Auditing Format of Confirmation by kwb16500

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									                Accounting for Lawyers -- Spring 2012
                Chapter 11 - Introduction to Auditing

 1   Table of Contents
 2   Who Can Perform and Audit?
 3   What Does It Take To Become (and Remain) a CPA?
 4   Generally Accepted Auditing Standards ("GAAS")
 6   Sources of GAAS
 7   PCAOB Rules and Auditing Standards
 9   AICPA ASB Statements on Auditing Standards
10   AICPA Auditing Standards Board Clarity Project
11   Reports of Accountants
12   Responsibilities of Auditors
13   Overview of Audit Procedures
16   Sample Audit Program - Cash - Objectives
17   Sample Audit Program - Cash - Procedures
19   Standard Account Balance Confirmation Form
20   Sample Audit Program - Income Statement - Objectives
21   Sample Audit Program - Income Statement - Procedures
23   Sample Audit Engagement Letter
29   Sample Audit Document Request
34   Sample Management Representation Letter
38   Sample Management Letter and Response
40   Sample Audit Report




                                -1-
      A Certified Public         Who Can Perform an Audit?(*)
  Accountant ("CPA") is a
   person who has met the                     CA BPC 5093 - 5095
 requirements of California                                                     Only persons who are licensed
                                                       Only a
 state law, has been issued a                                                    by the Board legally can call
                                                Certified Public                themselves a "Certified Public
  license to practice public
                                                  Accountant                      Accountant." (Business and
accounting by the California
                                                   can perform                        Professions Code §5050)
 Board of Accountancy, and
                                              an audit or a review.
who holds a valid license to
           practice.
                                   CPAs have a monopoly
                                    on audits, but most
                                   CPAs don't do audits.
      CPAs provide
 accounting, auditing,                Not all CPAs can do an audit.
tax, financial planning,         Effective January 1, 2002, some CPAs are
   and management                  authorized to perform a full range of
  consulting services.            accounting services, including signing                       Attest services do
                                  reports on attest engagements. Others                         not include the
                                 will be authorized to perform a full range                       issuance of
                                  of accounting services, but will not be                     compiled financial
                                    authorized to sign reports on attest                          statements.
                                               engagements.
         Attest Engagement: One in which the practitioner is engaged to issue, or does issue a written
      communication that expresses a conclusion about the reliability of a written assertion that is the
      responsibility of another party. Attest services include an audit, a review of financial statements,
                           or an examination of prospective financial information.

(*)
  An audit is an examination of a client's accounting records by an independent CPA to formulate an opinion on
financial statements and/or financial information. The auditor must follow generally accepted auditing standards.

                                                       -2-
                           What Does It Take To Become (and Remain) a CPA?
               Pathway 1                                   Pathway 2                                   Pathway 0
Education
Baccalaureate degree.                       Baccalaureate degree.                       Baccalaureate or higher degrees; or
                                                                                        120 semester units - no degree; or
                                                                                        Passed two general College Level
                                                                                        Examination Program exams plus 10
                                                                                        accounting units.
Core Course Requirement
24 semester units of accounting and         24 semester units of accounting and         10 semester units of accounting and
24 units of business-related subjects.      24 units of business-related subjects.      35 units of business-related subjects.
Experience
Two years general experience, which         150 semester hours of education and and     24, 36, or 48 months of experience,
may include 500+ attest hours for those     experience, which may include 500+          which includes attest experience.
who want to sign attest reports.            attest hours for those who want to sign
                                            attest reports.
Pass the CPA Exam
The CPA Exam has four sections: Accounting Practice, Accounting Theory, Audit and Law. You don't have to take or pass all
four sections in one sitting (less than 3% do). If you pass (75+) two sections of the exam at a single examination, you make take
the remaining sections one at a time (for up to three years). In May 2002, the AICPA, the National Association of State Boards of
Accountancy ("NASBA"), and Prometric announced the signing of a joint agreement to deliver a computer-based CPA Exam.
The final paper-and-pencil based CPA Exam was administered in November 2003. The first computer-based CPA Exam was April
2004.
Pass the Ethics Exam
It's a take-home exam.
Take Continuing Professional Educations Courses
CPAs must complete 80 hours of CE each two-year period. No carryover of CE hours is permitted between two-year periods.



                                                               -3-
   Generally Accepted Auditing Standards ("GAAS")

                         General Standards
1. The examination is to be performed by a person or persons having
   adequate technical training and proficiency as an auditor.
2. In all matters relating to the assignment, an independence in
   mental attitude is to be maintained by the auditor or auditors.
3. Due professional care is to be exercised in the performance of the
   audit and the preparation of the report.


                      Standards of Field Work
1. The work is to be adequately planned and assistants, if any, are to
   be properly supervised.
2. A sufficient understanding of the internal control structure is to be
   obtained to plan the audit and determine the nature, timing and
   extent of tests to be performed.
3. Sufficient competent evidential matter is to be obtained through
   inspection, observation, inquires, and confirmations to afford a
   reasonable basis for an opinion regarding the financial statements
   under audit.




