High quality audit is one performed in accordance with generally accepted auditing standards to provide reasonable assurance that

the audited financial statements and related disclosures are 1. presented in accordance with generally accepted accounting principles. 2. Are not materially misstated whether due to errors or fraud. 5 drivers of audit quality 1. Audit firm culture a. Ensures that partners and staff have sufficient time and resources to deal with difficult issues as they arise. b. Promotes the merits of consultation on difficult issues and supporting partners in the exercise of their personal judgment 2. Skills and personal qualities of audit partners and staff a. Professional skepticism b. Appropriate mentoring and on the job training 3. The effectiveness of the audit process a. Encourage partners and managers to be actively involved in auditplanning b. Ensure there is effective review of audit work c. Audit quality control procedures are effective, understood and applied d. High quality technical support is available 4. The reliability and usefulness of audit reporting a. Clearly and unambiguously the auditors opinion on the financial statements b. Communication with the audit committee include discussion about i. The scope of the audit ii. The threats to auditor objectivity iii. The risk identified and judgments made in reaching the audit opinion iv. The qualitative aspect of the entitys accounting 5. Factors outside the control of auditors that affect audit quality At the end of the audit, management and the auditor must decide which possible adjustments will be booked, that is, corrected in the financial statements and which will be waived, that is left uncorrected. Managements incentive may affect whether they are willing to book these detected misstatements. Forms of management bias in this setting: 1. The selective correction of misstatements brought to managements attention during the audit 2. The identification by management of additional adjusting entries that offset misstatement accumulated by the auditor. Client continuance decisions, which audit firms and individual engagement partners make at the completion of the audit are just a part of an audit firms overall portfolio management activities.

Accomplishing portfolio management, of which client continuance decisions are just one part, is the key to an audit forms long-run survival and its ability to offer high quality audit services to its clients. Existing clients for which the audit firm provided services in the preceding period are evaluated by the audit firm and individual engagement partner at the completion of the audit to determine whether the audit firm should continue to provide services again in the next period. Client continuance-related risk 1. Client entity characteristic 2. Independence factor 3. Third party/ due diligence risk factor- change in auditor due to unknown reasons or history of financial fraud 4. Quantitative risk factors- client is I financial distress. 5. Qualitative risk factor- industry is in early development or late, weak business model 6. Entity organizational or governancerisk 7. Financial reporting risk- inappropriate financial estimates or misrepresentations Ensuring audit quality: effectiveness of the audit process and associated review activities 1. Reviewing contingencies a. Management is responsible for designing and maintaining policies and procedures to identify, evaluate and account for contingencies b. The primary source of information concerning contingencies is the clients management. i. Description and evaluation of contingencies ii. Assurance in the management representation leeter iii. Major contracts regarding areas where contingencies are often present iv. Documentation of communication with internal and external legal counsel c. The auditor should ask the client to send a letter of audit inquiry to its legal counsel asking the counsel to confirm information about asserted claims ad those claims that are probable of assertion. The letter should include the following: i. Identification of the company and date of audit ii. Managements list that describes and evaluates contingencies iii. A request that the lawyer furnish the auditor with the following 1. A comment on the completeness of managements list and evaluations 2. For each contingency a. A description of the nature of the matter and the progress to date and the actions the company intends to take b. An evaluation of the likelihood of an unfavorable outcome 3. Any limitations on the lawyers response are not material iv. Legal counsel should be instructed by the client to respond directly to the auditors as close to the end of audit fieldwork as possible 2. Reviewing significant estimates

a. The auditor is responsible for providing reasonable assurance that i. Management has an information system to develop all estimates that could be material to the financial statements ii. Estimates are reasonable iii. Estimates are presented in conformity with GAAP. b. The auditor should take time at the end of the audit to consider whether, taken together, the estimates made in these accounts are reasonable c. Concentrate on key factors and assumptions that are: i. Significant to the accounting estimate ii. Sensitive to variations iii. Deviations from historical patterns iv. Subjective and susceptible to misstatement and bias v. Inconsistent with current economic trends d. Changes in facts, circumstances or the entitys procedures may cause factors different from those considered in the past to become significant to the estimate. e. Events and transactions occurring after the balance sheet date, but before the audit report date, can be useful in identifying and evaluating the reasonableness of estimates. 3. Reviewing the adequacy of disclosures a. If the auditor determines that informative disclosures are not reasonbly adequate, the auditor must note that fact in the auditors report. b. Disclosures can be made either on the face of the financial statements or in the notes to the statements c. The auditor must be sure that i. Disclosed events and transactions have occurred and pertain to the entity ii. All disclosure that should have been included are included iii. Disclosures are understandable to users iv. The information is disclosed accurately and at appropriate amounts. 4. Performing analytical review of the audit and financial statements a. Analytical procedures help auditors assess the overall presentation of the financial statements b. Auditing stands require the use of analytical procedures in both the planning phase and the final review phase of the audit to assist in identifying account relationships that are unusual. c. The auditor should have accumulated sufficient competent evidence during the audit to explain any unusual changes when none are expected or vice versa. 5. Performing an engagement quality review a. The audit firm should have policies and procedures in place for conducting an internal quality review of each audit before issuing the audit opinion. b. An experienced reviewer who was not a part of the audit team, nut who has appropriate competence independence, integrity and objectivity should perform this independent review, referred to as a concurring partner review or engagement quality review.

