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Your audit firm, Maisy LLP, recently gained a new public client. The partner has assigned your team to do the fieldwork for this audit and has asked you to do a preliminary risk assessment. You do not yet have any prior year workpapers from the predecessor auditor, so your partner is interested in seeing how much you can learn based strictly on publicly available information. Specifically, she wants you to obtain an understanding of the company and its environment, identify the significant accounts and disclosures, and, for each of those, do a preliminary assessment of the risk of material misstatement for each relevant assertion. She expects your consideration of risk of material misstatement to be whether that risk is due to error or fraud, and to identify potential fraud risks that could be discussed in the upcoming team fraudbrainstorming session (i.e., potential opportunities and incentives/pressures to commit material fraud in the company). She expects that your analysis will include both qualitative factors and quantitative factors based on risk assessment analytical procedures. Since you have not started fieldwork yet, you will not be able to do a preliminary assessment for control risk. Thus, as it relates to control risk, your only responsibility will be to determine whether there were any material weaknesses in the prior year that you should consider in the upcoming year's audit. She has noted the following resources to help you with your search of information commonly available for public clients. She would like you to consider each of these sources and think carefully about how the information you learn relates back to the risk of material misstatement in the audit. - Form 10-K (EDGAR): annually filed financial statements and other important information for shareholders. Be careful using "risk factors" (Item 1A) because these are written from the perspective of the shareholder or a potential investor. Typically, auditors can determine what affects the risk of material misstatement by reading Business, Management's Discussion and Analysis, Critical Accounting Policies and Estimates, discussion of any pending or threatened litigation or other contingencies, the Financial Statements, and the Notes to the Financial Statements - Form 10-Q (EDGAR): quarterly filed financial statements and other important information for shareholders. The 10Q should always be read in conjunction with the most recently filed 10K because disclosures are limited to material changes since the last 10K. - Form 8-K (EDGAR): periodic filings that report material events or transactions throughout the year. Pay particular attention to these items: 1 Items 1.01 and 1.02: Entry/termination from a material agreement; Item 1.03: Bankruptcy or receivership; Item 2.01: Acquisition/disposition of assets; Item 2.02: Results of operations and financial conditions; - You should also consider listening to a webcast or reading a transcript from the earnings conference call (typically on the Investor Relations website).? - These filings often contain management forecasts. You should also consider analyst forecasts that will be available from other sources, including Yahool Finance and https:/ew,nasdaq.com/ /3 Items 2.03 and 2.04: Material changes in financial obligations and off-balance sheet arrangements; Items 2.05 and 2.06: Material impairments or costs associated with exit activities; Item 4.01: Change of auditors reported; Item 4.02: Announcement of a restatement (non-reliance); Items 5.01 or 5.02: Changes in ownership, directors, or management; Items 5.07 or 5.08 : Shareholder voting; Item 7.01: Regulation FD disclosure; Item 8.01: Other material events; and Item 9.01: Financial statements and exhibits. - DEF 14A (EDGAR): Annually filed proxy statement containing information that is relevant to shareholders for voting in annual meetings. This includes information about the board of directors and executive compensation. It also often contains the fee amount paid to the auditor. - UPLOAD or CORRESP (EDGAR): The SEC periodically reviews the 10K and other related fllings to determine compliance with GAAP and other SEC disclosure requirements. The SEC issues their comments in a letter to the company, filed as an UPLOAD filing. The company then responds to those comments by providing clarification, promising to improve disclosure in the future, or agreeing to restate previously filed information. The company's responses are filed as a CORRESP filing. - Investor Relations website: Typically available as a separate website from the company's customer-facing website and contains many of the filings above, plus other information in a more user-friendly interface. - Media reports, business press articles, etc. The partner wants you to think carefully about all of the information learned from the sources above, identify the information that is relevant to assessing the risk of material misstatement, conduct risk assessment analytical procedures, and then summarize your final conclusions in an audit-planning memo that is written professionally and free of grammatical or typographical errors such that it could be included in the audit workpapers. To help you organize your thoughts, the partner recommends following this outline for the memo: 1. Background information about the company that is relevant to the audit. 