Understanding an Audit

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

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

3. Our guiding principles…R I P L • 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

4. The Grant Thornton Experience for Our People Offer meaningfuland challenging work Foster aculture of prideby enhancingour reputationin the marketplace Providecareer developmentto support ourprofessional growth The Grant ThorntonExperiencefor Our People Create an environmentwhere we feelconnected and appreciated Recognizewhat we doand pay us fairly

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

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

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

8. 495 Partners 4999 Employees FY '07= 442 Partners 4923 Employees FY '06 = FY '05 = 407 Partners, 3956 Employees FY '04 = 360 Partners, 3293 Employees FY '03 = 320 Partners, 2943 Employees Attract top quality talent: Headcount growth GROWTH TIME

9. 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

10. Grant Thornton US50 locations from coast to coast

11. Our service lines

12. Our service lines

13. A passion for the business of accounting

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

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

16. What is the value of an audit? 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

17. 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 valueof accounting, which is much more difficult to estimate than historical cost • Sarbanes-Oxley Act signed into law July 2002 • expectationsof CPAs continue to increase with regards to integrity, competence and fraud discovery

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

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

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

21. 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

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

23. Not black and white… Podco Manufacturing - Background • high-techmanufacturing company • signedsales agreement with i-pod to manufacture part for 4th 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

24. BREAKOUT #2Bidding 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?

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

26. Audit process Audit process can be broken down as follows: • Planning • Preliminary • Final Fieldwork • Issue the Report • Engagement Wrap-up

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

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

29. The audit engagement team • Partner- Overall responsibility for services provided • Senior Manager\Manager - 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

30. 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

31. 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

32. 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

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

34. 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

35. Questions A passion for the business of accounting