Compliance Made Simple

IPE: Key Report Testing

Understanding PCAOB Audit Alert #11

October 16, 2014

Presented by:

Sonia Luna &

Gabe Zubizarreta

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Sonia Luna & Gabe Zubizarreta

About the Speakers

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Agenda

• PCAOB –Alert#11– Common Audit Failures– Key Report Testing

• IPE (aka spreadsheet controls) – What is in-scope IPE? – Key reports: Definitions

• Controls over IPE– ITGC vs. user performed

• Part II Inspection Reports– Lessons Learned

• IPE Case studies

• FEI 2014 Study– IPE’s impact

• Resources– COSO Implementation

LinkedIN Group– CCA & Class

• Questions?

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New PCAOB Alerts!

PCAOB Alert #11: Excel Tango

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• Caused audit procedure layering

• More in-depth written description of estimates and use of judgment, especially review controls

• Detailed documentation and testing of system reports utilized in performance of controls.

New PCAOB Auditing BAR!

PCAOB Alert #11: Excel Tango

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Common Audit Failures

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Information Prepared by Entity “IPEs” What is it & What are we talking about?

• Big 4 Lingo

EY = EAE “Electronic Audit Evidence or Key Reports

Deloitte = IPE (Information Prepared by Entity)

Other firms “Mgmt reports”

• Management Team definitions in the field:

– Key reports– Key system reports

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Auditor’s Requirement & Definitions of IPEs

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PCAOB on IT Dependent Controls and IPEs (pg.# 27)

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PCAOB’s CASE Study (pg 24)

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What to do with IPE testing?

Remember it’s BOTH:Prior $ Data and

FORECASTED DATA!

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PCAOB – Suggestions on ITGC & IPE

IPE does include EXCEL.Test that Excel document!

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Level of Precision and IPEs

• Understanding how Mgmt Thinks

• Auditors used to focus on just tying out numbers

• Document when, how and what was used to create Mgmt’s conclusion

• IPEs are used to help in that process and must be TESTED!

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When External auditors turn bad?

Part II Inspection Reports- Lessons Learned

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External Audit Firm: Closing The Books (Findings)

PCAOB Alert #11: Excel Tango

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Closing The Books [Contd.]

Source: PCAOB Audit Alert #11 (Oct. 2013)

PCAOB Alert #11: Excel Tango

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Good isn’t good enoughgood v. NEW PCAOB control Language

Older Language (“OK”)

Quarterly, Controller reviews the AR allowance for adequacy and reasonableness of reserve amounts by initialing and dating the “AR reserve” analysis.

PCAOB Alert #11: Excel Tango

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NEW PCAOB control Language“new standards for control language”

Older Language (“OK”)

Quarterly, Controller reviews the AR allowance for adequacy and reasonableness of reserve amounts by initialing and dating the “AR reserve” analysis.

Updated Control (“Better”)

Quarterly, Controller reviews AR balances of significant customers with o/s balances greater than $10K and 5% of AR balance and those under that threshold by customer type (e.g. geographical location, types of orders, etc.), to review the AR allowance for accuracy and completeness. Adjustments, if needed, are sent via email to the AR manager, final review of the AR reserve analysis is initialed and dated by the Controller which agrees to the final g/l balance for the period.

PCAOB Alert #11: Excel Tango

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Documentation in Excel

• Notate use of a threshold for review– What is sufficient?

• What other considerations are key?

• How to document Management’s review?

• Every reviewer is different – Depth of review Manager vs. Controller

PCAOB Alert #11: Excel Tango

Accounts Receivable Aging

Last Payment Current Past DueCUSTOMER Date Amount 0-30 31-60 61-90 91-119 120-150 150+ Total DueLoyal Customer December 1, 2013 $10,000 $214,000 $245,000 $288,000 $747,000

New Customer - Russia September 1, 2013 $53,000 $101,000 $130,000 $0 $445,000 $676,000

Trying Things Out Customer January 12, 2014 $76,000 $95,000 $279,000 $131,000 $505,000

Not so new Customer February 1, 2014 $46,000 $284,000 $116,000 $400,000

TOTALS $379,000 $594,000 $491,000 $131,000 $288,000 $445,000 $2,328,000

Allowance Analysis New Customer - Russia $0 $101,000 $130,000 $0 $0 $445,000 $676,000

Trying Things Out Customer $126,250Grand Total of Allowance to A/R $802,250

Current G/L Balance $500,000Adjusting Journal Entry (Inc)/Dec ($302,250)

/s/ Susie Smith 4/5/2014Prepared by: Date

/s/ Arnold Jones 4/15/2014Prepared by: Date

Monday, March 31, 2014

Review Signatures “Old School Auditing”

Accounts Receivable Aging

Last Payment Current Past DueCUSTOMER Date Amount 0-30 31-60 61-90 91-119 120-150 150+ Total DueLoyal Customer December 1, 2013 $10,000 $0 $214,000 $245,000 $288,000 $747,000

New Customer - Russia September 1, 2013 $53,000 $0 $101,000 $130,000 $0 $0 $445,000 $676,000

Trying Things Out Customer January 12, 2014 $76,000 $95,000 $279,000 $0 $131,000 $0 $0 $505,000

Not so new Customer February 1, 2014 $46,000 $284,000 $0 $116,000 $0 $0 $0 $400,000

TOTALS $379,000 $594,000 $491,000 $131,000 $288,000 $445,000 $2,328,000

Allowance Analysis New Customer - Russia $0 $101,000 $130,000 $0 $0 $445,000 $676,000

Trying Things Out Customer $126,250Grand Total of Allowance to A/R $802,250

Current G/L Balance $500,000Adjusting Journal Entry (Inc)/Dec ($302,250)

/s/ Susie Smith 4/5/2014Prepared by: Date

/s/ Arnold Jones 4/15/2014Prepared by: Date

Monday, March 31, 2014

Russia Allowance supporting documents:1) AR Client detail report (a)2) Client Invoice Analysis report by product type (a)3) Payment history - client detail report (a)4) Email communication w/Dir. of Rev5) Email communication w/Dir. of Sales6) Confirmation email of AJE by COO and CEO (specifying Russia)

(a) - Part of Management Key report testing (page # 27 of PCAOB audit alert #11)

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Excel Risk Assessments

Key Steps:Step 1: Inventory your spreadsheetsStep 2: In-scope worksheets, rate them (see below)

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Evaluate & Testing Strategies (High/Mod/Low)

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Testing Sample – lead sheet

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Excel is a Powerful Tool

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Significant Issues on the Horizon• SEC action on Audit Standard #18-

Related Parties– Effective for Dec 31st 2015 audits

• Revenue Recognition Standard– Contracts with Customers

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COSO Implementation Group

Join Our LinkedIn GroupCOSO Framework Discussion & Webinars

http://www.linkedin.com/groups/2013-COSO-Implementation-4888186/about

Technical Community sharing Ideas ,Templates, WEBINARS, Advise and Learn from others implementing new framework.

JOIN Today!

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Send Questions

Sonia Luna- President, CEOAviva Spectrumwww.linkedin.com/in/sonialuna www.slideshare.net/soxppt www.avivaspectrum.com/podcasts

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Connect with Gabe

Gabe Zubizarreta - CEO, Financial Effectiveness & Transformation Team LeaderSilicon Valley Accountantswww.linkedin.com/in/gabez Gabez@svacpa.com www.svacpa.com