                                  -4-
   Generally Accepted Auditing Standards ("GAAS")

                      Standards of Reporting
1. The report shall state whether the financial statements are
   presented in accordance with generally accepted accounting
   principles.
2. The report shall identify those circumstances in which such
   principles have not been consistently observed in the current
   period in relation to the preceding period.
3. Informative disclosures in the financial statements are to be
   regarded as reasonably adequate unless otherwise stated in the
   report.
4. The report shall either contain an expression of opinion regarding
   the financial statements, taken as a whole, or an assertion to the
   effect that an opinion cannot be expressed. Whenever an overall
   opinion cannot be expressed, the reasons therefore should be
   stated. In all cases where an auditor's name is associated with
   financial statements, the report should contain a clear indication of
   the character of the auditor's work, if any, and the degree of
   responsibility the auditor is taking.




                                  -5-
                         Sources of GAAS

         Public Company Accounting Oversight Board
Sarbanes-Oxley Act of 2002.


                     Auditing Standards Board
Statements on Auditing Standards ("SAS") are issued by the Auditing
Standards Board, the senior technical body of the AICPA designated to
issue pronouncements on auditing matters.



American Institute of Certified Public Accountants (“AICPA”)
The AICPA’s Code of Professional Conduct requires adherence to the
applicable GAAS promulgated by the AICPA. It recognizes Statements
on Auditing Standards as interpretations of GAAS and requires that
members be prepared to justify departures from such Statements.
The staff of the Auditing Standards Division has been authorized to
issue Interpretations to provide timely guidance on the application of
pronouncements of the Auditing Standards Board. Interpretations are
reviewed by members of that Board. An Interpretation is not as
authoritative as a pronouncement of the Auditing Standards Board,
but members should be aware that they may have to justify a departure
from an Interpretation if the quality of their work is questioned.

AICPA Professional Standards, AU Section 100.




                                  -6-
                        Public Company Accounting Oversight Board
                                Rules and Auditing Standards

                                              Rules
3100 Compliance with Auditing and Related Professional Practice Standards      October 31, 2003
        Certain Terms Used in Auditing and Related Professional Practice
3101                                                                           September 8, 2004
        Standards
3200T   Interim Auditing Standards
        Temporary Transitional Provision for PCAOB Auditing Standard No. 2,
3201T   "An Audit of Internal Control Over Financial Reporting Performed in
        Conjunction With an Audit of Financial Statements"
3300T   Interim Attestation Standards
3400T   Interim Quality Control Standards
3500T   Interim Ethics Standards
 3501   Definitions of Terms Employed in Section 3, Part 5 of the Rules
 3502   Responsibility Not to Knowingly or Recklessly Contribute to Violations
 3520   Auditor Independence
 3521   Contingent Fees
 3522   Tax Transitions
 3523   Tax Services for Persons in Financial Reporting Oversight Roles         August 22, 2008
 3524   Audit Committee Pre-approval of Certain Tax Services
        Audit Committee Pre-approval of Non-audit Services Related to
3525
        Internal Control Over Financial Reporting
 3526   Communication with Audit Committees Concerning Independence             August 22, 2008
3600T   Interim Independence Standards
 3700   Advisory Groups




                                               -7-
                   Public Company Accounting Oversight Board
                           Rules and Auditing Standards

                                  Auditing Standards
    References In Auditors' Reports To The Standards Of The Public
1                                                                           May 14, 2004
    Company Accounting Oversight Board
    An Audit of Internal Control Over Financial Reporting Performed in
2                                                                           June 17, 2004
    Conjunction with An Audit of Financial Statements (SUPERSEDED BY
3   Audit Documentation                                                   August 25, 2004
    Reporting On Whether A Previously Reported Material Weakness
4                                                                         February 6, 2006
    Continues To Exist
    An Audit of Internal Control Over Financial Reporting That Is
5                                                                           July 25, 2007
    Integrated with An Audit of Financial Statements
6   Evaluating Consistency of Financial Statements                       September 16, 2008
7   Engagement Quality Review                                            December 15, 2009




                                          -8-
                          AICPA Auditing Standards Board
                    Statements on Auditing Standards Relating to
              the Assessment of Risk in an Audit of Financial Statements

99    Consideration of Fraud in a Financial Statement Audit                  October 2002
    Amendment to Statement on Auditing Standards No. 1, Codification of
104 Auditing Standards and Procedures (“Due Professional Care in the         March 2006
    Performance of Work”)
      Amendment to Statement on Auditing Standards No. 95, Generally
105                                                                          March 2006
      Accepted Auditing Standards
106 Audit Evidence                                                           March 2006
107 Audit Risk and Materiality in Conducting an Audit                        March 2006
108 Planning and Supervision                                                 March 2006
      Understanding the Entity and Its Environment and Assessing the Risks
109                                                                          March 2006
      of Material Misstatement
      Performing Audit Procedures in Response to Assessed Risks and
110                                                                          March 2006
      Evaluating the Audit Evidence Obtained
      Amendment to Statement on Auditing Standards No. 39, Audit
111                                                                          March 2006
      Sampling




                                             -9-
                               AICPA Auditing Standards Board
                                       Clarity Project

In 2004 the AICPA’s Auditing Standards Board (ASB) launched a significant effort to make U.S.
GAAS easier to read, understand and apply.

In 2007, clarity drafting conventions were developed and are being applied to all standards issued
by the ASB after January 2008.
In 2009, the International Auditing and Assurance Standards Board (IAASB) completed a similar
project to clarify its International Standards on Auditing (ISAs).
All AU sections of currently effective Statements on Auditing Standards (SASs) in AICPA
Professional Standards are being clarified over the next three years.

