed Audit Procedure Checklist -Provided in the Case Materials 3 Confirmation Log -From the dashboard, select the client, then under the Confirmation Statuses section, select view log and then select export. 4 Received Confirmations -Download copies of all completed confirmations from the Reports Tab © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

Students may work individually or in groups! Audit Team Some of the audit procedures for obtaining audit evidence for CASH has already been performed by: Audit Intern Audit Associate Instructor serves as the Audit Manager Students may work individually or in groups! The case study can be done individually or in teams of up to 5 people. Ideally, and if the class size allows it, students get the most out of the case study by working individually or in smaller teams of 2 or 3. © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.

QUESTIONS? End of Session ONE © 2013 Dr. Denise Hanes, Dr. Barbara Porco, and Dr. Jay Thibodeau Used with Permission. All rights reserved.