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Audit Planning Audit Planning Acct 6348 Advance Audit Research Role of an Audit • It provides assurance that management has presented a “true and fair” view of a company’s financial performance Source: PWC – Understanding a financial statement audit – January 2013 Purpose of an Audit • To evaluate the income statement, balance sheet and disclosures produced by management • To express an opinion on whether the subject matter is fairly presented – Unqualified – Qualified – Adverse – Disclaimer of Opinion Source: PWC – Understanding a financial statement audit – January 2013 Unqualified Opinion – Para 1 • We have audited the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. Memorize Unqualified Opinion – Para 2 • We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Memorize Unqualified Opinion – Para 3 • In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Memorize Coca-Cola Example Source: Coca-Cola 10k The Audit Process • Five phases: 1. Planning (AS 2101) 2. Risk Assessment (AS1101, AS 2110) 3. Audit strategy and plan (AS 2101, AS 2105) 4. Gathering Evidence (AS 1105, AS 2810) 5. Finalization Planning Risk Assessment Audit strategy Gathering evidence Finalization 1 2 3 4 5 Source: PWC – Understanding a financial statement audit – January 2013 Audit Standards The Audit Process • Initial planning activities include formal: – acceptance of the client by the audit firm, – verifying compliance with independence requirements, – building the audit team and performing other procedures to determine the nature, – timing and extent of procedures to be performed in order to conduct the audit in an effective manner. Planning Risk Assessment Audit strategy Gathering evidence Finalization 1 2 3 4 5 Source: PWC – Understanding a financial statement audit – January 2013 The Audit Process • Risk assessment includes: – Auditors use their knowledge of the business, the industry and the environment in which the company operates to identify and assess the risks that could lead to a material misstatement in the financial statements. – Those risks often involve a high degree of judgement and require a significant level of knowledge and experience by the auditor, particularly on large and complex engagements. Planning Risk Assessment Audit strategy Gathering evidence Finalization 1 2 3 4 5 Source: PWC – Understanding a financial statement audit – January 2013 The Audit Process • Risk assessment includes: – This requires a good understanding of the business and its risks, which is typically built up over a number of years as part of the audit firm’s and auditor's knowledge. – It also means that the auditors need to be well informed about the industry and wider environment in which the company operates, and about what its competitors, customers, suppliers and—where relevant—regulators are doing. Planning Risk Assessment Audit strategy Gathering evidence Finalization 1 2 3 4 5 Source: PWC – Understanding a financial statement audit – January 2013 The Audit Process Planning Risk Assessment Audit strategy Gathering evidence Finalization 1 2 3 4 5 • Audit strategy and plan includes: – Once the risks have been assessed, auditors develop an overall audit strategy and a detailed audit plan to address the risks of material misstatement in the financial statements. – Among other things, this includes designing a testing approach to various financial statement items, deciding whether and how much to rely on the company’s internal controls, developing a detailed timetable, and allocating tasks to the audit team members. Source: PWC – Understanding a financial statement audit – January 2013 The Audit Process Planning Risk Assessment Audit strategy Gathering evidence Finalization 1 2 3 4 5 • Audit strategy and plan includes: – The audit strategy and plan is continually reassessed throughout the audit and adjusted to respond to new information obtained about the business and its environment. Source: PWC – Understanding a financial statement audit – January 2013 The Audit Process • Gathering evidence includes: – Auditors apply professional scepticism and judgement when gathering and evaluating evidence through a combination of testing the company’s internal controls, tracing the amounts and disclosures included in the financial statements to the company’s supporting books and records, and obtaining external third party documentation. Planning Risk Assessment Audit strategy Gathering evidence Finalization 1 2 3 4 5 Source: PWC – Understanding a financial statement audit – January 2013 The Audit Process • Gathering evidence includes: – This includes testing management’s material representations and the assumptions they used in preparing their financial statements. – Independent confirmation may be sought for certain material balances such as cash. Planning Risk Assessment Audit strategy Gathering evidence Finalization 1 2 3 4 5 Source: PWC – Understanding a financial statement audit – January 2013 The Audit Process • Gathering evidence