The ASB is working toward completing the project in the first half of 2011.

The ASB will issue many of the clarified standards in one SAS that will be codified in “AU section”
format, just as it did in 1972, when SAS No. 1, Codification of Auditing Standards and Procedures , was
issued.

The effective date for [nearly] all clarified SASs is for audits of financial statements for periods
ending on or after December 15, 2012. This date was changed by the ASB in May 2010.

The ASB has decided that early adoption of [the new standards] would not be appropriate. The
ASB believes it is important that, for legal and practice inspection purposes, it be very clear
which standards are in effect. Therefore, auditors should continue to comply with the current
standards until the date that [the new standards] are effective.




                                                 - 10 -
                               Reports of Accountants

                                       Compilation
A compilation consists of presenting in the form of financial statements information that is
the representation of management without undertaking to express any assurance on the
statements. The accountant is not required to make inquiries or perform other procedures
to verify, corroborate or review information supplied by the entity.

                                          Review
A review consists of performing inquiry and analytical procedures that permit a Certified
Public Accountant to determine whether there is a reasonable basis for expressing limited
assurance that there are no material modifications that should be made to financial
statements for them to be in conformity with generally accepted accounting principles or, if
applicable, with other comprehensive basis of accounting. A review does not require
performing many procedures ordinarily performed during an audit. A review may bring to
the accountant’s attention significant matters affecting the financial statements, but it does
not provide assurance that the accountant will become aware of all significant matters that
would be disclosed in an audit.

                                           Audit
The objective of an ordinary audit of financial statements by an independent auditor is the
expression of an opinion on the fairness with which they present, in all material respects,
the financial position, results of operations and its cash flows in conformity with GAAP. The
financial statements are management’s responsibility. The auditor’s responsibility is to
express an opinion on the financial statements. An ordinary audit includes gaining an
understanding of an entity’s internal control structure, assessing control risk, performing
tests of accounting records, obtaining corroborating evidential matter through inspection,
observation and confirmation, and performing other procedures. The auditor should
design the audit to provide reasonable assurance of detecting errors and irregularities that
are material to the financial statements.

                                            - 11 -
               Responsibilities of Auditors

Auditors are required to plan and perform the audit to obtain
reasonable assurance that the financial statements are free of
material misstatement, whether caused by error or fraud.

Auditors are not required to detect fraud per se , but rather
material misstatements to the financial statements caused by
fraud.




                             - 12 -
                           Overview of Audit Procedures

Decide whether or audit or continue auditing the company.         In general, the audit firm, owners,
                                                                 employees and their families can have
Evaluate auditors' independence.                                 no financial interest in the company.

Evaluate the company, its internal controls and its audit risk factors (including the risk
of material misstatement due to fraud and management override of internal controls).
                                                                            Analyze risks and other business
Prepare an engagement letter.                                               factors to determine how much
                                                                                to charge for the audit.
Obtain necessary documents, records and schedules from the company.
Perform preliminary analytical procedures:
  (a) compare current-year account balances to prior-year values,
  (b) identify unexpected or unusual balances or ratios, particularly for revenue.

Discuss the type, scope and timing of the audit with the company's management.

Prepare audit programs for each significant area covered by the audit.

Review the minutes of all Board of Directors' meetings during the year.

Search for, evaluate and document and commitments and contingencies.
Determine whether all significant estimates and concentrations have been considered
for disclosure.
Review the accounting estimates reflected in the prior year's financial statements and
consider whether the underlying assumptions indicate a possible bias on the part of
manaagement.


                                          - 13 -
                           Overview of Audit Procedures

Look for subsequent events.                               Something important that happened
                                                            after the period being audited.
Look for and analyze any related-party transactions.
Consider whether there could be substantial doubt about the company's ability to
continue as a going concern for a reasonable period of time (not to exceed one year).
Perform final analytical procedures:
  (a) compare current-year audited account balances to prior-year values,
  (b) explain and document any significant changes.
Summarize and evaluate misstatements noted during the audit.
Determine whether additional audit procedures are needed.
Obtain a written representation letter from management.
Draft or assist the company in drafting the financial statements and notes thereto.
Evaluate GAAP departures, scope limitations, the work of other auditors and other
matters affecting the auditors' report.
Determine whether the company's financial statements are presented in accordance
with GAAP.
Draft the auditors' report on the financial statements.
Communicate management points (matter other than reportable conditions) to the
company's management.
Document all significant audit findings in the workpapers.


                                          - 14 -
                                  Overview of Audit Procedures

Communicate to the appropriate parties reportable conditions in internal control,
fraud or illegal acts.


    Auditors’ procedures relating to detecting fraud are governed by
     SAS No. 99, Consideration of Fraud in a Financial Statement Audit ,
       issued by the ASB in October 2002 and effective for audits of
   financial statements for periods beginning after December 15, 2002.
     Other auditing standards regarding to the detection of fraud are
      beginning to be released by the Public Company Accounting
       Oversight Board, created by the Sarbanes-Oxley Act of 2002.



                                                       Reportable conditions are matters relating to significant
                                                        deficiencies in the design or operation of the internal
                                                           control structure that could adversely affect the
                                                       organization’s ability to record, process, summarize, and
                                                         report financial data consistent with the assertions of
                                                               management in the financial statements.




