Video instructions and help with filling out and completing When Form 8815 Audit

Instructions and Help about When Form 8815 Audit

In this lesson we're going to do a high-level run-through of the audit process so that you get a feel for what an odd it is and how its conducted the rest of the course will take a deeper look into each of these audit procedures let's pretend that our client is Lakeview hotels it's a small capitalization public company that operates a small portfolio of hotels across the country and we work for early in young public accountants here's a bit of background Lakeview has been a client for the past four years the company has been negatively impacted by the slow recovery in the economy and it's older properties two years ago lakyn Lakeview outsource the management of its hotels to an external manager Lake view's corporate staff are responsible for the oversight of the managers the strategic decisions the financing decisions and of course preparing the public reporting Lakeview CEO is a seasoned veteran of the hotel industry the CFO has been with the company for the past three years and does not have a background in hotels the company is faced with a significant maturity of a debenture so with that background in mind let's walk through the high-level audit process let's start with the end in mind an audit is the expression of an independent opinion on the fairness of presentation of the financial statements as prepared by management two important points to make here first of all the responsibility for the preparation of the financial statements lies with management and not the auditors and secondly the auditors are responsible for their opinion which is based on the evaluation of audit evidence they gather so put in the simplest terms possible an audit is attended to ensure that every number and every disclosure within the financial statements is valid and supported so for instance let's just flip to the statement of financial position also known as the balance sheet management represents that there is one million four hundred thirty six thousand seven hundred and eighty nine dollars as of December 31st has auditors we need to gather evidence to support that this is in fact true think about this for a moment and consider the types of evidence you would expect the order to request to support this cash assertion here are some of the examples of the sorts of evidence you would have in mind a bank reconciliation a bank statement talking to the bank about how much money is in the account as of December 31st count the cash on hand the idea is to gather what is called sufficient appropriate audit evidence to support management's representation that there is only one million four hundred thirty six thousand seven hundred and eighty nine dollars of cash on the balance sheet the audit process and evidence gathering activity goes on and on for everything you see in the balance sheet and tell everything has been validated that's auditing in a nutshell however as you can imagine there's a bit more to it than that why well first of all and most importantly you need to realize that we practically can't look at every single piece of evidence that exists that would be cost prohibitive and in most cases is unnecessary for the users so what the auditors do instead is they use a risk-based approach to auditing that is to say they identify where the greatest risk for a material misstatement exists and then focus their audit procedures to ensure one or more of these so-called material misstatements does not exist notice I use the word material misstatement not just misstatement material implies a misstatement in the order of magnitude that it would change a user's decision when relying upon the financial statements now we're going to discuss this in much greater depth in a later lesson so let's go back to the beginning once again and then go through the audit process step by step the first thing we need to do has auditors of a youth is to evaluate whether we want to continue as the artists of Lakeview if this was a new client we would have to determine whether we want to accept the engagement the things to consider include the risk to the firm of taking on the engagement generally we don't want to get ourselves involved with any client that would expose us to a lawsuit we should also be wary of the businesses that are under pressure or companies with a bad reputation as these would be the sorts of indicators of a high business risk if it's a new engagement we will communicate with the predecessor auditor to determine if there's anything we should be concerned about of course we need to do our independence assessments by looking at the five threats to independence and the possible safeguards as we discussed in the previous lesson we will document the parameters of the engagement in what is called an engagement letter a fancy term that really means a contract between the audit firm and the client that covers the scope of services our fees and the deliverables assuming we are able to address all these items satisfactorily we can accept the engagement and move on to the actual planning audit planning encompasses a number of activities that are performed well ahead of the year-end audits are very much tailored to the client circumstances and no tool audits are exactly alike we begin with a risk assessment our risk assessment requires an in-depth study of the client's business the industry and the important factors that potentially impact the financial reporting the outcome of this analysis is that the higher the risk the more work we will likely have to perform before we get to that warm fuzzy feeling about the financial statements management has prepared risk assessments require professional judgment and general business acumen clients that have weak businesses post higher risks collides with weak people processes