c. Documentation of an engagement quality review i. Who performed the engagement quality review ii. Documents reviewed by the engagement quality reviewer iii. Date the engagement quality review provided concurring approval of issuance 6. Reviewing subsequent events a. The auditor has no responsibilities to continue obtaining audit evidence after the audit report date. b. The auditor must perform a subsequent events review up to the effective date of registration statement only when it is in the preparatory stage of selling new securities. Type 1 subsequent events- events that provide evidence about conditions that existed at the balance sheet date A major customer files for bankruptcy during the subsequent period because of deteriorating financial condition. Lawsuit settled for a different amount was accrued A stock dividend or spit that takes place during eh seubsequent peiod should be disclosed and eps should be adjusted retroactively. Sale of inventory below the carrying value provides evidence that the net realizable value was less than cost at year end.

Type 2 subsequent events-indicate conditions that did not exist at the alance sheet date but that may require disclosure. Uninsured casualty that occurred after the balance sheet date causes customers bankruptcy during subsequent periods Significant lawsuit is initiated relating to an incident that occurred after balance sheet date Because of a natural disaster Major decision are made during the subsequent period such as to merge, discontinue a line of business Material change occurs in the value of investment.

Audit procedures concerning the review of subsequent events Read munutes of the meeting of the board of directors Read interim financial statements and compare them to audited financial statement Inquiry of amnagment.

Subsequent discovery of facts existing at the date of the auditors report: he should consider the ff: Reliability of the new information Whether the development or event had occurred by the report date. (if it occurred after, new issuance of report is not required) Whether users are likely to still be relying on the financial statements.

Whether the audit report would have been affected

If the auditor decides that steps should be taken to prevent further reliance on the financial satements and audit report, the client is advised to make appropriate ad timely disclosure of these new facts. If issuance can be quickly prepared and distributed, reasons for the revision should be described in the footnote Revision and explanation can be made in the subsequent period audited financial statements Should notify users that the previously distributed financial statements and auditors report should no longer be relied on.

If the client did not cooperate Nofity the client and any regulatory agency having jurisdiction over it Notify users known to the auditor that the audit report should no longer be relied on.

Ensuring audit quality Evaluating the going-concern assumption a. Audit opinion is not a guarantee that the business is a going concern. b. The going concern evaluation is based on information ibtained from normal audit procedures performed to test maangements assertions. c. No addition procedures are required unless the auditor believe that there is substantial dbout about the clients going ability to continue as a going concern. d. Management (auditor) may be worrisome to issue a going concern modification (audit opinion) because it may cause investors, lenders and customers to lose faith in the business. e. If the auditor concludes that there may be a going concern problem, managements plans to overcome this problem should be identified and assessed. The auditor should identiy those factors that are most likely to resolve the problem and gather independent evidence to determine the likely success of such plans f. An explanatory paragraph should be added to the auditors report when the auditor concludes that substantial doubt remains about the clients ability to continue as going concern for a reasoble period of time. g. Confirmation of management assumptions i. About current industry developments ii. Cost savings related to a reduction in work force iii. Market price of assets that will be for sale Managements representation letter The letter is part of audit evidence but is not a substitute for audit procedures that are performed to corroborate the information contained in the letter.

The letter is prepared on the clientsletterhead, is addressed to the auditor and should be signed by the CEO or CFO. The content depends on the circumstances of the audot and the nature and basis of presentation of the financial statements. Management refusal to sign management representation letter is considered as scope limitation to preclude the issuance of an unqualified opinion.

Communication with audit committee Accounting an audit issues o Auditors responsibility o Management judegements and estimates o Audit adjustments o Uncorrected misstatements o Accounting policies and alternative treatments Other issues o Major account and reporting disagreements even if resolved o Management discussion with other public accounting firms o Difficulties encountered in performing the audit o Copies of significant wtitten communciations between the auditor and amangement.