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					                  Assurance Levels
Level      Procedures/                   User’s    Opinion      Distribu-
of service conclusions   OR       DR      Risk      form          tion

Examination conclude: assess- varies|             positive      general
            Low AttR    ed     OR     VL           assurance


Review      AP/        not ass-           L to  negative
             inquiry    essed     mod.     Mod. assurance general

Agreed-upon usr + prp not ass- varies| L to       findings-
procedures agree
    .                  essed    proc. VH            no neg. a   limited

Compilation assembly, not ass-           L to     no assur-
             format    essed      VH      VH       ance         general
       Internal Control Reporting
• As part of audit:
   – negative assurance on material weaknesses
   – report material weaknesses and reportable
     conditions
   – limited distribution (internal use only)


• Stand alone examination:
   – assertion of compliance with COSO/CoCo
     (financial reporting) by management
   – examination report as of point in time
   – general distribution
                     SysTrustSM
                     (AICPA/CICA)

• examination of computer system design and
  operations (five components)
• report on four areas - system
   – availability
   – security
   – integrity
   – maintainability
• partial substitute for internal control reporting
• useful for third party trading partners (B2B) and data
  processing outsourcing
   Jose’s Financial Cooperative
             Summary

Interest rate break on $1,000,000 loan:

     .02 for audit
     .01 for review
     .00 for compilation

  less:

     .005 if earnings are low
     Jose’s Financial Cooperative
     Example - certain that M = 0


Client with OR = .2, M = 0

     audit 20,000 - 10,000    $10,000
     review 10,000 - 3,000      7,000
     compilation   - 1,000     -1,000
Jose’s Financial Cooperative
Client with good controls (OR = .2)
              Audit

    DR* = AuR* / OR

          = .01 / .2

          = .05
Jose’s Financial Cooperative
Client with good controls (OR = .2)
                    Audit
 Pass audit
                        .80   M=0
        .8 x 1.00             correct
                              accept



        .2 x .05              M = M*
                        .01
                              incorrect
                              accept

        .2 x .95        .19   M= 0
Fail audit             1.00   after detect/correct
  Jose’s Financial Cooperative
  Client with good controls (OR = .2)
                  Audit
Analysis:
  Expected interest cost savings:
      .02 x .81 x 1,000,000     = $16,200
      .015 x .19 x 1,000,000    =   2,850
                                   19,050

   Audit cost                     -10,000
          Net gain from audit    $ 9,050
   Jose’s Financial Cooperative
             Summary
Client with OR = .2:
      audit                   $9,050
      review                   6,400
Client with OR = .8:
       audit                   1,050
       review                  4,600
Client with OR = .2, M = M*
      audit                    5,250
      review                   4,000
 Case 10 - Jose’s Financial Cooperative

• Audit (examination) holds probability of
  material misstatement constant
• Probabilities and attest risk affect value to
  preparer (and possibly user) of assertions
• Can calculate the value to preparer of
  attestation (audits/reviews)
• Jose is indifferent to audit vs. review vs.
  compilation?
• Self-selection reveals borrower type?

				
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