Completing The Audit /
Post Audit Responsibilities
Completing the Audit
Main point: Procedures performed at the
end of the audit are your last chance to
detect material misstatements.
There are a series of ―standard
procedures‖ to catch problems.
Mentally need to step back and ―look at
Auditor Responsibilities in
Completing the Audit
Evaluate Going Concern
Communications with clients
Making subsequent events review.
Reading minutes of meetings.
Obtaining evidence concerning
litigation, claims and assessments.
Obtaining a client representation letter.
Performing analytical procedures.
Subsequent Event’s Time Frame
Year End Issue Report
Subsequent Events Period
Type I Type II
Provides evidence with Provides evidence with
respect to conditions that respect to conditions that
existed at balance sheet did not exist at balance
date and affect estimates sheet date but arose
inherent in financial subsequent to that date.
Adjust the financial
statements e.g., issued new debt,
e.g., evidence regarding refinancing, merger or
subsequent collection of acquisition, casualty loss
receivables, sales of
inventory, or settlement of
Subsequent Event’s Time Frame
Year End Field work Issue Report
Subsequent Events Period
Dual Date Report
Dual Dating Report
Material Subsequent Event (usually type
II event ) which happens after the close
of field work but prior to printing and
issuing the report.
Audit Procedures for
Read interim financial statements after
Inquiry of management (Explain what
you are looking for)
Read minutes of board of directors
Inquiry of client’s legal council.
Representation letter from client.
Reading Minutes of Meetings
Read all minutes of meetings
throughout the year as well as through
the report release date
Look for significant items that have not
been properly addressed
May indicate a significant subsequent
Attorney’s Letters and
Primary concern is evidence regarding FASB No.
5 regarding Accounting for Contingencies on
litigation, claims, assessments
Direct communication with expert: Attorney
Record a liability
Disclose a contingency
Client waives attorney - client privilege in the context of
Identify existence of litigation
Need assessment of probability of material loss in the
context of FASB No. 5
The client’s lawyer is an expert with respect to:
Existence of a condition indicating an uncertainty as to
possible loss from litigation, claims, and assessments.
Period of underlying cause for legal action.
The degree of probability of unfavorable outcome.
The amount or range of potential loss.
Ifclient representation is not competent
evidence, what is the value of the
» Mgmt. acknowledges their primary responsibility for
the financial statements
» Availability of ALL financial records
» Completeness of minutes
» Representation regarding irregularities involving
management or employees
» Address all material accounting estimates!!
Two Key Representations
The client takes responsibility for the financial
statements as their own.
The client indicates that no evidence has been withheld from
Everything Else is Icing on the Cake
Have management address every accounting estimate.
Discuss any issue of audit interest
REMEMBER! REP LETTER DOES NOT
SUBSTITUTE FOR CORROBORATING EVIDENCE!
Year-End Analytical Procedures (required)
Compare this year to last year
Comparison to budgets
Comparison to underlying business activity
** Put it all together and determine if it makes sense**
Evaluating the Findings
Making final assessment of materiality and
Review financial statements.
Formulating opinion(s) & audit report(s).
Making final review of working papers.
Final assessment of Materiality
Determine whether known & projected errors
will influence a financial statement user’s
decision (as called Summary of Unadjusted
Differences in class).
See Figure 19-3 p. 906.
Consider implications of prior year’s ―passed
Proposed Adjusting Journal
• Balance Sheet
• Pretax Income => Income Tax Expense
• Statement of Cash Flows
• Statement of Owner’s Equity
• Any potential disclosures
Implicationsof Prior Year’s Passed Adjustments
(corrected during this year)
Materiality & Audit Risk
Once the final numbers are there, you can
assess whether you were testing at the
materiality level (should be considered
throughout the engagement, but must be
done at completion).
Have we obtained enough comfort on all the
audit risks? Review audit plan and evaluate
whether the audit took place in accordance
with the plan.
Assess Going Concern
The auditor has a responsibility to evaluate
whether there is substantial doubt about the
entity’s ability to continue as a going concern for
a reasonable period of time, not to exceed one
year beyond the date of the financial statements
being audited (AU 341)
The results of auditing procedures designed and
performed to achieve other audit objectives
should be sufficient for this purpose.
Going Concern Considerations
The auditor must evaluate if:
Negative trends (e.g., operating losses, negative cash
flow from operations)
Other indications of possible financial difficulties (e.g.,
denial of trade credit by suppliers, restructuring of debt)
Internal matters (e.g., work stoppages, uneconomic long-
External matters (e.g., loss of license, patent, loss of
Going Concern: Evaluate
If, after consider the identified conditions and
events in the aggregate, the auditor believes
there is substantial doubt about the ability of the
entity to continue as a going concern for a
reasonable period of time, he should consider
management’s plans for dealing with the adverse
effects of the conditions and events.
