 and welcome to this session in which we will discuss communication with management and dose charge with governance. This topic is covered in an auditing course as well as the CPA exam. If you are studying for your CPA exam, I strongly suggest you check out my website farhatlectures.com. I don't replace your CPA review course whether you are taking Becker, Roger, Glyme, Wiley or Sargent or any other course. I can be a useful addition. I can be the vitamin pill that's going to add 10 to 15 points to your exam, to your exam score. How can I help you? What's the difference between what I do in your CPA review course? Totally two different things. The CPA review course will help your review for the exam. They don't teach you the material. They assume you know the material. I teach you the material. That's the difference between what I do in the CPA review course. My subscription is monthly. You can try it for one month. You would lose $30 if you don't like it, but if it works for you, you can potentially pass the exam. Are you willing to take that chance? Are you willing to invest $30 to find out whether my lectures and my material will help improve your score substantially? And if not for anything, check out my website to find out how well is your university doing on the CPA exam? It tells you how rigor is your accounting program. I do have other courses besides auditing. I have tax, finance, intermediate accounting, advanced accounting, all sorts of accounting courses. Please connect with me on LinkedIn. And if you do so, you can see my LinkedIn recommendation. Actual students, CPA candidates who use my resources and succeed on the exam. Please like this recording. Share it with others. Connect with me on Instagram and Facebook. So this topic governs corporate governance. This is an important topic. It's covered much, much more in details in BEC, but hopefully this picture will give us the big picture of what we need to talk about. For any corporation, it's publicly traded or not. Well, for publicly traded, we have special rules which we'll talk about in a separate recording. But if there's a corporation who owns the corporation, the shareholders. Those are on the top. The shareholders are people like you and I who own stocks in the company. Now, the only thing that the shareholders can do to influence the company is to vote this board of directors. The board of directors, basically people who are in charge of the company, who selects them, the owners of the company, the shareholders. The shareholders are the owners. You vote them. Can you vote yourself? Of course, you can vote yourself or you can assign your vote to someone else. Now, the board of directors will form other committees. One of them is the audit committee. And this is the committee that hires and fires the auditor. We could have an internal audit committee, compensation committee, and the board of directors would select management. Management would select the employees and the employees would run the company on your behalf, which is the owners. So what we need to talk about in this session is what is the auditor's responsibility vis-à-vis this group, this corporate governance group, and management as well, which is part of it. You know, top management are part of the corporate governance. But specifically, when we are dealing with the board of directors and the audit committee, what do we have to tell them? What do we have to explain to them? How much do we have to keep them in the picture? So on and so forth. So we have to communicate matter that are, notice, significant and relevant. We're going to specify what are significant and relevant. But the point is they have to be significant and relevant to the responsibility to those who charged with governance and overseeing the financial reporting process. Who oversee the financial reporting process? These are the people in front of you. The board of directors, the CEO, the CFO, all these top management position. Now why do we have to keep in touch and communication with them? Just some basic sense reasons, constructive relationship, because we need to obtain information from them. Therefore, it's a good way to keep them up to date. That's one thing. Also, obtaining relevant information for the audit. These people, these people means the audit committee, the board of directors, they can put pressure on management, because if they don't like management, they can fire management. They have leverage over management. So when you are looking for information and you cannot obtain this information, the board of directors and the audit committee can force management to give you that information. And it's going to assist them. It's going to assist the board of directors, the audit committee top management to run the company and overseeing the financial reporting. So this way, you will need to keep them up to date. You are helping them. They're helping you to get the audit done. Now what do we communicate? What are these significant and relevant topics that we need to keep them aware of? The first thing is, first, we need to tell them what is our responsibility. They need to know this. So this way, they know what do they expect from us. Our responsibility as auditor is to express an audit opinion on the fairness of the financial statement. We have to clearly state that management, not us, not the auditor, is responsible for presenting the financial statement in conformity with GAAP or IFRS or whatever framework we are using. That has to be clearly communicated. There's no disagreement. That's one. Usually those responsibilities are communicated, hopefully you know this by the engagement letter. I have a separate recording about the engagement letter. You need to know a lot about the engagement letter. In the engagement letter, you will discuss this topic. Two, any disagreement with management over accounting and auditing matter, whether or not these disagreements were satisfactorily resolved. So you want to make sure, make them aware, keep them aware that we had these disagreements about accounting principles and auditing matters so you are aware of it. Just keep them in the loop about these issues. No, why certain accounting treatment may be not appropriate in our opinion. You want to keep them aware of this. Any known instances where management consulted with another accounting firm about an accounting or auditing matters. This is called opinion shopping. So if we are aware of this, we need to let management know that they are going outside to get some other opinion. We want to make sure you are aware of this. Any significant findings, what are significant findings? Well, depending on the circumstances or any issues discussed with management. If it's significant, we would let them know. For example, significant accounting policies adopted or changed during our tenure. Any adjustments or reclassification of significant importance adjustments, basically you have to adjust certain account. Usually adjustments affect the balance sheet and the income statement. Usually reclassification affect only one financial statement. Communicate any uncorrected misstatement. This is important