 In this presentation, we will discuss the evaluation of audit test results. At the completion of the audit, the auditor should evaluate whether total misstatements cause the financial statements to be materially misstated. First, a word from our sponsor. Well, actually, these are just items that we picked from the YouTube shopping affiliate program, but that's actually good for you, because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you. These are things that we actually researched, purchased, and used ourselves. Acer 27 inch monitor. I've been using an Acer monitor as my primary monitor for a few years now. This is the first Acer monitor that I have used after having used a series of different brands of monitors in the past. The Acer monitor has been performing well and I'm trusting the Acer brand more and more as I use the monitor. I have a 27 inch monitor, which I think is ideal for what I do, which is of course the screen recording and the editing. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com where we have many different courses. You can purchase one at a time or have a subscription model given you access to all the courses, courses which are well organized, have other resources like excel files and pdf files to download and no commercials. So we can imagine our auditing process here. We're starting off for planning the audit. As we plan the audit, we consider what misstatement would be. What would be a material misstatement? Our goal here is to give an opinion. Hopefully that opinion is that the financial statements are free of material misstatements. Therefore, we need to know what is or what would constitute a material misstatement. As we think about what would constitute a material misstatement, we're actually also considering what is a tolerable level of misstatement. What level of misstatement then would be tolerable at the financial statement level. Then as we go through the audit, we're breaking the audit down into individual, basically accounts, assertions, transactions. We're considering at the assertion level what would be tolerable misstatements at the assertion levels as we go through that testing. At the end of the audit process, then we're imagining now ourselves at the end. We're going to evaluate whether the total misstatements, so we're considering the potential misstatements as we go through the auditing process, whether they caused the financial statements to be materially misstated. So then we're considering back at the complete financial statement level, taking the financial statements as a whole. If we add together the total misstatements that we're basically looking through as we go through the audit on the assertion level, would they add up to be materially misstatement at the financial statement level as a whole? If financial statements are materially misstated, what if that is the case? What if the financial statements, what if we look at it and we say the financial statements are materially misstatement? Is there anything we can do at that point? Because of course, we don't really want to issue anything other than basically a clean opinion, an unqualified opinion, if we can't avoid it. That's basically the objective. We want to be able to say, hey, we've got good clients. We've got honest clients. The clients have said they put their information together in accordance with generally accepted accounting principles. We tested the assertions and they did indeed do as they said and put the financial statements together in accordance with the generally accepted accounting principles. If that's not the case, then we were going to request management to eliminate the material misstatement. So if we see a material misstatement, it's quite possible we could say, hey, and it could be something that's not fraud or anything, of course, it could be something that's an error, some type of material misstatement. We can say, hey, we would like you to, you know, correct this, eliminate the material misstatement, make the adjustment that needs to happen and to be in accordance with generally accepted accounting principles so that we can give an opinion that the financial statements are represented in accordance with generally accepted accounting principles. If management does not make needed adjustments, the auditor will issue a qualified or adverse opinion. And this could happen if management says, I'm not going to do that. It might be the case. Again, it might not be the case where there's basically fraud happening here. The management might have a reason and say, hey, I think that it should be represented in this way for one reason or another. And we're going to say, well, look, we have generally accepted accounting principles and generally accepted accounting principles say that you have to put it in this format. And we're giving an opinion as to whether the financial statements are in accordance with generally accepted accounting principles. Your idea of I want to report it this way, because it makes sense, makes sense, but it's not generally accepted accounting principles possibly, right? So we could have that kind of kind of issue on a one or one basically issue. And if that's the case, and we can't resolve it, then of course, we have to report it on our audit opinion. So if it's just one type of thing that that's the case in, then we're going to say, hey, that, you know, they're basically on generally accepted accounting principles except this one item, which is deviating from generally accepted accounting principles and possibly explain why, you know, management thinks it's important to represent that and take that deviation resulting in a qualified opinion as opposed to an unqualified opinion. If it's more pervasive than that, or if there's a lot of things going on, then we have to give an adverse opinion. And obviously an adverse opinion on the financial statements is pretty much useless to the company. So at that point in time, if there's no agreement on the action that the management should do in order to put the financial statements, we might have to also just disengage from the engagement at that point in time. And if it comes down to giving an adverse opinion or disengaging, oftentimes it ends up in a disengagement at that point in time. So if auditor decides that the misstatement is or may be the result of fraud, and that the effect may be material, the auditor should then obtain audit evidence to determine whether material fraud has occurred and the effect. So we're going to dig down into the fraud to see if it has a material effect. And notice our focus here is really on the financial statements. It's not necessarily on the fraud in and of itself. It's on what is the fraud, the nature of the fraud that we want to dive into is what's going to be the effect on the financial statements. Because of course our goal here is to make an opinion on the financial statements and the reporting of it, not necessarily as it would be in say a criminal type case. So if we're auditing from a forensic type of situation to look for a criminal type of, you know, fraud type of activity, we will pursue that. But notice where our aim is. Our goal is that trying to see what the financial statements and if the financial statements are presented fairly, that's our primary purpose. That's what we are engaged to do. Think about implication to other areas of the audit. So if there's a fraud here, does this have implications elsewhere? And one way we might do that, if it's lower management, if it's lower employees that committed the fraud or something, even if it's substantial, then the question is, well, what other types of areas do they have influence over? Possibly not many because of internal controls because of separation of duties. If the fraud, on the other hand, is in upper levels of management, again, that then gives us pause. We're saying, well, now it's possible if there's fraud at that level of misrepresentation or misstatement, then it could be more pervasive because they have more influence. Whereas lower level people have restrictions due to separation of duties. So we want to think about what does this fraud have a result on other areas of the financial statement and the credibility of the audit evidence that we have in the financial statements as a whole. Discuss the issue and plan to approach it further with the appropriate level of management, at least one level above those involved in committing the fraud and with senior management. So if we detect fraud, then of course we're going to discuss it with someone. Most of the time, the fraud is employees and oftentimes some type of beneficial to the employee, some type of theft or something like that. And if that's the case, then of course we talk to the proper level of management, possibly one step removed, not the level right above, but the one above that, and then upper management. And again, that's hopefully something that can then be detected at that level and taken care of within the organization and not give us questions about the integrity of the upper level management, hopefully, which would be more problematic. Suggest the management, consult with legal counsel. So we're always going to basically say, hey, you know, our objective here is to see that the financial statements are reported and free of material misstatement. You have, if you have a some type of fraud or illegal activity happening here, fraud being an illegal activity, you could, you should consult with legal counsel and pursue it further in that direction. Our responsibility, of course, is towards the financial statements and the reporting of them. Think about withdrawing from the engagement. Now, if the if the fraud happened at a lower level again, it's something that an employee committed fraud theft, even if it's substantial, we go to the upper level and we can say, hey, the upper level management didn't have well designed internal controls or whatnot. This fraud took place, it shouldn't have taken place, but it's not lack, it's not the fact that the upper level of management were somehow involved or somehow manipulating or deceiving. If again, however, that the fraud is in the upper level of management, if we perceive that we're getting documentation that, you know, was altered in some way or there's some type of fraud involved in the representation of the financial statements, what we're engaged to give an opinion on, then we might say, hey, that we're going to we're going to remove ourselves from the engagement. And again, that's not something we want to do because we waste a lot of time to do that because so we want to be able to determine this at the front end. What type of clients do we want to pick up? Do we want to pick up clients? We want to pick up good clients with integrity so we don't run into this problem. But if we do, if we go halfway through the audit and we say, you know, I don't have any faith in the integrity of management at this point in time, then and then at some point, we'd have to consider just withdrawing from the engagement as well.