Today . . .

1
Today . . .

• Auditors Decision Model
• Case 9
• Case 9.a volunteers
• Introduce Lesson 11

2
Auditors Reporting Decision Model
Real-world conditions of client related to
Fee potential
Personal observation and audit firms client
selection/ retention policies
Auditing Procedures
General Guidance and criteria
Auditor
GAAP
Mental image of client conditions
GAAS and professional ethics
Utility function
Knowledge and skills
Processing
CPA firm policies
Laws and regulations
Decision (adjust, disclose modify report, resign)
Audit contract
Audited financial statements
Audit report
3
World Wide Acquisitions, Inc.(reverse the
reporting process)

• Co. A - divided audit report
• Co. B - going concern paragraph
• Co. C - except for (unjustified acctg. change)

• Co. D - accounting change paragraph (D has none)
• Co. E - related party paragraph
• Co. F - standard report -- any problems?

4
Case 9.a (see course website)

• Using WSJ Index/ Dow Jones Index / NAARS find
• Non standard audit report/financial statements
• Restatement of previous financial statements
• Resignation of auditor
• Using Edgar (sec.gov)/ NAARS/ Yahoo find /copy
• footnote/ audit report
• Form 8-K explanation to SEC
• Stock price changes for 12 month surrounding
  announcement
• Write one/two page narrative and attach the above

5
Essential Concepts of Chapter 11(Regulatory
Reporting and Disclosure from Managements
Perspective)

• Managements responsibilities under the U.S.
  securities acts
• Listing requirements of U.S. stock exchanges
• Corporate governance and audit committees
• (including BRAC and SEC initiatives)
• Interpreting mandated financial reports around
  the world

6
Private-Sector Financial Reporting Standards and
Oversight by SEC
U.S. Securities and Exchange Commission
Independence Standards Board
Auditing Standards Board (AICPA)
Financial Acctg. Standards Board
Statements on Financial Accounting Standards
Independence Standards
Statements on Auditing Standards
Disolved 2001
7
Going Public in the United States
Benefits Costs

• access to capital sources
• raise stock price due to more liquid market
• share risk of ownership
• use stock as collateral and assist mergers/
  acquisitions
• use stock options to keep employees

• cost of issuance (9-16) and continuing
  disclosure
• indep. audit committees, audits
• US GAAP-based fin. stmts., operations, risks,
  contracts, related party disclosures
• loss of control
• disclose executive holdings compensation,
  directors/ primary sh. holdings
• insider information/ insider trading
  restrictions/disclosure

8
Principal SEC Filing Forms
Form 10-K Form 10-Q Form 8-K Form S-1 Form 20-F
Item 17 Item 18 Rule 144-A
9
Directors Roles in Certification for Public
Companies
Auditor
Audit Report
Stockholders
Management
Audited Financial Statements
10
Accounting and Corporate Governance
Competitors
General public
11
Typical Auditor Communication Links for U.S.
Public Companies
Indirect responsibility
Stockholders
Direct
responsibility
Board of Directors
Chair
Inside Directors
Direct
Outside Directors (Audit Committee)
External Auditor
Communication
Chief Executive Officer
Other Officers
Audit activities
Corporate Assets, Obligations, Personnel, Processe
s, Contracts, and Activities
Financial Statement Assertions
Same person sometimes fills both roles.
12
Audit Committee Requirements

• NYSE/NASD - 3 financially literate (one expert),
  and independent Audit Committee members
• SEC -
• audit committee charter
• disclose independence of Aud. Comm., auditor
• AC discuss preferability of AccPrin used w/
  auditor
• Aud. Comm. approve financial statements
• timely reviews of quarterly fin. stmts. by
  auditor
• ASB - auditor discuss with AC uncorrected
  misstatements (certified as immaterial by
  management) and suspected illegal acts by
  client/management, etc.

13
Case 11

• Part I
• d. SEC approve auditor change?
• e. Maintain audit committee?
• f. Maintain good IC and report to sh.?
• g. Disclose risks, major customers, etc.?
• h. Cease insider trading?
• Part II trade-offs . . .