2. Identification of financial-statement-level risks of material misstatement (consider factors such as geographic locations, complexity of operations, litigation risk, industry, operating segments, management and director backgrounds, etc.). Be sure to explain how any financial-statementlevel risks you identify relate to the risk of material misstatement in your upcoming audit, a. The "Risk Factors" section of the 10K (item 1A) is a great resource, but remember that business risks are not the same thing as the risks of material misstotement. The former relates to whether the business will be able to meet their business objectives, while the latter relates to the risk that the financial statements will contain material misstatements. Clearly the two are related, but remember to stay focused on the risk of material misstatement here! 3. Calculation of overall financial statement materiality and tolerable misstatement. a. Since you are planning the upcoming audit, the 10K you will be auditing has not been released yet. So you will need to think about the net income, revenues, and assets from the most recent 10-K, and then consider whether there have been any signs of material changes for the upcoming audit based on subsequently filed 10-Qs and/or management forecasts. 4. Results of your risk assessment (i.e., preliminary) analytical procedures. a. The actual calculations for this procedure should be completed in a separate Excel file, which should be submitted along with your memo file. Use this section of the memo to reference to that work and highlight areas of particular concern and/or significance. 5. Identification of potential fraud risks that should be considered in the team fraud brainstorming session. a. Pressures/incentives to commit fraud (whether through GAAP or non-GAAP metrics, management's concerns with analyst forecasts, executive compensation benchmarks, cash versus stock-based compensation, etc.). b. Opportunities to commit fraud (consider prior-year internal control material weaknesses, accounts, and disclosures requiring significant estimates or judgment, etc.). 6. Identification of "significant" (in-scope) accounts and disclosures based on all the information assessed above. Remember to consider both qualitative and quantitative factors when determining significant accounts. For each selected account, identify the relevant assertion(s) and make recommendations for the preliminary assessment of the risk of material misstatement. These recommendations should be presented in tabular format similar to that shown below. a. Feel free to use qualitative assessments such as "High" "Medium" or "Low." This should be done for every selected account and every relevant assertion that you consider to be important for that account (choosing from the 5 PCAOB assertions we have focused on in class). You can use additional explanation in the planning memo and/or the class presentation to justify any difficult decisions. Please assume that the audit partner has set audit risk at "Low" as you make your decisions. The following example template can be used to document your work: 7. Select five of the highest-risk account/assertion combinations and describe some potential substantive auditing procedures that could be conducted to address the risk. The key here is to try and be specific to your selected company as possible given the available information; dor't just copy procedures out of your textbook. The whole point of this step is for you to use your knowledge, creativity (e.g., designing unique analytical procedures), and intuition to design your recommended procedures. 8. Other information or Issues identified, but not mentioned previously, that the partner should consider when planning the audit. In addition to the written audit-planning memo, the partner would like you to prepare a 1520 minute professional presentation to hear you summarize the most important issues from the merno. EXHibII 4.11 Duader-Mirtin, Ine.