Assurance and Attestation Services BA 427 Winter 2007 Substantive Procedures Glenn Lovett, Shareholder

What can Certified Public Accountants do that no one else can? Answer: Express an opinion on financial statements

Audit Report

Independent Auditors' Report Board of Directors Portland, Oregon We have audited the accompanying balance sheets of ABC Corporation as of December 31, 2006 and 2005, and the related statements of operations and shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. “Our responsibility is to express an opinion on these financial statements based on our audits.”

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we “plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.” An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. “An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management”, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Corporation as of December 31, 2006 and 2005, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Significant Cycles

Revenue > Sales > Accounts Receivable Conversion > Cost of Sales > Purchases > Accounts Payable > Inventory Financial Management >Interest > Cash > Investments > Goodwill > Debt > Equity

Significant Cycles Payroll > Payroll Expenses > Accruals > Compensated Absences Expenditure > All other expenses > Prepaids > Accruals Other > Taxes

Assertions

Completeness whether all transactions and accounts that should be present in the financial statements are included. Rights and Obligations whether, at a given date, all assets are the rights of entity and all liabilities are the obligations of the entity. Valuation or Allocation whether the assets, liabilities, revenues, and expenses of an entity have been included in the financial statements at the appropriate amounts in conformity with GAAP. Existence or Occurrence whether assets/liabilities exist at a given date and whether recorded transactions have occurred during a given period. Statement Presentation and Disclosure whether financial statement components have been properly classified, described, and disclosed.

Risks - Overall and Direction

Management Industry Economic Governance Ownership Susceptibility to Misappropriation

Fraud Risk

Pressure Opportunity Rationalization

Glenn’s Insight #1 “You always trust the one that steals from you”

Internal Controls

Control Environment Risk Assessment Control Activities Information and Communication Monitoring

Glenn’s Insight #2 “You cannot audit financial statements that are unauditable”

Relationship Between Risk, Internal Control and Detection (Substantive) Procedures

Relationship Between Risk, Internal Control and Substantive Procedures Low Inherent Risk Low Analytic Risk Low Internal Control Risk None of the Above Moderate or High Substantive Risk Low or very low Substantive Risk

Low Control, Inherent and Analytic Risk High Substantive Risk

High Control (SAS) Inherent and Analytic Risk Low Substantive Risk

Types of Substantive Procedures

Initial understanding of the client Analytical procedures Tests of details Tests of balances Tests of accounting estimates Tests of Disclosures

Selecting the Appropriate Substantive Tests

Level of detection risk Timing of procedures Quality of Results (competence of evidential matter) Efficiency

Glenn’s Insight #3 “An audit workpaper should be designed to be read on an average computer screen in 10pt font.”

Level of Quality of Substantive Procedures

Personal Inspection/Observation Specialist report Third party corroboration Vouching to documents Analytical procedures Related party representation

Audit Procedures for Substantive Tests

Counting Tracing/Vouching Observing/Inspecting Confirming Analytical Procedures Inquiring Reperforming Experts

Glenn’s Insight #4 “Don’t put workpapers in the file that don’t have any audit procedures on them.”

Examples of Substantive Procedures Related to Cycles and Assertions

Conversion Completeness Counting Inventory Observation Vouching Experts Existence Inventory Observation Vouching Experts

Conversion Valuation Inventory Observation Reperformance Observation/Inspection Vouching Rights and Obligations Inventory Observation Vouching Disclosure Vouching/Tracing Reading Contracts

Revenue CompletenessVouching ExistenceConfirmation Vouching Inquiry

Revenue ValuationReperformance Analytical Procedures Rights and ObligationsVouching DisclosureInquiry Vouching

Glenn’s Insight #5 “Document all work outlined in the audit program and only do work outlined in the audit program.”