includes: Planning Risk Assessment Audit strategy Gathering evidence Finalization 1 2 3 4 5 Source: PWC – Understanding a financial statement audit – January 2013 The Audit Process • Finalization includes: – The auditors exercise professional judgement and form their overall conclusion, based on the tests they have carried out, the evidence they have obtained and the other work they have done. This conclusion forms the basis of the audit opinion. Planning Risk Assessment Audit strategy Gathering evidence Finalization 1 2 3 4 5 Source: PWC – Understanding a financial statement audit – January 2013 Role of an Audit • It provides assurance that management has presented a “true and fair” view of a company’s financial performance PCAOB Standards Re-organization January 2016 PCAOB Standards Re-organization Source: pcaobus. org PCAOB Standards Re-organization Source: pcaobus. org PCAOB Standards Re-organization Source: pcaobus. org PCAOB Standards Re-organization Source: pcaobus. org Audit Planning Role of an Audit Purpose of an Audit Unqualified Opinion – Para 1 Unqualified Opinion – Para 2 Unqualified Opinion – Para 3 Coca-Cola Example The Audit Process The Audit Process The Audit Process The Audit Process The Audit Process The Audit Process The Audit Process The Audit Process The Audit Process The Audit Process Role of an Audit PCAOB �Standards Re-organization�January 2016 PCAOB Standards Re-organization PCAOB Standards Re-organization PCAOB Standards Re-organization PCAOB Standards Re-organization 2020 Annual Report DEAR STAKEHOLDERS, Due to the devastating impact of COVID-19, 2020 was the most challenging year in our company’s history. While the pandemic had a severe negative impact on our business and our financial results, we relied on our strengths – an agile business model, a strong balance sheet, and our talented and resourceful employees – to successfully navigate the crisis and position the company for an accelerated recovery. We continued investing in our brands and our digital capabilities while reducing expenses in other areas, and we utilized our test-and- react strategy and speed-to-market capability to quickly adjust our product mix to align with changing consumer preferences. We also made significant progress on our ESG initiatives. Outlined below are some of the year’s accomplishments. PROTECTING OUR EMPLOYEES & THE BROADER COMMUNITY Since the crisis began, our top priority has been protecting the safety and well-being of our employees and the broader community. I’m proud of the steps we took to safeguard the health of our employees and our customers – including proactively closing our stores earlier and keeping them closed longer than most of our industry peers – and how we supported our communities through donations of medical grade masks to hospitals, non-medical face coverings to homeless shelters, meals for health care workers, financial assistance for organizations combating hunger, and more. PRESERVING LIQUIDITY & ENHANCING FINANCIAL FLEXIBILITY When the severe impact of COVID-19 became clear, we quickly implemented a number of precautionary measures to preserve liquidity and enhance financial flexibility, including suspending dividends and share repurchases; cutting operating expenses, capital expenditures, and inventory receipts; and putting in place a new $150 million asset-based revolving credit facility. These actions enabled us to generate strong free cash flow through the crisis, and we ended 2020 with $287 million in cash and short-term investments and no debt. Based on our strong financial position at year end, our Board of Directors approved the reinstatement of a quarterly cash dividend of $0.15 per share beginning in the first quarter of 2021, and we announced our plan to resume share repurchases in future periods. ADAPTING TO THE CHANGING MARKETPLACE With COVID-19 driving meaningful shifts in consumer behavior, we took swift action to address the rapidly changing marketplace. In terms of product, we utilized our test-and-react strategy and industry-leading speed- to-market capability to quickly adjust our merchandise assortments to align with changed consumer preferences, pivoting toward more casual and comfortable styles while de-emphasizing dressier products. And with respect to distribution, we significantly accelerated our digital commerce initiatives, increasing investment in that area even as we pulled back spending in other parts of the business. We added high-level talent to the organization, invested in our data science capabilities, accelerated digital marketing spend, launched our new Try Before You Buy payment option, rolled out Buy Online Pick Up In Store to all U.S. full-price retail stores, introduced new enhanced delivery and return options, and more. Overall, our company-operated e-commerce revenue grew nearly 50% in 2020 on top of 58% growth in 2019, including 55% growth in our Steve Madden e-commerce business on top of a 51% increase in 2019. Importantly, company-operated e-commerce profit margins also expanded