ACC 411 5-2 notes

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Southern New Hampshire University *

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411

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Accounting

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Nov 24, 2024

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Audit Report information needed to complete the template: •Audit firm name: Audit Partners •Audit firm location: Boston, Massachusetts •Audit Partners has been ABC Electronics' auditor since 2019 •Date of audit report: February 11, 2023 •Company name: ABC Electronics •Current audit period ending: December 31, 2022 •Comparative statement: December 31, 2021 •The audit report also references the audit of the company's internal control over financial reporting as of December 31, 2022, based on criteria established in the Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. That audit report, dated February 11, 2023, expressed an unqualified opinion on the company's internal control over financial reporting. Critical audit matters are used to render an opinion. 1 Description The company enters into long-term service agreements within the generator segments. These agreements require the company to provide maintenance services for customer assets over the contract term, which generally range from 5 to 10 years. Revenue for these agreements is recognized using the percentage of completion method, based on costs incurred relative to total estimated costs over the contract term. As part of the revenue recognition process, the company estimates both customer payments that are expected to be received and costs to perform maintenance services over the contract term.

◦ Tested amount and timing of revenue recognition of the service agreements Audit Tests Performed •Tested the effectiveness of controls over the revenue recognition process for the long-term service agreements, including controls over management's key estimates •Evaluated management's risk assessment process through observation of key meetings and processes •Tested management's process for estimating the timing and amount of costs associated with maintenance 1 Description The company performs premium testing to assess the adequacy of future insurance reserves on an annual basis or whenever events or changes in circumstances indicate that a premium deficiency event may have occurred. ◦ Involved our actuarial specialists Significant uncertainties exist in testing cash flow projections in the adequacy of the reserves for these insurance contracts. Given the significant judgments made by management in estimating the cash flow projections used in the reserve calculation, a high degree of auditor judgment is required. Audit Tests Performed •Tested the effectiveness of controls related to controls over the development of key assumptions and management's judgments related to the development of the cash flow projections •Tested the underlying data for completeness and accuracy that served as the basis for the actuarial estimates

Specifically, you must address each section of the Audit Report Template using the following rubric criteria: 1Write audit summary . 2Identify the audit objectives of the report. 3Explain the basis for an audit opinion . 4Describe the critical audit matters: 1 Determination 2 Communication 3 Documentation 5 Challenge the audit opinion: Challenge the basis for an unqualified opinion. 1 Identify areas of concern. Justify your concerns. (1) This audit report, which was completed on February 11, 2023, provided an opinion on the company's internal control over financial reporting that was free of any qualifications. The most important audit issues that were addressed in the report were the appropriateness of future insurance reserves, as well as the amount of income that should be recognized for service agreements at the appropriate time. Testing the effectiveness of controls over the revenue recognition process for the long-term service agreements was one of the aspects of the audit that was carried out. Other aspects of the audit included evaluating management's risk assessment process and testing management's method for estimating the timing and amount of costs associated with maintenance.

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In addition, actuarial experts were brought in as part of the audit to verify the efficiency of the controls connected to the formulation of key hypotheses and the management's judgements regarding the formulation of cash flow predictions for future insurance reserves. (2) The audit goals pertaining to the report for ABC Electronics encompassed the examination of the service agreements' revenue recognition in terms of both quantity and time, as well as the evaluation of the sufficiency of future insurance reserves. The audit procedures conducted encompassed the evaluation of the efficacy of controls pertaining to the recognition of revenue in relation to long-term service agreements. (3) The foundation for an audit opinion is derived from the outcomes of the audit examinations conducted by the auditor. The audit procedures conducted for ABC Electronics encompassed several key areas. These included assessing the adequacy of controls pertaining to revenue recognition for long-term service agreements, evaluating the risk assessment process employed by management, and scrutinizing the methodology employed by management to estimate the timing and magnitude of maintenance-related costs. Furthermore, the audit encompassed the participation of actuarial experts in order to assess the efficiency of controls pertaining to the formulation of crucial assumptions and the decision-making process of management for the creation of cash flow predictions for prospective insurance reserves. The auditor has rendered an unqualified opinion regarding the company's internal control over financial reporting as of

December 31, 2022, based on the results of these tests. An unqualified opinion signifies that, according to the auditor's assessment, the financial statements accurately and comprehensively depict the company's financial condition, operating outcomes, and cash flows in accordance with generally accepted accounting standards, without any reservations or qualifications. Explanation: (4) Determination: The important audit problems pertaining to ABC Electronics encompassed the evaluation of the service agreements' revenue recognition in terms of both amount and time, as well as the assessment of the sufficiency of future insurance reserves. The critical audit matters were identified through the auditor's execution of audit procedures, which encompassed assessing the adequacy of controls pertaining to the recognition of revenue for long-term service agreements, evaluating the risk assessment process employed by management, and scrutinizing management's methodology for estimating the timing and magnitude of maintenance-related costs. Furthermore, the audit encompassed the participation of actuarial experts in order to evaluate the efficiency of controls pertaining to the formulation of crucial assumptions and the decision-making process of management regarding the creation of cash flow predictions for prospective insurance reserves. Communication: The audit report conveyed the important audit matters, along with a reference to the audit conducted on the company's internal control over financial reporting as of December 31, 2022. The report provides an analysis of the key audit matters, elucidating the methodology employed in their identification, and furnishing comprehensive

information regarding the audit examinations conducted. Documentation: The significance of documenting these crucial audit items lies in their capacity to enhance openness and foster responsibility within the audit procedure. The provision of an auditor's report facilitates the comprehension of the rationale behind the auditor's opinion and the various elements that were taken into account during the decision-making process. (5) In order to scrutinize the foundation of an unqualified opinion, it is necessary to assess the audit tests conducted and the evidence collected by the auditor. The audit procedures conducted for ABC Electronics encompassed various aspects. These included assessing the adequacy of controls pertaining to the recognition of revenue for long-term service agreements, evaluating the risk assessment process employed by management, and scrutinizing the methodology employed by management to estimate the timing and magnitude of maintenance-related costs. If there exists evidence indicating inadequate performance of these tests or insufficient data to establish an unqualified conclusion, it is possible to question the foundation of such an opinion. Regrettably, my ability to contest the rationale behind an unqualified conclusion in this instance is hindered by the absence of comprehensive access to the auditor's meticulous audit work sheets and collected evidence. A plausible matter of apprehension may pertain to the organization's methodology for appraising consumer

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payments and expenses linked to extended service agreements. In the event that the auditor discerns notable doubts or deficiencies in the company's methodology for formulating these estimations, such findings may be highlighted as a matter of apprehension within the audit report. Another area that may warrant attention is the sufficiency of forthcoming insurance reserves, particularly in cases where there exist substantial uncertainties in the evaluation of cash flow estimates employed during the reserve computation.