                                                       - 15 -
                           Sample Audit Program -- Cash
                                      Objectives
Cash exists and is owned by the Company.


Cash balances reflect a proper cutoff of receipts and disbursements.
Cash balances as presented in the balance sheet properly reflect all cash and cash items
on hand, in transit or on deposit with third parties.
Cash balances are properly classified in the financial statements.


Any restrictions on the availability of funds are properly disclosed.




                                          - 16 -
                          Sample Audit Program -- Cash
                                    Procedures
Using the standard confirmation form, request confirmation as of the audit date for
each bank account.
For each bank account:
   Compare the bank balance on the confirmation form to the bank reconciliation.
   Test the clerical accuracy of the bank reconciliation and supporting schedules.
   Trace the reconciled balance to the general ledger.
   Identify inter-account transfers and verify recording in the proper period.
   Review the nature and extent of reconciling items (in particular, deposits and
   outstanding checks) for reasonableness.
   Investigate any large or unusual outstanding checks.

Analyze:
   Confirmation forms
   Loan and debt agreements
   Minutes of Board of Directors' meetings
   Inquiries of and representations by management
To determine whether:
   Accounts are subject to withdrawal restrictions,
   There are related guarantees, endorsements or letters of credit,
   There are amounts designated for special purposes,
   Accounts are restricted in any manner (e.g., minimum balance requirements),
   Amounts are appropriately classified as cash, cash equivalents or other short-term
   investments.


                                         - 17 -
                          Sample Audit Program -- Cash
                                    Procedures
Select a sample of journal entries related to cash.
   Examine supporting documents and accounting records.
   Determine whether the selected entry is valid and appropriate.
   Determine whether the business purpose of the underlying transaction is valid and
   appropriate.
   Determine whether the selected entry was properly recorded in the general ledger
   in the correct accounting period.

Consider the need to apply additional procedures.

Consider whether the procedures performed are adequate to respond to identified
fraud risks.
Consider whether the procedures performed indicate reportable conditions in
internal control and, if so, add to the memo of points for communications with
management.




                                        - 18 -
Standard Form to Confirm Account Balance Information with Financial Institutions
                                                                                                [Customer Name]

Financial Institution Name                                     We have provided our accountants the following information as of
Address                                                        the close of business on [Date]
City, State, Zip                                               regarding our deposit and loan balances. Please confirm the
                                                               accuracy of the information, noting any exceptions to the information
                                                               provided. If the balances have been left blank, please complete this
                                                               form by furnishing the balance in the appropriate space below*.
                                                               Although we do not request nor expect you to conduct a
                                                               comprehensive, detailed search of your records, if, during the process
                                                               of completing this confirmation, additional information about other
                                                               deposits and loan accounts we may have with you comes to your
                                                               attention, please include such information below. Please use the
                                                               enclosed envelope to return the original directly to our accountants.


1. At the close of business on the date listed above, our records indicated the following deposits balance(s):

     Account Name:                 Account Number:                       Interest Rate:                            Balance:




2. We were directly liable to the financial institution for loans at the close of the business on the date listed above as follows

Account #/Description:           Balance:       Due Date: Interest Rate:           Date through int. pd.   Description of Collateral:




  (Customer's Authorized Signature)                                                                                        (Date)

The information presented above by the customer is in agreement with our records. Although we have not conducted a comprehensive, detaile
search of our records, no other deposit or loan accounts have come to our attention except as noted below




(Financial Institution's Authorized Signature)                                                                             (Date)


                     (Title)

                                                       Exceptions and/or comments




  Please return this form directly to our accountants:                              CPA Firm Name
                                                                                    Address
                                                                                    City, State, Zip

*Ordinarily, balances are intentionally left blank if they are not available at the time the form is prepared




                                                                      - 19 -
                   Sample Audit Program -- Income Statement
                                      Objectives
Revenue is for valid transactions in the ordinary course of buiness that are recorded
correctly as to account, amount and period.
Uncollectible amounts, returns or allowances are adequately considered.
Recorded revenue includes billings at the correct amount for products shipped or
services provided.
Costs of products or services are valid, complete and recorded correctly as to account,
amount and period.

Expenses are valid, complete and recorded correctly as to account, amount and
period.
Revenues, cost of products or services, and expenses are properly described and
disclosed in the income statement.

Extraordinary, unusual or infrequent items are properly described and disclosed in
the income statement.




                                         - 20 -
                  Sample Audit Program -- Income Statement
                                    Procedures
Inquire of management about, and evaluate, revenue recognition policies and
significant, unusual and complex revenue transactions.
Prepare or obtain a schedules summarizing sales and cost of sales by month or by
quarter in meaningful divisions, for example:
   Subsidiary
   Customer
   Product line
   Geographic location.
For each division, perform the following procedures:
   Compare to prior year amounts, budgets or other expectations.
   Critically evaluate and document explanations for significant differences that are
   unusual in amount or nature.
   Select a few categories and compare the amounts shown with those recorded in the
   sales journal.
   Trace sales journal balances to the general ledger and to the income statement.
   Calculate the gross profit and compare it to prior-year or industry averages.

Select individual large disbursements and examine the supporting documentation.
Review and document all large or unusual differences in specific expense accounts
compared to the prior period and current period budgets. Analyze, discuss with
management and document explanations for variances noted.