-Prelimiaary Analyileal Procedures Data Sample Memo Template General Instructions: This memo provides a template that can be used to complete the group project. Note that audit workpapers use concise, professional tone and language. Auditors use the term "we" or the firm name (PwC, EY, PYA, DHG, etc.) when documenting in the files because it reflects the audit team's conclusions. It would help to create a workpaper number for this file (e.g., 1000) and for the Excel risk assessment analytic file (e.g., 1010) and label each tab of the Excel workbook (e.g., 1010.1, 1010.2, etc.). You can then cross-reference between this file and the Excel file so that the reviewer can clearly see how the Excel analytical procedures relate to the summary discussion herein. Additional prompts for information are in bold brackets below. In the final memo, bold should only be used for headers, titles, and workpaper references. Please delete this instructional note before turning in the workpaper memo. [Insert name of public company] [Insert fiscal year end being planned - e.g., December 31, 2018] Risk Assessment and Planning Memo PURPOSE: We have been engaged to audit the financial statements of [insert name of public company] (the "Company") as of and for the year ended [Insert fiscal year end being planned, e.g., December 31, 20X9]. To plan for the upcoming audit, we have reviewed publicly available information about the company, as referenced at the end of this memo. This memo describes the information that we identified as relevant to potential risks of material misstatement in the audit, along with planned audit procedures to reduce those risks to an acceptable level. Section 1: COMPANY BACKGROUND Section 2: FINANCIAL STATEMENT LEVEL RISKS Section 3: CALCULATING MATERIALITY AND TOLERABLE MISSTATEMENT Section 4: SUMMARY OF FINDINGS FROM RISK ASSESSMENT ANALYTICAL PROCEDURES Section 5: FRAUD BRAINSTORMING SESSION Pressures/Incentives to Commit Fraud: Opportunities to Commit Fraud: Section 6: RECOMMENDATIONS FOR THE PRELIMINARY ASSESSMENT OF THE RISK OF MATERIAL MISSTATEMENT FOR EACH SIGNIFICANT ACCOUNT AND RELEVANT ASSERTION Section 7: PLANNED SUBSTANTIVE PROCEDURES TO REDUCE THE RISK OF MATERIAL MISSTATEMENT TO AN ACCEPTABLE LEVEL Instructional Note to be deleted: As noted in the project instructions, for classroom purposes, you can limit this discussion to the FIVE highest risk account/assertion combinations. Section 8: OTHER RELEVANT AND IMPORTANT INFORMATION TO CONSIDER IN THE UPCOMING AUDIT Section 9: LIST OF REFERENCES OF INFORMATION USED TO COMPLETE THE RISK ASSESSMENT Your audit firm, Maisy LLP, recently gained a new public client. The partner has assigned your team to do the fieldwork for this audit and has asked you to do a preliminary risk assessment. You do not yet have any prior year workpapers from the predecessor auditor, so your partner is interested in seeing how much you can learn based strictly on publicly available information. Specifically, she wants you to obtain an understanding of the company and its environment, identify the significant accounts and disclosures, and, for each of those, do a preliminary assessment of the risk of material misstatement for each relevant assertion. She expects your consideration of risk of material misstatement to be whether that risk is due to error or fraud, and to identify potential fraud risks that could be discussed in the upcoming team fraudbrainstorming session (i.e., potential opportunities and incentives/pressures to commit material fraud in the company). She expects that your analysis will include both qualitative factors and quantitative factors based on risk assessment analytical procedures. Since you have not started fieldwork yet, you will not be able to do a preliminary assessment for control risk. Thus, as it relates to control risk, your only responsibility will be to determine whether there were any material weaknesses in the prior year that you should consider in the upcoming year's audit. She has noted the following resources to help you with your search of information commonly available for public clients. She would like you to consider each of these sources and think carefully about how the information you learn relates back to the risk of material misstatement in the audit. - Form 10-K (EDGAR): annually filed financial statements and other important information for shareholders. Be careful using "risk factors" (Item 1A) because these are written from the perspective of the shareholder or a potential investor. Typically, auditors can determine what affects the risk of material misstatement by reading Business, Management's Discussion and Analysis, Critical Accounting Policies and Estimates, discussion of any pending or threatened litigation or other contingencies, the Financial Statements, and the Notes to the Financial Statements - Form 10-Q (EDGAR): quarterly filed financial statements and other important information for