AUDIT TECHNICAL UPDATE – BUSY SEASON

STEVEN MORRISONCOHNREZNICK

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2 • March 20, 2019

STEVEN MORRISONSteven Morrison, is a partner in National Assurance at CohnReznick, bringing

experience as an engagement partner, quality control reviewer, and as a

standard setter in a variety of industries, including automotive dealerships,

employee benefit plans, freight forwarding /mail courier, retail, and

wholesale/distribution. His experience encompasses effectively addressing

unique accounting and audit issues of entities in the United States, Asia, Europe,

Oceania, and the Americas. Steven addresses specific issues for companies in a

variety of other industries and has extensive experience in effectively

communicating simple and complex technical matters to all levels of personnel.

His current responsibilities include advising engagement teams on accounting

and auditing matters

.From 2015 to 2018, he served on the American Institute of Certified Public Accountants’ (AICPA)

Auditing Standards Board (ASB), a senior committee that promulgates U.S. Generally Accepted Auditing

Standards. As a part of his responsibilities on the board, he served as the final chair of the going

concern taskforce, which updated the going concern standard with SAS 132. He also served on the

audit evidence taskforce, which is considering updates to AU-C 500, Audit Evidence, and other

standards for issues such as blockchain and artificial intelligence.

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3 • March 20, 2019

STEVEN MORRISONSteven is a past recipient of the ‘40 Under 40’ Award for the CPA Practice Advisor and South Florida

Business Journal. He has extensive speaking experience at conferences, and has presented on

accounting and auditing matters at various conferences including those of the AICPA, Florida Institute of

CPAs (FICPA), Michigan Association of CPAs (MICPA), and the Association of Certified Fraud

Examiners (ACFE).

Education

University of Florida – Bachelor of Science in Accounting

University of Florida – Master of Arts in Real Estate, Concentration in Capital Markets and Finance

Florida Atlantic University – Master of Accounting

Certificates

University of Notre Dame–Executive Integral Leadership at Kylemore program (Ireland)

University of Notre Dame–Advanced Specialized Certificate in Intercultural Management (expected 2019)

AICPA Certificate

Blockchain Fundamentals for Accounting and Finance Professionals Certificate (2018)

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4 • March 20, 2019

GEOGRAPHIC COVERAGE

4

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5 • March 20, 2019

A BROAD PORTFOLIO OF SERVICES

5

ACCOUNTING

AND ASSURANCE

SERVICES

TAX SERVICES ADVISORYAFFILIATED

COMPANIES

Audits, Reviews, and

Compilations

Employee Benefit Plans

IFRS

SOC 1(SSAE 16), 2, and

3 Examinations

Agreed-upon

Procedures

Accounting

Outsourcing and

Consultations

Public Company

Services

IT Audit and Controls

Review

Tax Compliance and

Preparation

Strategic Tax Planning

Corporate Tax

Outsourcing

Private Clients

Federal Tax

Trust and Estate

International Tax

State and Local Tax

Transfer Pricing

Cost Segregation Studies

New Market Tax Credits

Tax Specialty Services

Tax Credit Advisory

Bankruptcy and Restructuring

Computer Forensics and eDiscovery

Cybersecurity

Forensic and Litigation

Governance, Risk and Compliance

Government and Public Sector

Management Consulting and CFO

Advisory

Real Estate Advisory / NOI Strategies

Technology and Digital Services

Transactional Advisory and M&A

Consulting

Valuation

Capital Markets

Securities

CohnReznick

Benefits Consultants

CohnReznick UIC

Insurance

Consulting, Inc.

CohnReznick Real

Estate LLC

CohnReznick

Wealth

Management LLC

WJ Technologies

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IMPORTANT NOTEThe views expressed in this presentation are my own at this timeand not necessarily those of CohnReznick.

This presentation does not constitute accounting or legal advise.