                                         - 21 -
                   Sample Audit Program -- Income Statement
                                     Procedures
Determine the total number of employees by type from a review of the payroll
records. Identify the normal rate of pay by type. Calculate expected compensation
expense by type and compare to compensation expense recorded. Analyze, discuss
with management and document explanations for variances noted.

Select a sample of journal entries related to the income statement.
   Examine supporting documents and accounting records.
   Determine whether the selected entry is valid and appropriate.
   Determine whether the business purpose of the underlying transaction is valid and
   appropriate.
   Determine whether the selected entry was properly recorded in the general ledger
   in the correct accounting period.

Determine any material matters that should be disclosed in the financial statements.
Cross reference income statement accounts to the balance sheet.
Consider the need to apply additional procedures.
Consider whether the procedures performed are adequate to respond to identified
fraud risks.
Consider whether the procedures performed indicate reportable conditions in
internal control and, if so, add to the memo of points for communications with
management.




                                         - 22 -
                             Sample Audit Engagement Letter
To the Board of Directors:
This letter establishes our mutual understanding of the professional services we will be providing
as part of the audit of the financial statements of the Company as of December 31, 2010, and for the
year then ended.

We will audit the Company’s balance sheet as of December 31, 2010, and the related statements of
operations, retained earnings, and cash flows for the year then ended, for the purpose of assessing
the fairness of the Company’s presentation of such financial statements in conformity with
generally accepted accounting principles ("GAAP"). Our primary service will be the provision of
an auditor’s report that will express our professional opinion on the fairness of the Company’s
financial statements, including all relevant financial statement disclosures. Our Opinion can take
many forms. If no issues, problems or mistakes are identified that would impair the fairness of the
Company’s financial statements, then the Company can expect to receive an “unqualified”
auditor’s report. If some other auditor’s report is contemplated, we will follow appropriate
professional standards. In most circumstances, that will include discussing the issues with you in
their fullness.
Our audit will be conducted in accordance with rules promulgated by the Auditing Standards
Board, an independent organization with responsibilities to both government and professional
organizations that is governed in part by the Public Company Accountability and Oversight Board.
These rules are better known as generally accepted auditing standards ("GAAS"). Importantly,
these standards require that we plan and perform the audit to obtain a reasonable, rather than a
certain, assurance about whether the financial statements are free of material misstatement.
Misstatements can arise from errors or fraud. In determining whether an error is material, we
follow the guidelines stablished by GAAS. We consider all intentional misstatements or omissions
to be material.




                                                - 23 -
                             Sample Audit Engagement Letter
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
made by the Company in its financial statements. Our audit report will reflect the results of our
assessment of the overall propriety of the accounting principles and estimates employed by the
Company in its financial statements. Management is responsible for making all financial,
operational and managerial records and related information available for purposes of the audit.

Our audit will include such tests of the accounting, operational and managerial records as we
consider necessary to satisfy our professional obligations. Important among our audit planning
procedures will be steps taken to understand your company’s business, the functioning of its
control systems and its risks. These steps could range widely and may involve our making inquiries
of non-accounting or financial personnel. Also, in order to comply with professional obligations to
consider possible areas of misrepresentations, we may include retrospective, surprise and non-
standard procedures in our engagement plan.

An important consideration in our audit planning and conduct is the recipient of and intended use
of the financial statements. We have designed our audit to satisfy the general needs of persons
involved in the ongoing internal operations of the company. Intended third-party recipients of
these financial statements should be identified so that appropriate changes to the audit planning
and conduct can be made to accommodate the special needs of these third-parties. Based upon our
understanding, the following represents a list of intended third party recipients of these financials
statements:
      Bank
      Regulator
      Supplier




                                                - 24 -
                              Sample Audit Engagement Letter
Our ordinary procedures will include tests of documentary evidence supporting the transactions
recorded in the accounts, tests of the physical existence of inventories, and direct confirmation of
receivables and certain other assets and liabilities by correspondence with selected customers,
creditors, legal counsel, banks and other stakeholders. At the conclusion of our audit, we will
request certain written representations from you about the financial statements and related
matters, including, but not limited to contingencies, commitments and changes in the financial
condition or prospects of the Company going forward.

An audit conducted in accordance with GAAS is not assured of identifying all material errors,
fraud, or illegal acts that may exist. Subject to the guidelines of professional standards, we will
inform you of any material errors, fraud or potential illegal acts that come to our attention.

An audit also includes obtaining a sufficient understanding of a Company’s internal control
mechanisms such that the nature, timing, and extent of audit procedures can be planned.
Understanding a company’s internal control environment is not limited to understanding those
controls related to the safeguarding of assets, compliance with applicable laws and regulations,
and preparation of the financial statements. It can include among other things, the assessment of
the control functions employed by a company to ensure budgetary compliance, personnel
recruitment and strategic planning. It is important to understand, however, that an audit of
financial statements is not the kind of service that is designed to identify reportable deficiencies in
the internal control functions of an entity, including financial, operational and environmental red
flags that could adversely affect the company’s ability to meet its goals. Such an examination would
require a separate engagement. If we become aware, however, of such material reportable
deficiencies, we will communicate them to you in a separate letter.




