Understanding an Audit Texas Tech University — ALC

Understanding an Audit Texas Tech University - ALC January 22, 2008

Agenda • • Grant Thornton overview Breakout #1 Changes in the audit profession Criteria for accepting new clients Breakout #2 Audit process Breakout #3

Our guiding principles… RIPL • Universal Respect for firm policies and each other, guaranteeing a unified direction • Fierce commitment to Integrity • Professional excellence in all our efforts • Leadership in the accounting profession, the business community and within our firm

The Grant Thornton Experience for Our People Offer meaningful and challenging work Foster a culture of pride by enhancing our reputation in the marketplace The Grant Thornton Experience for Our People Create an environment where we feel connected and appreciated Provide career development to support our professional growth Recognize what we do and pay us fairly

Grant Thornton initiatives Grant Thornton Experience Leadership Council Sr. Associate Advisory Council Women @ Grant Thornton Work Life Integration Career Development 5

Career development and professional growth Leadership. . . from the Campus to Partner rin g Partner Leadership Program* en to Partner Candidate Development Program* d M Senior Manager Development Program* Co ac h in g an Industry and Service Line Conferences Specialized Academies Program Leader Certifications* New Manager Development* Bridges - Experienced Hire Development* Senior Development Programs Leadership Development and Technical Development Programs Mastering the Associate Role Footsteps and Intern Programs Mastering the First Year SM Welcome to Your Grant Thornton Experience* *Internal and External Client Service partners and employees participate in these programs

Service line and industries: U. S. firm growth Our financial track record GROWTH FY '07 = $1 B FY '06 = $886 M FY '05 = $728 M FY '04 = $565 M FY '03 = $458 M TIME

Attract top quality talent: Headcount growth GROWTH 495 Partners FY '07= 4999 Employees FY '06 = 442 Partners 4923 Employees FY '05 = 407 Partners, 3956 Employees FY '04 = 360 Partners, 3293 Employees FY '03 = 320 Partners, 2943 Employees TIME

Grant Thornton International Grant Thornton is a premier global accounting firm, focused on serving a diverse group of public and private companies since 1924. Countries with Grant Thornton LLP or Grant Thornton International member firm offices

Grant Thornton US 50 locations from coast to coast Albuquerque District of Columbia New York – Downtown San Antonio Alexandria Edison New York – Melville San Francisco Appleton Fond du Lac New York – Midtown San Jose Atlanta Greensboro North Palm Beach Seattle Baltimore Honolulu Oakbrook Terrace Southfield (Detroit) Boston Houston Oklahoma City Tampa Charlotte Irvine Orlando Tulsa Chicago Kansas City (Missouri) Philadelphia Vienna Cincinnati Los Angeles Phoenix Weston Cleveland Madison Portland Wichita Columbia Miami Raleigh Woodland Hills Dallas Milwaukee Reno Denver Minneapolis Salt Lake City

Our service lines Audit & Assurance Services • traditional audit and accounting services • business advisory services (BAS) • economic advisory services (EAS) • • • Tax Services federal tax services state and local tax services international tax services family wealth planning compensation and benefit plan design

Our service lines Global Public Sector • creation and delivery of financial, performance manager and system solutions to governments and international organizations • GPS is located in Alexandria and recently added an office in San Antonio • • • Internal Client Services finance and accounting human resources information technology marketing strategic learning/training

A passion for the business of accounting

Agenda • • Grant Thornton overview Breakout #1 Changes in the audit profession Criteria for accepting new clients Breakout #2 Audit process Breakout #3

Breakout #1 Why are audits needed? What does an audit entail? Why would anyone want to be an auditor?

What is the value of an audit? • Provides independent assurance on information • Increases the reliability of information for users – Public, stockholders, investors, lenders, government Why do we need audits? • To obtain sufficient relevant and reliable audit evidence in order to afford a reasonable basis for our opinion on the client’s financial statements

Changes in public accounting…. . • accounting rules and regulations have become more complex (i. e. , revenue recognition, derivatives, special purpose entities, etc. ) • accounting industry has been moving to more of a fair value of accounting, which is much more difficult to estimate than historical cost • Sarbanes-Oxley Act signed into law July 2002 • expectations of CPAs continue to increase with regards to integrity, competence and fraud discovery

Who are these individuals and why are they significant to public accounting? 1 4 2 3 5 6

Criminal Penalties Sarbanes-Oxley Certification 10 to 20 years Escaping from prison Kidnapping involving ransom Second degree murder Air piracy 1 to 2 years 3 to 5 years 11 to 14 years 20 to 25 years

Agenda • • Grant Thornton overview Breakout #1 Changes in the audit profession Criteria for accepting new clients Breakout #2 Audit process Breakout #3

Criteria for accepting new clients • • industry environment future growth of the company material litigation and ongoing investigations management integrity international structure satisfactory engagement economics reasons for leaving current auditors, if applicable

Agenda • • Grant Thornton overview Breakout #1 Changes in the audit profession Criteria for accepting new clients Breakout #2 Audit process Breakout #3

Not black and white… Podco Manufacturing - Background • high-tech manufacturing company • signed sales agreement with i-pod to manufacture part for 4 th generation i-pod • company has no cash flow • stock based payment because limited cash • company is family-owned and well known in the community • company founded 3 years ago and are looking for a new auditor • company is involved in significant litigation regarding patent infringement • company has incurred double digit growth for two years • intends to go public in 3 years

BREAKOUT #2 Bidding on an Audit Proposal What factors would you consider when deciding if you should accept Podco Manufacturing as a new client? What are the risks?

Agenda • • Grant Thornton overview Breakout #1 Changes in the audit profession Criteria for accepting new clients Breakout #2 Audit process Breakout #3

Audit process can be broken down as follows: 1. 2. 3. 4. 5. Planning Preliminary Final Fieldwork Issue the Report Engagement Wrap-up

Agenda • • Grant Thornton overview Breakout #1 Changes in the audit profession Criteria for accepting new clients Breakout #2 Audit process Breakout #3

Breakout #3 Audit process Determine which stage the following audit procedures are performed. The stages of an audit are as follows: 1. 2. 3. 4. 5. Planning Preliminary Final Fieldwork Issue the Report Wrap-up

The audit engagement team • Partner - Overall responsibility for services provided • Senior ManagerManager - Supervises the audit work • Senior Associate - Responsible for day-to-day conduct of the audit • Staff/ Associate - Perform procedures as assigned • Intern - Perform procedures as assigned • Concurring reviewer - Quality Assurance

Step 1 – Planning • risk assessment – fraud risk factors – changes in IT systems – impact of new accounting pronouncements – turnover of top management – prior year issues – gather knowledge of the business • design and develop appropriate audit procedures, based upon risk assessment 30

Step 2 – Preliminary Stage Testing and evaluation of controls • staff and senior complete tests of controls • audit significant transactions • perform some analytical work • vouch property additions • continuous job training and feedback for Staff and Seniors 31

Step 3 – Final fieldwork • perform substantive test of account balances • perform legal circularization • draft financial statements • perform search for unrecorded liabilities • feedback for Staff and Seniors 32

Step 4 - Issue the Report • quality control reviews • review client- prepared financials • issue audit opinion • issue Internal Control Letter • archive files 33

Step 5 – Engagement wrap up • time analysis by area • formal evaluations of staff and seniors • audit team analysis of planning ideas for next audit 34

Questions A passion for the business of accounting