1. Communism “ In the end we beat them with Levi 501 jeans. Seventy-two years of Communist indoctrination and propaganda was drowned out by a three-ounce Sony Walkman. A huge totalitarian system... has been brought to its knees because nobody wants to wear Bulgarian shoes....” -- P. J. O’Rourke (b. 1947), U.S. journalist. “The Death of Communism,” in Rolling Stone (New York, Nov. 1989)

2. Substantive Testing: Financing & Investing Cycle Completing the Audit Field Work

3. Substantive Testing: Financing & Investing Cycle  Borrowing  Investing  Stockholder’s Equity

4. Financial and Investing Cycle- Summary of Processing Steps

5. Substantive Testing: Financing & Investing Cycle  General/Subsidiary Ledger Reconciliation  Physical Examination  Confirmation  Other Documentary Evidence  Hearsay Evidence/Meeting Minutes  Analytic Procedures

6. Substantive Testing: Financing & Investing Cycle  Risk Assessment –Related Party Transactions Legal Form vs Economic Substance –Loan Collateral, Defaults, Restructuring –Derivatives –Segment Disposal

7. Completing The Audit  Final Analytic Procedures Review

8. Analytical Procedures as part of Audit Review  Compare with prior year’s audited data –Trend analysis –Proportional analysis  Compare budget and audited actual –Calculate variances –Analyze variances  Compare ratios with industry averages  Questions: –Are all suspicions resolved? –Is audit evidence adequate?

9. Completing The Audit  Final Analytic Procedures Review  Materiality Reevaluation  Subsequent Events Review –Type 1 vs Type 2

10. Types of Subsequent Events  Type I: Evidence of conditions existing at the balance sheet date –Requires adjustment if material  Type II: Evidence of conditions not existing at the balance sheet date –Does not require adjustment –May require disclosure

11. Subsequent Events Time Dimensions Balance Sheet End field workReport date (report date) issuance date Dec. 31 Mar. 1 Mar. 15 |---------------------------------------------------------|----------------------| | |

12. Completing The Audit  Final Analytic Procedures Review  Materiality Reevaluation  Subsequent Events Review –Type 1 vs Type 2  Cash Flow Statement Review  Workpaper Review  Clear Open Items (p. 556)

13. Completing The Audit  Auditor/Client Conference  Audit Committee Communication  Communication of Internal Control Matters –Reportable Conditions Letter (Significant Internal Control Deficiencies, p. 562) –Management Letter (All Weaknesses & Recommendations, p. 563)

14. Letters Required as Audit Evidence (to the Auditor)  Lawyer’s Letters (p. 504-6) –Describes litigation  Client Representation Letter (p. 560-1) –Management’s assurance regarding conformity with GAAP

15. Letters Required as Audit Evidence (from the Auditor)  Reportable Conditions Letter –Significant control structure deficiencies  Communication with Audit Committee –Audit adjustments, management/auditor disagreements, changes in accounting policy, etc.  Management Letter –Covers all weaknesses and broader improvement suggestions

16. Auditor’s Responsibilities in Completing the Audit