                                                 - 25 -
                             Sample Audit Engagement Letter
We direct your attention to the fact that management of the Company has the responsibility for the
proper recording of transactions in the books of account, for establishing and maintaining
adequate and effective internal controls, for the safeguarding of assets, for ensuring compliance
with applicable laws and regulations, and for the preparation and substantial accuracy of the
financial statements. If you intend to publish or otherwise reproduce the financial statements and
make reference to our firm, you agree to provide us with printers’ proofs or masters’ copy for our
review and approval before printing. You also agree to provide us with a copy of the final
reproduced material for our approval before it is distributed.

The general timing of our audit will be scheduled for performance and completion as follows:
  Major Planning and Conduct Steps                       Begin Date     End Date
    Planning and risk assessment
    Preliminary control and audit testing
    Observation of physical inventories
    Distribution of confirmations
    Year-end audit procedures
    Issue audit report

Our fees are based on the amount of time required at various levels of responsibility, plus actual
out-of-pocket expenses. In certain circumstances involving the identification of high risk factors
such as questions about the firm’s ability to continue as a going-concern or the existence of
unusual transactions, additional fees may be warranted. In such circumstances, we will discuss
these matters with you. Invoices will be rendered monthly and are payable upon presentation. We
estimate that our fee for the audit will be $[ ]. We will notify you immediately of any circumstances
we encounter that could significantly affect this initial fee estimate. Whenever possible, we will
attempt to use your Company’s personnel to assist in the preparation of schedules and analyses of
accounts. This effort could substantially reduce our time requirements, facilitate the timely
conclusion of the audit, and help you hold down audit fees.




                                                - 26 -
                             Sample Audit Engagement Letter
If, for any reason, we are unable to complete our audit of your financial statements, we will discuss
this matter with the appropriate organizational personnel. In such a case, we will not issue a report
on such statements. In some circumstances, our withdrawal from an assignment may subject us to
certain professional or regulatory reporting requirements. If any such requirements present
themselves, we will discuss them with the appropriate company personnel.

Any other significant services to be provided will be covered by other more specific engagement
letters. Our fees for these services will be at our regular hourly rates plus out-of-pocket expenses.
Payment for services rendered is due immediately. We reserve the right to withdraw from this
assignment if our billings are not paid within [ ] days of submission. We require a retainer to begin
this assignment in the amount of $[ ].

We will also prepare the Company’s federal and state income tax returns for the fiscal
year ended December 31, 2010. The fee for tax return preparation is not expected to exceed
$[ ].

It is not the policy of this firm to voluntarily disclose to third parties any non-public, information
obtained from or about your organization during or as a result of this engagement absent your
express consent to do so. Indeed, as professionals, we are obligated to preserve the confidential
nature of such information in our possession. However, such information may not be protected
from disclosure by an absolute privilege, and therefore, we may be compelled by law or legal
process, with or without your consent, to produce documents or testify about facts and
circumstances that have come into our possession, or become known to us, during or as a result of
this engagement. You should consult with legal counsel to obtain a thorough understanding of the
extent and limitations of the confidentiality of information in our possession.




                                                 - 27 -
                             Sample Audit Engagement Letter
If any dispute arises among the parties hereto, the parties agree first to try in good faith to settle
the dispute by mediation administered by the American Arbitration Association under its
Commercial Mediation Rules before resorting to litigation. Mediation costs shall be shared equally
by the parties. In the event that mediation does not settle the dispute, the parties agree to submit
to binding arbitration in accordance with the rules of the American Arbitration Association. IN
AGREEING TO BINDING ARBITRATION, EACH PARTY TO THIS CONTRACT AGREES TO WAIVE
ITS RIGHT TO HAVE THE DISPUTE DECIDED IN A COURT OF LAW BEFORE A JUDGE OR JURY.
Instead, it shall be decided by an Arbitrator. The parties also agree that in the event of any dispute
that damages will be limited to and in no way exceed five times the amount of fees paid on this
engagement.
If the foregoing is in accordance with your understanding, please indicate your agreement by
signing this letter and returning it to us. We will also deem the terms and conditions enumerated
in this letter to be acceptable to you in the event you invite us into your organization to begin
providing professional services. If you have any questions, please let us know.

CPA Firm




                                                - 28 -
                            Sample Audit Document Request
To the Chief Financial Officer:
We look forward to working with you on the audit of the Company for the year ended December
31, 2010. To facilitate our audit, we have prepared a list of documents and records that we will
need. Additional information may be requested during the audit of the Company. The items we
request are as follows:
                                             General
Copies of the Board of Directors minutes (including special meeting or actions taken by the Board)
during 2010 and subsequently through the final week of our audit procedures.

Copies of all new contracts, agreements and leases, including amendments and revisions, in effect
throughout 2010 and through the final week of our audit procedures.

A complete listing and the related documentation of any commitments and/or contingencies
outstanding at December 31, 2010 and such items that originated subsequent to this date through
the final week of our audit procedures. The would include, among other things, leases, regulatory
commitments, sales commitments, purchase commitments and employee-related obligations.

Copies of any updated Company brochures.

                                          Confirmations
Please prepare the following confirmations as requested by us:
   Cash
   Attorneys
   Notes payable
   Notes receivable
   Line of credit

                                   Trial Balance and Support
A copy of the 12/31/2010 trial balance in Excel format at least one week prior to fieldwork.

