Auditing

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Auditing

• Bus 425 - spring 1999
• tad miller

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a day in court
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• prospective jurors

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• December 31, 1987 FILL IN THE BLANK Savings
  and Loans year-end
• March 15, 1988 BIG audit firm issued an
  Unqualified Opinion on those financial statements
• During 1988 FILL IN THE BLANK SL sold
  250,000,000 in bonds
• April 14, 1989 FILL IN THE BLANK SL became
  insolvent.

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• included in the Prospectus given to investors
  who purchased the bonds
• FILL IN THE BLANK SLs financial statements
• BIG audit firms Unqualified Opinion

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Unqualified Opinion page 759

• We have audited the accompanying balance sheet of
  Miller Motor Co. as of Dec. 31, 1997, and the
  related statements of income, retained earnings
  and cash flows for the year then ended. These
  statements are the responsibility of the
  Companys management. Our responsibility is to
  express an opinion on these financial statements
  based on our audits.
• We conducted our audits in accordance with
  generally accepted auditing standards. Those
  standards require that we plan and perform the
  audit 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 Miller Motor
  Co. as of Dec. 31, 1997, and the results of its
  operations and cash flows for the year then ended
  in conformity with generally accepted accounting
  principles.

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• people who purchased those bonds are suing
  BIG-SIX audit firm
• they claim they relied on the auditors
  Unqualified Opinion

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• Big Audit firm was well compensated to audit the
  financial statements
• Big Audit firm was well compensated to accept
  part of the market risk
• Partner in charge of audit gt 225,000/ yr (back
  in 1987)

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• purpose of financial statements
• role of an audit
• 4 possible outcomes
• audit risk
• opinions

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• 4 possible outcomes

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• 4 possible outcomes

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• 4 possible outcomes

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• 4 possible outcomes

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• 4 possible outcomes

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audit risk

• Beta error audit risk
• page 231 risk that the auditor fails to
  modify his opinion when financial statements are
  materially misstated

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AR CR DR

• control risk risk that a material
  misstatement could occur and not be prevented or
  detected by the clients internal controls
• detection risk risk that the auditor will not
  detect a material misstatement

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detection ??

• audit procedures or audit tests
• to gather evidence
• to detect misstatements
• or evidence that indicates the account balances
  are correct

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• when is audit risk acceptably low ??
• Pretend GAAS define an acceptably low
  probability as 0.04
• AR CR DR

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• AR(gaas) lt 0.04
• if Internal Controls are great say CR lt 0.04
• then DR isnt very important even if DR 1.00
• AR CR DR 0.04 DR
• AR lt 0.04

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• AR(gaas) 0.04
• but if Internal Controls are terrible say CR
  1.00
• then DR is very important
• AR CR DR

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• client acceptance
• planning the audit
• understanding internal controls
• assessing control risk
• tests
• audit report

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• remember blonde jokes ??
• do you remember men jokes ??
• what is the difference between a man
• and a 30 year government bond ?
• 30-year bonds eventually mature

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• how do you get your husband to do sit-ups ?
• tape the TVs remote control to his foot ?

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• why are blonde jokes all one-liners ?
• so men can remember them

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Organizations

• Securities Exchange Commission
• Financial Accounting Standards Board
• American Institute of Certified Public
  Accountants
• California Society of CPAs
• State Board of Accountancy

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AICPAAmerican Institute of Certified Public
Accountants

• Auditing Standards Division
• Professional Ethics Division
• CPA Firms Division
• SEC Practice Section
• Private Companies Practice Section
• Quality Review Division

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• generally accepted auditing standards
• page 41
• auditors report
• page 46 759
• financial statement assertions
• chapter 5 page 145