Plans to dispose of assets
Plans to borrow money or restructure debt
Plans to reduce or delay expenditures
Plans to increase ownership equity
Going Concern: Consider Financial
Disclosures in F/S:
Pertinent conditions and events giving rise to the
assessment of substantial doubt about going concern
Information about recoverability or classification of
recorded asset amounts or classification of liabilities
Impact on Audit Reports
Evaluate adequacy of disclosure in the financial
Possible ―except for‖ qualified opinion regarding
Possible explanatory paragraph regarding
If the auditor reaches a conclusion about substantial
doubt, that is mitigated by management plans,
disclosure is still necessary. The auditor may
conclude that reference to going concern in the
audit report is unnecessary.
Report of Independent Registered
Public Accounting Firm – TRM Corp
We have completed an integrated audit of TRM Corporation’s 2005 consolidated financial statements and of
its internal control over financial reporting as of December 31, 2005 and audits of its 2004 and 2003
consolidated financial statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1)
present fairly, in all material respects, the financial position of TRM Corporation and its subsidiaries at
December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2005 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the accompanying financial statement schedule
listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements and financial statement schedule
based on our audits. We conducted our audits of these statements 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 of financial statements includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
Report of Independent Registered
Public Accounting Firm – TRM Corp
The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the
Company incurred a net loss for 2005 resulting in its failure to meet certain financial covenants of its
financing agreement with Bank of America, N.A. and other lenders. The Company does not expect to meet
the required financial covenants during 2006, which may render the debt callable by the bank. This raises
substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Internal control over financial
Also, we have audited management’s assessment, included in Management’s Report on Internal Control
Over Financial Reporting appearing under Item 9A, that the Company did not maintain effective
internal control over financial reporting as of December 31, 2005, because the Company did
not maintain effective controls over the a) valuation of its accounts receivable including the
related allowance for doubtful accounts, b) completeness and accuracy of certain of its
equipment, including the related depreciation expense, and c) completeness and accuracy of
its accrued liabilities and related expense accounts, including cost of goods sold, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express opinions on
management’s assessment and on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
We conducted our audit of internal control over financial reporting 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 effective internal control over
financial reporting was maintained in all material respects. An audit of internal control over financial
reporting includes obtaining an understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The following material weaknesses
have been identified and included in management’s assessment as of December 31, 2005:
Ineffective controls over accounts receivable . The Company did not maintain effective controls over
the valuation of its accounts receivable. Specifically, the Company failed to properly review its aged
customers’ accounts receivable in order to value such receivables in accordance with generally accepted
accounting principles. This control deficiency resulted in audit adjustments to the Company’s 2005 annual
consolidated financial statements. Additionally, this control deficiency could result in a misstatement in the
accounts receivable, allowance for doubtful accounts and the related general and administrative expense
accounts that would result in a material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly, the Company’s management has
determined that this control deficiency constitutes a material weakness.
Ineffective controls over equipment . The Company did not maintain effective controls over the
completeness and accuracy of certain of its equipment, including the related depreciation expense.
Specifically, a United Kingdom subsidiary failed to ensure the completeness and accuracy of costs used to
capitalize security and processing compliance enhancements made to its ATM equipment. This control
deficiency resulted in an audit adjustment to the Company’s 2005 consolidated financial statements.
Additionally, this control deficiency could result in a misstatement in the equipment, accumulated
depreciation, and the related depreciation expense accounts that would result in a material misstatement to
the annual or interim consolidated financial statements that would not be prevented or detected.
Accordingly, the Company’s management has determined that this control deficiency constitutes a material
Ineffective controls over accrued liabilities . The Company did not maintain effective controls over
the completeness and accuracy of certain of its accrued liabilities and related expense accounts, including
cost of goods sold. Specifically, a United Kingdom subsidiary failed to ensure the completeness and
accuracy of its customer discounts and accruals for processing costs and services. This control deficiency
resulted in audit adjustments to the Company’s 2005 annual consolidated financial statements. Additionally,
this control deficiency could result in a misstatement in the accrued liabilities and related expense accounts,
including cost of sales that would result in a material misstatement to the annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly, the Company’s management
has determined that this control deficiency constitutes a material weakness.
These material weaknesses were considered in determining the nature, timing, and extent of
audit tests applied in our audit of the 2005 consolidated financial statements, and our opinion
regarding the effectiveness of the Company’s internal control over financial reporting does
not affect our opinion on those consolidated financial statements.