                                               - 29 -
                            Sample Audit Document Request

                                               Cash
A copy of the December 2010 and January 2008 bank reconciliations and bank statements for all
cash accounts.

A schedule of interbank transfers for five business days before and after December 31, 2010.

A schedule of check number sequences used during 2010 for each bank account. This schedule
should reflect the last check number used in the prior year, the first check number used in the
current year, the last check number used in the current year, and any major breaks in sequence
within the current year. Please explain any major breaks in sequence.

                                      Accounts Receivable
A copy of the accounts receivable aging trial balance as of 12/31/2010. This schedule should be
reconciled to the general ledger at 12/31/2010.

A schedule/analysis of anticipated losses on accounts receivable at 12/31/2010.

                                           Inventories
A copy of the 12/31/2010 detailing inventory listing. The listing should be extended and in
agreement with the general ledger.

                                  Prepaid Expenses and Other
A detailed schedule of the components of prepaid expenses at 12/31/2010 that agrees to the general
ledger at 12/31/2010.




                                               - 30 -
                             Sample Audit Document Request

                                     Property and Equipment
An activity schedule of property, equipment and other fixed assets by general ledger account
showing beginning balances that agree to the prior year audit, additions, property sold,
retirements, and ending balances that agree to the general ledger at 12/31/2010. Indicate all items
that are capital leases. Prepare separate detailed schedules of additions and deletions that tie to
the activity schedule. Provide the accumulated detailed fixed asset listing that agrees to the
general ledger and activity schedule at 12/31/2010.

A schedule showing recorded accumulated depreciation and depreciation expense for the year,
asset life, and depreciation methods used. Accumulated depreciation and depreciation expense
should agree to the general ledger at 12/31/2010.

Original sales invoices, cash receipt documentation and other related records for assets sold during
the year for amounts in excess of $[ ].

                                         Accounts Payable
A detailed schedule of accounts payable at 12/31/2010 that agrees to the general ledger at
12/31/2010.

Cash disbursements journal for the period January 1, 2008 through the beginning of fieldwork.

Copies of all checks and invoices for all items greater than $[ ] for the period January 1, 2008
through the end of fieldwork.




                                                 - 31 -
                             Sample Audit Document Request

                                         Accrued Expenses
A detailed schedule of accrued expenses at 12/31/2010 that agrees to the general ledger at
12/31/2010.

All supporting documents for accrued expenses.

                                   Salaries and Benefits Payable
Copies of the last five federal and state quarterly payroll tax returns.

A detailed schedule of accrued payroll at 12/31/2010 that agrees to the general ledger at
12/31/2010.

A schedule of vacation and sick accrual that agrees to the general ledger at 12/31/2010.

                                                 Debt
A roll forward schedule that agrees to the trial balance and shows the beginning balance,
additions, payments and the ending balance for all debt outstanding during the year.

Copies of all bank debt agreements and copies of all new notes payable.

Amortization schedules for each new loan outstanding as of December 31, 2010.

A schedules of calculations as of December 31, 2010 that supports the Company's compliance with
applicable loan covenants (e.g., profitability, working capital, payments of dividends, tangible net
worth, net worth ratios). Provide forbearance letters, if necessary.




                                                 - 32 -
                            Sample Audit Document Request

                               Obligations Under Capital Leases
A detailed schedule of the components of obligations under capital leases at 12/31/2010, if any.
The schedule must show the prior year's audited balance, additions (new leases), deletions (pay
downs) and the ending balance, which must agree to the general ledger. Certain components may
be selected for further test work.


                                    Revenues and Expenses
Support and explanation for any increase/decrease in sales.

Support and explanation for any increase/decrease in cost of sales.

A schedule showing the calculations for pension plan contributions, if at, at 12/31/2010.

A schedule of rent expense for the year ended 12/31/2010 with agrees to the general ledger.

                                               Other
A schedule of sales to the Company's five largest customers during 2010.

A schedule of all federal and state income taxes paid during 2010.




                                               - 33 -
                      Sample Management Representation Letter
Smith and Jones, CPAs
We are providing this letter in connection with your audit of the balance sheets of the Company as
of December 31, 2009 and 2010, and the related statements of income, changes in shareholders'
equity, and cash flows for the years then ended for the purpose of expressing an opinion as to
whether the financial statements present fairly, in all material respects, the financial position,
results of operations, and cash flows of the Company in conformity with generally accepted
accounting principles. We confirm that we are responsible for the fair presentation in the financial
statements of financial position, results of operations, and cash flows in conformity with generally
accepted accounting principles. We confirm that we are responsible for adopting sound
accounting policies, establishing and maintaining internal control, and preventing and detecting
f d
Certain representations in this letter are described as being limited to matters that are material.
Items are considered material if they involve an omission or misstatement of accounting
information that, in light of surrounding circumstances, makes it probable that the judgment of a
reasonable person relying on the information would be changed or influenced by the omission or
misstatement. An omission or misstatement that is monetarily small in amount could be considered
material as a result of qualitative factors.

We confirm, to the best of our knowledge and belief as of February 15, 2011, the following
representations made to you during your audit.

1. The financial statements referred to above are fairly presented in conformity with generally
   accepted accounting principles.

2. We are responsible for the supplementary information accompanying the basic financial
   statements.
3. We have made available to you all:
   a. Financial records and related data.
   b. Minutes of meetings of the Board of Directors, or summaries of actions of recent meetings
      for which minutes have not yet been prepared.

