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good morning welcome to our discussion for chapter 16 in chapter 16 we're going to be talking about some final procedures related to auditing of operations as well as completing the audit we focus on the statement of operations focusing on net income because company earnings are considered an extremely important indicator of the health and well-being of the organization the measurement of net income is generally regarded as a single most important function of accounting I'm sure that we remember from our accounting classes that conservatism is a major construct as we are developing our financial statements conservatism has a powerful influence on revenue and expenses it's important because of the subjectivity involved with accounting estimates using a conservative approach assets are generally stated lower and liabilities are generally stated higher this results in an income statement with a lower net income using conservative income figures as otherwise so let's spend a few minutes talking about the relationship between balance sheet accounts and the income statement we've talked about the audit of accounts receivable well clearly accounts receivable relates directly to sales inventory is going to relate directly to some of our expenses in terms of purchasing cost of goods sold and supply expense we've not talked about payroll we're going to talk about that in a few minutes but when we talk about property plant and equipment these items are going to affect expenses in the form of depreciation amortization and other expenses in addition if we've sold any property plant and equipment we may have gains or losses we also may have rent as well as royalties so let's take a deep dive into some of these areas that we've not yet covered in the course of our discussions miscellaneous revenue is the first account that we want to talk about this is a mixture of items such as non reoccurring and others received at regular intervals examples of this would be sales of scrapped rebates or refund from insurance policies proceeds from the sale of plant equipment keeping mind that one of the things that we're looking for here is the classification some of the items that we may identify in miscellaneous revenue are in fact a reduction in expenses so if we identify things that need to be reclassified we would be proposing adjusting journal entries for the reclassification performing analytical procedures will help us to investigate unusual fluctuations including material amounts of unreported revenue and significant misclassifications affecting revenue let's now shift our attention to payroll payroll is clearly important to an organization because it's usually the largest cost associated with operations with proper controls hey roll fraud is difficult perpetrate controls include the segregation of duties related to payroll timekeeping and human resources the use of computers with proper controls help with the segregation of duties in addition the filing of frequent payroll reports with the government reduces the risk of having individuals on our payroll that are fictitious these are very important internal controls that we need to assess as we are exploring what's taking place with a roll our employees pay by cheque or by direct deposit is the payroll bank account maintained as an impress account in other words is there a separate payroll account as opposed to general operations are the activities of time keeping payroll payroll signing payroll check distribution and Human Resources separated by departments and employees our employee timesheets approved by supervisors is the payroll bank account reconciled monthly by an employee having no other payroll duties and then finally our operations involved in the preparation of payroll subject to independent verification before paychecks are distributed some of the data analytic procedures that we need to conduct as the course of our audit is to identify duplicate paychecks to employees within a pay period also identify checks that may have been issued to employees after they have been terminated we need to compare the payroll file to the vendor master file and determine if in fact there are duplications while there may be appropriate reasons for this duplication these are the items that we need to investigate as part of our audit we need to identify false invalid or duplicate social security numbers identify differences in pay between union contracts and actual payments and then finally compare and summarize costs for special pay overtime and cream let's now shift our attention to audit procedures that we complete near the end of our fieldwork one of the things that we need to do is to search for unrecorded liabilities including lost contingencies as part of our final review we're going to be reviewing the minutes of Board of Directors meetings we are going to perform the final analytical procedures which is a required component of our audit we're going to review for subsequent events obtain representation letter from management communicate any mistake nents to management in our management letter and then finally evaluate audit results loss contingencies are items that are probable and we are able to estimate the contingency loss an example of a loss contingency is a pending lawsuit now not all pending lawsuits are lost contingencies but what we need to do as part of our audit is inquire of the clients legal counsel the status of open litigation if there is a loss contingency we need to make sure that the financial statements reflect liability and corresponding expense loss contingency should also be disclosed in the notes of the financial statement that are reasonably possible however we're not able to estimate the potential loss loss contingencies do not be disclosed when the possibility of loss is removed let's now shift our attention to subsequent event we want to start off with a number of definitions so in our scenario let's say the balance sheet date is the end of the year December 31st let's say the date of the audit report in this case the date of the audit report is the completion of the audit the end of the fieldwork date and generally speaking the date that management is going to sign the management representation letter let's say that date is March 31st and then the financial statements are release a April first so we have three dates that we're looking at anything that occurs up through the balance sheet date is the interim period we're adjusting our financial statements ingly and there's really no issue but what we really want to focus on is the subsequent period the subsequent period again is between the end of the balance sheet date and the completion of our field work which is the date of the audit report this is what we call our subsequent period the issue is what happens if something take place during this time period well we have what we call type one event and type do events like one events our conditions that existed on or before the balance sheet date but have been resolved in the subsequent period so as an example let's say we established a loss contingency based upon an estimate as of December 31st but during the month of February we actually resolved this let's say we resolved it for a number different than the estimate this is a type 1 and we would make an adjustment to the financial statement a pipe 2 event is something that does not affect the financial statement so let's say during this subsequent period the organization issued additional stock or a bond while this does not affect December 31st we would want to disclose this information because this would be valuable information to the user of the financial statement the period between the audit report date and the actual release of the financial statements the auditor is only responsible for information coming to the attention of the auditor to identify subsequent events we're going to review the last available financial report and the minutes of the board of director we're going to inquire about matters out with at management for what meeting minutes are not available inquire of management obtain the lawyers letter and then finally obtain the representation letter from manager the purpose of the representation letter is to have the clients principal officers president and the CFO acknowledge that they are responsible for the fairness of the financial statement and that they have provided everything that the auditor has requested of them and provided everything that supports their responsibilities related to the financial statement there is no substitute for a signed representation letter if we do not get a signed representation letter we must not issue the audit report let's finally talk about subsequent discovery of facts existing at the date of the report now this is different as compared to the subsequent event testing that we're doing the subsequent discovery effect generally involving major fraud is where that after the audited financial statements have been issued there is a discovery of major fraud related to the financial statement when this happens we need to advise the client to make appropriate disclosures and inform users of the financial statement that they no longer can rely on the audited financial statement if the client refuses the CPA should inform each member of the board of directors and notify regulatory agencies okay I thank you very much for your time and I'm looking forward to our next discussion [Music]