In our opinion, management’s assessment that TRM Corporation did not maintain effective
internal control over financial reporting as of December 31, 2005, is fairly stated, in all material
respects, based on criteria established in Internal Control — Integrated Framework issued by the COSO.
Also, in our opinion, because of the effects of the material weaknesses described above on the
achievement of the objectives of the control criteria, TRM Corporation has not maintained effective
internal control over financial reporting as of December 31, 2005, based on criteria established in
Internal Control — Integrated Framework issued by the COSO.
/s/ PricewaterhouseCoopers LLP
March 30, 2006
TRM: Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies (portion of)
Our consolidated financial statements have been prepared on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. We incurred a net loss of
$8.9 million in 2005. As a result of our 2005 financial performance, we have failed to meet certain financial
covenants of our financing agreement with Bank of America, N.A. and other lenders. As discussed further in Note 8
we have entered into a Forbearance Agreement and Amendment with our lenders pursuant to which they have agreed not to
take any action with regard to our covenant violations prior to June 15, 2006. However, we do not expect to meet all of our
financial covenants for the second quarter of 2006, because some of the covenant calculations include results of operations
for the most recent twelve-month period, and we incurred substantial losses in the fourth quarter of 2005. Therefore, we
expect that the lenders will have the right to require payment in full of our outstanding debt under our financing agreement
($91.6 million at December 31, 2005). Because there are claimed cross-default provisions in TRM Inventory Funding Trust’s
Loan and Servicing Agreement, if we do not refinance the outstanding debt under our financing agreement or obtain an
additional forbearance period we expect to be declared in default of the provisions of the Loan and Servicing Agreement as
well, and the lender will be able to demand payment. These factors, among others, may indicate that we may be unable to
continue as a going concern for a reasonable period of time. Our financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be
necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is
contingent upon our ability to continue to defer payment of our liabilities under our financing agreement, or to refinance the
We expect to be able to refinance the outstanding balances under our financing agreement and have begun
initial efforts to do so. However, we can provide no assurance that we will be able to do so. If we are unable to refinance
our debt or to get our lenders to agree to any further forbearance from calling our loans, we might be forced to seek
protection of the courts through reorganization, bankruptcy or insolvency proceedings.
If we refinance the outstanding balances under our financing agreement, or if the balance is demanded by
the lender, the remaining unamortized deferred financing costs of $2.5 million as of December 31, 2005
associated with this credit facility may be written off in the period of refinancing or demand.
Technical review of Financial
Use Disclosure Checklist
If this is subject to 404…what happens
if you find something wrong with the
Formulating Opinion(s) &
Public company subject to 404 – 3 opinions
Financial statements presented fairly
Fairness of management’s assertions
Adequacy of internal controls
Companies not subject to 404 – 1 opinion
Financial statements presented fairly
Make sure to use the most updated templates
Communicating with the Client
Communicating internal control matters
(AU 325 and PCAOB Standard No. 2)
Communicating matters of audit
conduct (AU 380)
Internal Control Matters
REQUIRED for companies if significant
deficiencies are noted.
Public companies subject to 404 – All
significant deficiencies are reported
Private companies – not required to search
for significant deficiencies, but if they are
found, must report
Internal control deficiency that adversely affects the
company’s ability to initiate, record, process, or report
external financial data reliably in accordance with
GAAP…results in more than a remote likelihood that a
misstatement of the annual or interim financial statements,
that is more than inconsequential in amount, will not be
prevented or detected.
Significant deficiency that results in more than a remote
likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or
Significant deficiency = reporting to
Material weakness = adverse controls
opinion and reporting to client
Communicating matters of
audit conduct (AU 380)
Auditor’s responsibilities under GAAS
Significant accounting policies
Management judgments and accounting
Significant audit adjustments
Disagreements with management
Consultation with other accountants
Major issues discussed with management
Difficulties encountered in performing the
Report card for management
Recommendations not otherwise
Improved efficiency and effectiveness
Way to add value to your clients.
Discovery of facts between report date and
issuance of report –> dual dating of report
Example, follows original date:
―February 28, 20xx, except for the information
in Note A for which the date is March 7,
Do the facts affect the report that was issued? If
Time for restatement and must take steps to
prevent future reliance on the audit report.
Consult attorney and insurance carrier.
Notify the client that the audit report must no longer be
associated with the financial statements.
Notify the regulatory agencies having jurisdiction over the
client that the report should no longer be relied on.
Notify each individual known to be relying on the financial
statements that the report should no longer be relied on.
Discovery of Omitted
Assess the importance of the procedure in relation
to ability to currently support opinion expressed on
the financial statements.
If needed, perform procedure and obtain evidence.
If evidence does not support opinion previously
issued on the financial statements, follow
procedures related to subsequent discovery of
facts existing at report date.