accumulated by the auditor, including any effect on the financial statements as a result. Of course, we have to let them know this. Significant finding from the audit, like the auditor's view about the qualitative characteristic of the entity's significant accounting policies, significant accounting practices, estimates, and disclosure. Anything like this, any significant information, we have to let them know. Any significant difficulties encountered during the audit, including significant delays caused by management, any unreasonable time pressure, if they're trying to put, you know, time pressure on us to finish the work. Any documents that we could not obtain an availability of expected information and anything similar to that matter that's considered significant. Any other matter that the auditor believed would be important to those charged with governance in their oversight of financial reporting. So notice here, anything that's considered relevant and significant, we gave you some examples, but you have to use your judgment. The written representation that the auditor requests from management. Again, there's a whole session about the written representation. You want to make sure you are aware what goes into that. There's a whole whole different topic about this. Any non-compliance with laws and regulations simply put some illegal acts, any illegal acts. Okay, now how do we communicate this information? The communication might be oral or in writing. Obviously, it's better if it's in writing. If it has to be effective, it's better to be in writing. May include formal presentation, written report, that's the best. That's the best. Or informal discussion, you know, the judgment the auditor will use the judgment in that case. And the auditor should communicate significant finding from the audit in writing. Any significant finding that has to be in writing. Notice when oral communication is inadequate. If we don't think oral communication is adequate, especially for significant finding, for the record, we need to tell you something, make it in writing. Make sure communication is disseminated to all members. Let's assume you told only one member of the audit committee. Make sure in the next next session, you make sure all of them, they got the information or if you only inform subgroup of the audit committee. Make sure the information is timely. That depends on the circumstances. Make sure the communication is adequate. It's a two-way communication. You're telling them something and you're getting some response from them, right? Because this is going to tell you whether they care about the internal control, about the financial misstatement of the company. So it's a signal about the control environment or the tone at the top. If people in charge don't care about what's going on within the company, that's a signal that the tone on the top is not ideal. So the two-way communication is seriously inadequate. If you notice they're not responding, that may amount to a scope limitation. At this point, you will consider the possible effect on the assessment of the risk of material misstatement. If that's the case, if corporate governance is not really strong, you really want to think if you want to do this audit or not. So you may want to modify the opinion or even withdraw could be the appropriate answer under those circumstances. So communication, it's also a signal for the auditor how well the corporate governance has taken their job seriously. And that's very important for the for the life of the company. Now from the auditing standards perspective, we have certain topics we have to kind of report. Illegal acts, the auditor should communicate any illegal act that comes to the auditor's attention. So notice illegal act, any illegal act. Going concern issues, of course, we should know about this. When there's substantial doubt about the entity's ability to continue as a going concern, remain after considering management strategy, because if there's a common concern, we have to look at the management strategy. The auditor will communicate the nature of the conditions identified, the possible effect on the financial statements or disclosure and the effect on the auditor's report. So notice here, I'm going to say again, you want to make sure you are familiar with going concern, because again, going concern is a topic by itself on the audit. But here we are, we are basically looking at everything, the engagement letter, the rep letter, going concern issues, and telling you what they need to communicate. But all these issues, you need to know a little bit more in details about them within the within their topic themselves. Any fraud, what should you do with fraud, ask or inquire about the knowledge of fraud, you might be saying, that's it, ask or inquire, you'll be surprised. Sometime they will spill the beans. Okay, so you need to ask, you need to ask the audit committee, you need to ask top management, are they aware of fraud, and you need to report any fraud, notice any fraud involving senior management, any fraud involving senior management, and any fraud that cause material financial misstatement, regardless of the level of the fraud, even though it's lower level employee, if it causes material financial misstatement, you would report that fraud. You want to learn too, in terms of, you know, what you need to learn about how corporate governance or management deal with misappropriate, misappropriation theft committed by lower level employees, do they fire them, do they reward them, do they discipline them, what did they do with them, do they train them, you know, what do you do when that happens, because this is going to give you a signal about how serious corporate governance is in running the company, how serious are they. Communicate any identified significant deficiencies in internal control. Also, you want to communicate the plan, scope and timing of the audit, this is basically according to the auditing standard, and here you will give them an overview of the plan and timing of the audit, but nothing really specific. For example, you don't tell them when you're going to be observing or counting inventory, the location or the timing, you really don't want to give them a heads up. Why? Because they will move all the inventory there to count and they'll make sure everything is tied up, so you just want to have surprise visit. You also don't want to tell them about materiality threshold, okay? Why? Because that would reduce the effectiveness of the audit. Now they know what you're looking for, then they can meet you halfway and you will be under the impression that, you know, everything is good and the fear is everything may not be as good. So you don't want to tell them about the threshold for materiality. All in all, this topic is basically you need to memorize some of it, some of it is common sense, some of it you need to memorize. At the end of this recording, I'm going to invite you again to check out my website, farhadlectures.com, and if not for anything, check out your university score, how well is your university scoring on the CPA exam. Good luck, study hard and of course, stay safe.