                                               - 34 -
                     Sample Management Representation Letter

4. There have been no communications from HUD or other regulatory agencies concerning
   noncompliance with, or deficiencies in, financial reporting practices.

5. There are no material transactions that have not been properly recorded in the accounting
   records underlying the financial statements.

6. There have been no:
   a. Fraud involving management or employees who have significant roles in internal control.
   b. Fraud involving others that could have a material effect on the financial statements.

7. The Company has no plans or intentions that may materially affect the carrying value or
   classification of assets, liabilities, or equity balances.

8. Receivables recorded in the financial statements represent valid claims against customers or
   other parties arising on or before the balance sheet date and have been appropriately reduced
   to their estimated net realizable value.
9. The following have been properly recorded or disclosed in the financial statements:
   a. Related party transactions and related accounts receivable or payable, including sales,
      purchases, loans, transfers, leasing arrangements, and guarantees.
   b. Arrangements with financial institutions involving compensating balances or other
      arrangements involving restrictions on cash balances and line-of-credit or similar
      arrangements.
   c. Arrangements to repurchase assets previously sold.
   d. Guarantees, whether written or oral, under which the Company is contingently liable.




                                               - 35 -
                      Sample Management Representation Letter
10. There are no estimates that may be subject to a material change in the near term that have not
    been properly disclosed in the financial statements. We understand that near term means the
    period within one year of the date of the financial statements. In addition, we have no
    knowledge of concentrations existing at the date of the financial statements that make the
    Company's owners vulnerable to the risk of severe impact that have not been properly
    disclosed in the financial statements.
11. We are responsible for:
    a. Compliance with the laws, regulations, and provisions of contracts and grant agreements
       applicable to us; and we have identified and disclosed to you all laws, regulations and
       provisions of contracts and grant agreements that we believe have a direct and material
       effect on the determination of financial statement amounts.
    b. Establishing and maintaining effective internal control over financial reporting.

12. There are no:
    a. Violations or possible violations of laws or regulations and provisions of contracts and grant
       agreements whose effects should be considered for disclosure in the financial statements or
       as a basis for recording a loss contingency.
    b. Unasserted claims or assessments that our lawyer has advised us are probable of assertion
       and must be disclosed in accordance with Statement of Financial Accounting Standards No.
       5
    c. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by
       Statement of Financial Accounting Standards No. 5.
13. The Company has satisfactory title to all owned assets, and there are no liens or encumbrances
    on such assets nor has any asset been pledged except as made known to you.




                                                - 36 -
                     Sample Management Representation Letter
14. We are responsible for the Company’s compliance with laws and regulations and the provisions
    of contracts and grant agreements applicable to it; and we have identified, and disclosed to
    you, all laws and regulations and the provisions of contracts and grant agreements that have a
    direct and material effect on the determination of financial statement amounts. We have
    complied with all aspects of laws, regulations, and the provisions of contracts and grant
    agreements that would have a material effect on the financial statements in the event of
               li
15. No events have occurred subsequent to the balance sheet date and through the date of this
    letter that would require adjustments to, or disclosure in, the financial statements or
    supplementary information.




                                              - 37 -
                        Sample Management Letter and Response
                       Reportable Conditions / Material Weaknesses(*)

          Auditors' Observation                                   Management's Response
We found several non-voided blank checks.                We've changed the policy for checks.

We found discrepancies between sales order               We found the source of the problem and we've
documents and sales reported in the financial            corrected it.
The Company doesn't keep its accounts                    We're working on it.
receivable aging schedules up to date.

The Company has several accounts receivable              We've assigned these accounts to a collection
over 90 days.                                            agency.

The Company has no formal hiring policy and              We're preparing a formal hiring policy.
has hired employees without performing
background checks.


(*)
  A material weakness is a condition in which the design or operation of a specific internal control
element does not reduce to a relatively low level the risk that errors or irregularities in material
amounts would occur and not be detected by employees within a timely period in the normal course
of their assigned functions.




                                                - 38 -
                        Sample Management Letter and Response
     "Opportunities for Strengthening Internal Controls and Operational Efficiency"

          Auditors' Observation                                       Management's Response
Establish an annual budget and prepare five-              That's a good idea.
year projections.

Document customer payment terms better.                   It's fine as it is.
Include payee names in bank reconciliations.              Done.
Prepare written inventory control procedures.             We're working on it.
Document all employee loans.                              All employee loans have been paid off and no
                                                          more will be issued.
Pay all employees through the payroll systems.            Done.
A supervisor should pre-approve all overtime.             No more overtime will be authorized.
Hire a personal manager.                                  We don't have the money.
Track dishonored checks better.                           It's fine as it is.




                                                 - 39 -
                Sample Report of Independent Registered Public Accounting Firm

The Board of Directors
XYZ Company
    We have audited the accompanying consolidated balance sheets of XYZ Company and subsidiaries as of December 31,
2010 and 2009, and the related consolidated statements of income, comprehensive income, changes in stockholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
    We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the
financial position of XYZ Company and subsidiaries as of December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity
with U.S. generally accepted accounting principles.
    We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 15, 2011 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control over financial reporting.
Accounting Firm Name
City, State
Date


                                                          - 40 -

								
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