shareholders. The 10Q should always be read in conjunction with the most recently filed 10K because disclosures are limited to material changes since the last 10K. - Form 8-K (EDGAR): periodic filings that report material events or transactions throughout the year. Pay particular attention to these items: 1 Items 1.01 and 1.02: Entry/termination from a material agreement; Item 1.03: Bankruptcy or receivership; Item 2.01: Acquisition/disposition of assets; Item 2.02: Results of operations and financial conditions; - You should also consider listening to a webcast or reading a transcript from the earnings conference call (typically on the Investor Relations website).? - These filings often contain management forecasts. You should also consider analyst forecasts that will be available from other sources, including Yahool Finance and https:/ew,nasdaq.com/ /3 Items 2.03 and 2.04: Material changes in financial obligations and off-balance sheet arrangements; Items 2.05 and 2.06: Material impairments or costs associated with exit activities; Item 4.01: Change of auditors reported; Item 4.02: Announcement of a restatement (non-reliance); Items 5.01 or 5.02: Changes in ownership, directors, or management; Items 5.07 or 5.08 : Shareholder voting; Item 7.01: Regulation FD disclosure; Item 8.01: Other material events; and Item 9.01: Financial statements and exhibits. - DEF 14A (EDGAR): Annually filed proxy statement containing information that is relevant to shareholders for voting in annual meetings. This includes information about the board of directors and executive compensation. It also often contains the fee amount paid to the auditor. - UPLOAD or CORRESP (EDGAR): The SEC periodically reviews the 10K and other related fllings to determine compliance with GAAP and other SEC disclosure requirements. The SEC issues their comments in a letter to the company, filed as an UPLOAD filing. The company then responds to those comments by providing clarification, promising to improve disclosure in the future, or agreeing to restate previously filed information. The company's responses are filed as a CORRESP filing. - Investor Relations website: Typically available as a separate website from the company's customer-facing website and contains many of the filings above, plus other information in a more user-friendly interface. - Media reports, business press articles, etc. The partner wants you to think carefully about all of the information learned from the sources above, identify the information that is relevant to assessing the risk of material misstatement, conduct risk assessment analytical procedures, and then summarize your final conclusions in an audit-planning memo that is written professionally and free of grammatical or typographical errors such that it could be included in the audit workpapers. To help you organize your thoughts, the partner recommends following this outline for the memo: 1. Background information about the company that is relevant to the audit. 2. Identification of financial-statement-level risks of material misstatement (consider factors such as geographic locations, complexity of operations, litigation risk, industry, operating segments, management and director backgrounds, etc.). Be sure to explain how any financial-statementlevel risks you identify relate to the risk of material misstatement in your upcoming audit, a. The "Risk Factors" section of the 10K (item 1A) is a great resource, but remember that business risks are not the same thing as the risks of material misstotement. The former relates to whether the business will be able to meet their business objectives, while the latter relates to the risk that the financial statements will contain material misstatements. Clearly the two are related, but remember to stay focused on the risk of material misstatement here! 3. Calculation of overall financial statement materiality and tolerable misstatement. a. Since you are planning the upcoming audit, the 10K you will be auditing has not been released yet. So you will need to think about the net income, revenues, and assets from the most recent 10-K, and then consider whether there have been any signs of material changes for the upcoming audit based on subsequently filed 10-Qs and/or management forecasts. 4. Results of your risk assessment (i.e., preliminary) analytical procedures. a. The actual calculations for this procedure should be completed in a separate Excel file, which should be submitted along with your memo file. Use this section of the memo to reference to that work and highlight areas of particular concern and/or significance. 