The Annual Audit

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The Annual Audit
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Agenda

• Objectives of the Annual Audit
• Audit process / approach
• Auditor areas of focus
• Audit Committee / Auditor Communications
• Q A

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Annual Audit Objectives

• Provide support for Auditors opinion whether
  financial statements of each investment company
  are fairly stated in all material respects
• Provide basis for Auditors conclusions with
  respect to the investment companys control
  environment whether any material weaknesses
  exist within control environment

4
Financial Statement Opinion

• fairly stated in all materials respects no
  error(s) in financial statements which would
  cause a reasonable person to modify their
  conclusions with respect to the financial
  statements
• Subjective concept
• Quantitative and qualitative assessment
• Starting point for assessment is auditor defined
  materiality (dollar amount)

5
Control Environment

• Assessment of the procedures and controls over
  financial reporting
• Determine whether a deficiency or material
  weakness exists
• Evaluation of the severity of each control
  deficiency to determine whether deficiency
  results in material weakness
• Severity depends on reasonable possibility of
  failure to prevent or detect, not actual
  occurrence of misstatement
• Material weakness reasonable possibility that a
  material misstatement of annual or interim
  financial statements will not be prevented or
  detected timely
• Significant Deficiency less severe that
  material weakness but important enough to merit
  attention by those responsible for oversight of
  financial reporting

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Audit Process / Approach

• Top Down Approach identifying entity level
  controls
• Risk based
• Knowledge of financial statement close process
• Matters affecting the industry
• Continuous process, includes planning and testing
• Culminates in audit plan detailing testing
  approach and scope
• Audit plan focuses on areas of highest risk and
  largest balances on Financial Statements

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Investment Company Audit Risk Areas

• Investment valuation and existence
• Fair valued and thinly traded securities
• Complex and unique securities
• Derivatives
• Foreign Locations
• Asset based fees / caps / waivers
• Shareholder activity
• Tax compliance
• Compliance securities rules regulations
• Use of service organizations

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Auditor / Audit Committee Communications

• Driven by
• Number of funds and timing of year-end audits
• Audit Committee preference / style
• Regulation
• Rule 2-07 of Sarbanes/Oxley Act
• PCAOB AU Section 380 (commonly known as SAS 61
  Communication with Audit Committees)
• Auditor communication should include both formal
  (required) and informal
• Pre-approval of services
• Discussion of Independence of Auditor and
  understanding of the Investment Company Complex

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Questions?