Before proceeding regarding any accounting or auditing matterplease be sure to consult the appropriate guidance. Thispresentation does not contain all US GAAP, US GAAS, PCAOBStandards, other financial reporting frameworks, other auditingstandards, or other information that may be applicable and theremay be circumstances which may result in different treatment thanwhat is presented in this presentation.

Certain considerations mentioned are practical considerations thatmay or may not be relevant in the facts and circumstances.

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7 • March 20, 2019

STEVEN MORRISON, CPAPartner, National Assurance – Audit Quality Group

CohnReznick LLP

1301 Avenue of the AmericasNew York, NY 10019 Tel: 646-601-7740Mobile: 862-233-0679steven.morrison@cohnreznick.com

https://www.linkedin.com/in/stevenmorrisoncpa

BUSY SEASON REMINDERS

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9 • March 20, 2019

PROFESSIONAL SKEPTICISM

In AU-C 200, professional skepticism is defined as:

“An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.”

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AUDIT EVIDENCE• The concepts around audit evidence is visualized below:

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11 • March 20, 2019

POLLING QUESTION 1

Of the following, which is not specifically noted in AU-C 500 related to audit evidence:

1. Sufficient

2. Appropriate

3. Mystical

4. Relevant

5. Reliable

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12 • March 20, 2019

Auditing estimates is an important part of both AICPA and PCAOB

engagements and both inspection programs have found issues with a

large number of firms and the auditing of estimates. An overall thought

process to address estimates may include:• Reviewing and testing the processes used by management to develop estimates• Developing an independent expectation of the estimate to corroborate the

reasonableness of management's estimate• Reviewing subsequent events or transactions occurring prior to the date of the

auditor's reportAICPA AU-C 540 and PCAOB 2501 provide the structure of how to address estimates.As a general practice aid, consider asking yourself: “How do we know?”

CHALLENGING MANAGEMENT’S ESTIMATES

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13 • March 20, 2019

To the right is a sample PPE impairment

test provided by a theoretical client.

Asking “how do we know?” helps bring

forth other questions as to if we have

sufficient appropriate evidence:• Do we have executed lease agreements

for these subsequent years?

• How do we know these cash

expenditures are accurate and

complete?

2019 2020 2021

Net carrying amount of PPE at 12/31/18

CHALLENGING MANAGEMENT’S ESTIMATES

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Mindsets that may not be appropriate:• “Who cares, it’s just an estimate”• “Who are we to tell the client ‘no’?”• “They gave us a plain Excel spreadsheet, no need to audit it, this is

management’s estimate, we are good to go!”• “The estimate came from a third party valuation expert, no need for us to

worry”• “What’s the risk?”• “Who cares? Management’s estimate of the liability is below scope”• “Did we inquire of management and document their response? Once we

have done that we are DONE!”

CHALLENGING MANAGEMENT’S ESTIMATES

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POLLING QUESTION 2

Which sets of audit standards have a specific standard (or standards) on auditing estimates:

1. US GAAS

2. PCAOB

3. US GAAS and PCAOB

4. SSARS for preparation

5. SSARS for preparation and PCAOB

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16 • March 20, 2019

• Some important notes about valuation reports (often received for

business combinations, PPE impairment, goodwill/intangibles

impairment, etc.):

• Many of the concepts about challenging estimates still apply

• The use of specialist requirements in AICPA (AU-C 500 and

620) and PCAOB (AS 1210) are typically applicable and there

are forms in third party providers which help guide the thought

process and related documentation

• Build in time up-front for specialist review, assume there will be

questions, issues, changes, delays, etc.

VALUATIONS

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17 • March 20, 2019

• A basic premise underlying the application of analytical

procedures is that plausible relationships among data may

reasonably be expected to exist and continue in the absence of

known conditions to the contrary.

• The reasons that make relationships plausible are an important

consideration because data sometimes appears to be related

when it is not, which may lead the auditor to erroneous

conclusions.

• In addition, the presence of an unexpected relationship may

provide important evidence when appropriately scrutinized.

