 Hello and welcome to this session. This is Professor Farhad and this session we would look at the report on internal control over financial reporting. This topic is covered in auditing and attestation course and obviously covered on the CPA auditing exam. As always I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, tax and finance lectures. This is a list of all the courses that I cover. If you like my lectures, please like them. Click on the like button. It doesn't cost you anything. Share them. Put them in playlists. If they benefit you, it means they might benefit other people and please connect with me on Instagram. On my website you'll have additional resources such as PowerPoint slides through false multiple choice if you're studying for your CPA exam, 2000 plus CPA questions. You can look at my website. It's worth checking it out. So the first thing we're going to look at is the auditor's report about the financial statements. The auditor's report about the financial statements and you might be asking why do we have to do so. Well for one thing we looked at this report in the prior session and when we looked at the report in the prior session we had a paragraph and I said we'll come back to that and it read well let's go over the report real quick. We have the report title. It mentioned the word independent. It's who's it addressed to the board of directors and the stockholders. In the auditor's opinion we talked about the financial statements and those statements present fairly in all material respect. If you remember we talked about this and when I get to the third paragraph so this was the first, the second, the third. Under the third paragraph I said the auditor will also have to audit in accordance with the PCAOB the company's internal control over financial reporting. As of December 31st, 2019 based on criteria established by COSO criteria the committee of sponsoring organization and I said I will look at this report in a separate recording and this recording is we're going to be looking at this report. So simply put the auditor will have to basically for publicly traded companies they'll have to issue to report. One on the financial statements which we already looked at that too on the internal control and this is the internal control report that we're going to be looking at today or right now in this recording. So let's go ahead and take a look at the report just like with the other report. I'm going to break it down into separate components go over each component separately then we will look at each one and take it from there. The first thing is again we have report title and the report title must include the word independent. Just like when we did the financial statement we had to be independent we're going to see when we are auditing the internal control we have to be independent. Again who is it addressed to the board of directors and the stockholder those are the same. Then we're going to get to the auditor's opinion and in a sense it's the same concept we also have an auditor's opinion and notice the auditor's opinion when we looked at the report let's take a look at the report here the auditor's opinion comes first just like with the financial statements the report because it's important the opinion is important so I'm not going to be flipping back and forth but there we go we have the auditor's opinion so let's take a look at the opinion it's listed first so let's see what they said in the opinion first. In the opinion it says we have audited audited notice the word internal control over financial reporting of the company they have the company name what else do you need to basically be aware of? The audit for the internal control cover only one period December 31st 2019 if you notice the financial statements they covered multiple period the the auditing report covers only one period then they tell us what criteria they used which criteria they used the criteria as the internal control integrated framework issued by the committee of sponsoring organization the COSO treaty in our opinion now this is the most important part the company maintained in all material respect effective internal control over financial reporting basically they're given them an unqualified opinion. Now we have something called cross-reference paragraph and what is a cross-reference paragraph is to tell you we did mention that we're going to be auditing this report and the other and the others in the other report which is right here and they're cross referencing to this paragraph now they're just saying we also we also have audited in accordance with this PCAOB the consolidated financial statement December 31st 2019 and 2018 notice the audit of the financial statements is for multiple period the the audit for the internal report is only for one period so just telling you just like in this report we cross-reference the internal control in this report we cross-reference the financial statement okay in the related consolidated statement of stockholders equity cash flow for each three period ending actually three period ending December 31st and expressed an unqualified opinion on those so we also expressed an unqualified opinion so those are the first part of the report the second part is the basis for the opinion how did you how did we come up with our opinion what what are the basis well before we talk about the basis we need to also explicitly state what responsibility do we have as auditors what responsibility do management have okay the company's management is responsible for maintaining an effective internal control and for its assessment of the effectiveness of the internal control so management is responsible for that management is responsible for the internal control our responsibility as auditors is to express an opinion now our responsibility is only to express an opinion we are a public company firm registered with the PCAOB and are required to be independent so we're just kind of telling the users that we are independent and we are registered with the PCAOB okay now how did we conduct the audit how do we how did we conduct the audit we conducted the audit in accordance with the standard of the PCAOB so we are part of the PCAOB and the and the framework we follow is the PCAOB this is how we conducted the audit these standards require that we plan and perform the audit to obtain notice reasonable assurance we never give any guaranteed any absolute assurance we always give reasonable assurance about whether effective internal control over financial reporting was maintained in all material respect now we talk a little bit more about our audit it includes obtaining an understanding of the internal control so we did understand it assess the risk that a material weakness exists test and evaluate the design and operate an effectiveness of the internal control based on the assessed risk and perform such procedures as we consider necessary in the circumstances we believe that our audit report provide a reasonable reasonable basis for our opinion so again we're explicitly stating how we conducted the this internal control in this internal control testing in this paragraph this is how did we come up with the basis of our opinion this is what we did we're just explicitly saying so then we have a definition paragraph and this is basically a boilerplate definition basically we need to tell the users what is internal control what is internal control okay a company's internal control is a process designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with gap a company's internal control over financial reporting include these policies and procedures just basically the finding internal control this is the definition of internal control when you study internal control and then accounting one-on-one course pretend that the maintenance of record that that and that unreasonable detail accurately and fairly reflected the transaction and disposition of the asset of the company provide reasonable assurance that the transaction are recorded as necessary provide reasonable assurance regarding prevention or timely deduction of unauthorized acquisition use or disposition of the company's assets so basically just telling you what is internal control basically the definition of internal control we don't only stop with the definition we have to let the users that there's always inherent limitation in other words the internal control are not perfect something could go wrong and they may not work as as appropriate so because of the inherent limitation internal control over financial reporting may not prevent or detect misstatement so we're saying we did the testing it's working it's if it's working but we cannot eliminate the possibility that it may not work for many reasons also projection of any evaluation the future period are subject to risk that the control may become inadequate because of change changes in condition so we're saying we're saying what we did now it looks good but we cannot we cannot predict anything about the future because of changes in condition maybe the employees that are using the internal control that are maintaining the internal control might change maybe their situation might change and may start to to defeat the internal control so we don't know what's going to happen in the future or that the degree of compliance with the policies and procedures may deteriorate so they were complying but now in the future they may not comply because of changes maybe personal changes people who are working at the company or changes at the company itself the company is now coming under a tremendous pressure then now we have we might have to fudge the numbers to look good so we don't know about the future and we don't know we don't know what would happen in future period so we can only say when we tested the internal control they were effective that's that only for that specific period this is basically the report about the internal control i broken down on three on three on three slides it's basically this is all basically one one report on one page in the next session we would look at the unmodified opinion but we're going to be looking at that report with an emphasis of a matter paragraph or non-standard report wording if you like this lecture please click on the like button subscribe as always i would like to remind you to visit my website for additional resources you're going to be studying for your cpa once it's a 20 to 30 year investment in your career do it properly study hard it's worth it and stay motivated