5. Identification of potential fraud risks that should be considered in the team fraud brainstorming session. a. Pressures/incentives to commit fraud (whether through GAAP or non-GAAP metrics, management's concerns with analyst forecasts, executive compensation benchmarks, cash versus stock-based compensation, etc.). b. Opportunities to commit fraud (consider prior-year internal control material weaknesses, accounts, and disclosures requiring significant estimates or judgment, etc.). 6. Identification of "significant" (in-scope) accounts and disclosures based on all the information assessed above. Remember to consider both qualitative and quantitative factors when determining significant accounts. For each selected account, identify the relevant assertion(s) and make recommendations for the preliminary assessment of the risk of material misstatement. These recommendations should be presented in tabular format similar to that shown below. a. Feel free to use qualitative assessments such as "High" "Medium" or "Low." This should be done for every selected account and every relevant assertion that you consider to be important for that account (choosing from the 5 PCAOB assertions we have focused on in class). You can use additional explanation in the planning memo and/or the class presentation to justify any difficult decisions. Please assume that the audit partner has set audit risk at "Low" as you make your decisions. The following example template can be used to document your work: 7. Select five of the highest-risk account/assertion combinations and describe some potential substantive auditing procedures that could be conducted to address the risk. The key here is to try and be specific to your selected company as possible given the available information; dor't just copy procedures out of your textbook. The whole point of this step is for you to use your knowledge, creativity (e.g., designing unique analytical procedures), and intuition to design your recommended procedures. 8. Other information or Issues identified, but not mentioned previously, that the partner should consider when planning the audit. In addition to the written audit-planning memo, the partner would like you to prepare a 1520 minute professional presentation to hear you summarize the most important issues from the merno. EXHibII 4.11 Duader-Mirtin, Ine.-Prelimiaary Analyileal Procedures Data Sample Memo Template General Instructions: This memo provides a template that can be used to complete the group project. Note that audit workpapers use concise, professional tone and language. Auditors use the term "we" or the firm name (PwC, EY, PYA, DHG, etc.) when documenting in the files because it reflects the audit team's conclusions. It would help to create a workpaper number for this file (e.g., 1000) and for the Excel risk assessment analytic file (e.g., 1010) and label each tab of the Excel workbook (e.g., 1010.1, 1010.2, etc.). You can then cross-reference between this file and the Excel file so that the reviewer can clearly see how the Excel analytical procedures relate to the summary discussion herein. Additional prompts for information are in bold brackets below. In the final memo, bold should only be used for headers, titles, and workpaper references. Please delete this instructional note before turning in the workpaper memo. [Insert name of public company] [Insert fiscal year end being planned - e.g., December 31, 2018] Risk Assessment and Planning Memo PURPOSE: We have been engaged to audit the financial statements of [insert name of public company] (the "Company") as of and for the year ended [Insert fiscal year end being planned, e.g., December 31, 20X9]. To plan for the upcoming audit, we have reviewed publicly available information about the company, as referenced at the end of this memo. This memo describes the information that we identified as relevant to potential risks of material misstatement in the audit, along with planned audit procedures to reduce those risks to an acceptable level. Section 1: COMPANY BACKGROUND Section 2: FINANCIAL STATEMENT LEVEL RISKS Section 3: CALCULATING MATERIALITY AND TOLERABLE MISSTATEMENT Section 4: SUMMARY OF FINDINGS FROM RISK ASSESSMENT ANALYTICAL PROCEDURES Section 5: FRAUD BRAINSTORMING SESSION Pressures/Incentives to Commit Fraud: Opportunities to Commit Fraud: Section 6: RECOMMENDATIONS FOR THE PRELIMINARY ASSESSMENT OF THE RISK OF MATERIAL MISSTATEMENT FOR EACH SIGNIFICANT ACCOUNT AND RELEVANT ASSERTION Section 7: PLANNED SUBSTANTIVE PROCEDURES TO REDUCE THE RISK OF MATERIAL MISSTATEMENT TO AN ACCEPTABLE LEVEL Instructional Note to be deleted: As noted in the project instructions, for classroom purposes, you can limit this discussion to the FIVE highest risk account/assertion combinations. Section 8: OTHER RELEVANT AND IMPORTANT INFORMATION TO CONSIDER IN THE UPCOMING AUDIT Section 9: LIST OF REFERENCES OF INFORMATION USED TO COMPLETE THE RISK ASSESSMENT