ANALYTICS (FROM AU-C 520.A6, EMPHASIS ADDED)

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SUBSTANTIVE ANALYTICS – DEBT INTEREST• In a number of circumstances, it may not be appropriate to consider a

flux analysis as a substantive analytic. A simple flux analysis, when not supplemented by expectations and precision, can lead to incorrect conclusions.

• In this case, the entity paid off its debt at the start of 2018, thus the expectation should be that interest expense is approximately $8,000, thus the $100,000 would possibly warrant additional audit work.

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19 • March 20, 2019

SUBSTANTIVE ANALYTICS – DEBT INTERESTThe more precise the expectation, the more likely we may detect a previously unrecorded derivative. In the theoretical example below, the client provides the auditor the original debt agreement with a variable rate at prime. However, our test below reveals a difference between predicted interest and actual.

Here, the client forgot to tell the auditor that the client had entered into an interest rate swap fixing the interest rate at about 6%, thus actual interest expense is different and more accounting/ disclosure is necessary

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GOING CONCERN - OVERALL• Consider if there are conditions and events which raise

substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time

• Evaluate management’s plans to alleviate substantial doubt

• Conclude on:• Whether there is substantial doubt the entity will be able to continue as a going

concern for a reasonable period of time

• The appropriateness of using the going concern basis of accounting

• NOTE: The going concern basis of accounting (as opposed to the liquidation basis) may be appropriate even if there is substantial doubt.

• Report

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21 • March 20, 2019

GOING CONCERN – THIRD PARTY SUPPORT

• When management’s plans include financial support by third parties or the entity’s owner-manager (“supporting parties”) and such support is necessary in supporting management’s assertions about the entity’s ability to continue as a going concern, the auditor should obtain sufficient appropriate audit evidence about the following:

a) The intent of such supporting parties to provide the necessary financial support, including written evidence of such intent, and

b) The ability of such supporting parties to provide the necessary financial support

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22 • March 20, 2019

POLLING QUESTION 3

When considering going concern, if third-party support is necessary for an entity to alleviate substantial doubt about the entity’s ability to continue as a going concern, evidence as to intent and ability of the third-party is necessary. In regards to “intent”, the evidence must be:

1. Written

2. Orally communicated to the auditor by the third party

3. Written only by the client (such is sufficient if in the auditor’s judgment, that the third party will provide the support)

4. Orally communicated to the auditor by the client

5. Written manually

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23 • March 20, 2019

GOING CONCERN - SUFFICIENCY OF AUDIT EVIDENCE• Sufficiency of the audit evidence (responses the auditor might

receive):

• “But all we can get is an Excel spreadsheet…”

• “This is all we have ever gotten before”

• “The supporting party has always provided the support and just does not want to sign the support letter because they do not want to put anything in writing”

• “Don’t you trust my professional judgment?!”

• “What’s the risk?”

• “No one will ever know”

• “It is not an inspection year”

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24 • March 20, 2019

TECHNICAL MEMOS• Appropriately document consideration of technical issues (possibly such

as debt vs. equity, impairment considerations, etc.)

• A way of thinking through the documentation may be continuing to ask throughout the memo: “How do we know?”

• Cite authoritative literature, as appropriate• FASB, IFRS, etc. (e.g., ASC 330-10-30-1, etc.)

• AU-C, PCAOB, SSARS, etc. (e.g., AU-C 570, para. .12, etc.)

• Cite non-authoritative literature, as appropriate• AICPA Technical Practice Aids (Q&A Section 5290: Other Expenses, .05, Accrual of Audit Fee)

• Third party guides (specify guide and page)

• Rather than putting large extracts of literature in memos, consider putting the extracts as an appendix, if extracts are needed at all

• Possibly insufficient: “Based upon discussion with Ralph the quality reviewer, the accounting was correct”

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25 • March 20, 2019

OTHER ITEMS• Planning/risk assessment - in addition to identifying risks, this helps

prevent allocating time and effort with the wrong focus and then revisiting areas later on unnecessarily)

• Inventory procedures as to existence – Consider the appropriate AU-C or PCAOB standards and design the procedures appropriately

• When sampling, be mindful that the Other Substantive Procedures Risk is typically only lowered when appropriate other substantive procedures will be performed to address the risk (such as substantive analytics)

• For final analytics, analytical procedures near the end of the audit may assist when forming an overall conclusion about whether the financial statements are consistent with the auditor’s understanding of the entity. The results of final analytics may identify a previously unrecognized risk of material misstatement

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• Update as appropriate

• Consider the need to update legal letters (particularly if there is

litigation in progress)

• Note also that the contingency footnote is dictated by the

requirements of GAAP. If the contingency note does not have

the necessary disclosures or is otherwise misleading, consider

the requirements of AU-C 705

SUBSEQUENT EVENT PROCEDURES

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• Consider the qualitative considerations (third party forms may

have a checklist built into the uncorrected misstatements form)

• Note that uncorrected misstatements may be quantitatively

immaterial (i.e., below materiality) but qualitatively material

(e.g., if the misstatement was corrected, the entity would then

be in covenant violation)

UNCORRECTED MISSTATEMENTS

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• Be mindful of the date (consider also the report date and

subsequent events procedures):

• Consider tailoring as appropriate

• Certain items that may be appropriate to add:

• Debt vs. equity conclusions

• Assertions regarding lack of goodwill impairment

• Management’s plans to alleviate conditions or events that raise

substantial doubt about the entity’s ability to continue as a

going concern

• Portions of certain financial statement disclosures

REPRESENTATION LETTERS

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• PRACTICAL TIP: Consider starting with a fresh template each

year and adding engagement-specific items to the end. That way,

each year, you get the benefit of the latest template and when

looking at the prior year, typically the engagement-specific items

are at the end and easy to identify

REPRESENTATION LETTERS

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• Consideration of the statement of cash flows, including:• Operating

• Investing

• Financing

• Non-cash

• Supplemental disclosures (cash paid for interest, cash paid for taxes, etc.)

• ASC 230 and specifically ASU 2016-15 and 18 have included a

number of examples of what gets classified where

STATEMENT OF CASH FLOWS

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• AICPA AU-C 230 addresses documentation requirements

• Application guidance indicates:“.A7 On their own, oral explanations by the auditor do not represent

adequate support for the work the auditor performed or conclusions

the auditor reached, but may be used to explain or clarify information

contained in the audit documentation.”

• However, as indicated in the AICPA’s 2017 EAQ report:“If an auditor’s work is not documented, the auditor is not doneobtaining evidence to support his or her opinion.”

DOCUMENTATION

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POLLING QUESTION 4

According to AU-C 230, oral explanations of auditor procedures are typically:

1. Just fine, provided the auditor remembers everything

2. Not sufficient

3. Sufficient

4. Sufficient as long as the engagement is not selected for peer review

5. Just fine

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REPORT MODIFICATIONWhen considering the need for modifying our report, for AICPA

engagements, consider this chart, which is extracted from AU-C 705:

Nature of Matter Giving Rise to the Modification

Auditor’s Professional Judgment About the Pervasiveness of the Effects or Possible Effects on the Financial Statements

Material but Not Pervasive

Material and Pervasive

Financial statements are materially misstated

Qualified Adverse

Inability to obtain sufficient appropriate audit evidence Qualified Disclaimer

THANK YOU FOR YOUR PARTICIPATION

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35 • March 20, 2019

STEVEN MORRISON, CPAPartner, National Assurance – Audit Quality Group

CohnReznick LLP

1301 Avenue of the AmericasNew York, NY 10019 Tel: 646-601-7740Mobile: 862-233-0679steven.morrison@cohnreznick.com

https://www.linkedin.com/in/stevenmorrisoncpa