 In this presentation, we will discuss documentation, documentation of risk assessment. So recalling our goal as we go through the audit, we're giving an opinion as to whether the financial statements are in accordance or prepared in accordance with some set of standards typically being generally accepted accounting principles. 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. 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So the documentation is going to be our evidence that the financial statements are free of material misstatement or will be evidence of the opinion that we give on the financial statement the most common being that the financial statements are free of material misstatements and unqualified opinion. Now that documentation is of course for us so we can look back at it if there's any kind of situation or any kind of problem and recall what happens. We also want to format that documentation in such a way that someone who is an experienced auditor, someone who has experience in these types of situations or in this type of documentation can look at it, can review it, can determine what types of assertions we are looking to assert on or gather evidence about and determine what our conclusions will be. So considering the documentation as we go through the documentation note that one we want the documentation to give us evidence in a similar way that we would have for a case so that we can back up or support our opinion with it. We then too want to format our documentation in such a way that an experienced third party individual can come in and look at it and say, okay, I see what you're doing. I see what the assertion is that you're driving out with this particular form of documentation. I see the work that is done and I see how you came to the conclusion that you came to. So documentation of audit risk assessment. Auditors should document discussion with engagement personnel. So when we have the discussions with engagement personnel, when we have our inquiries, we're going to document, of course, the inquiries that we have, we're going to have specific type of questions, those questions geared towards specific types of assertions, and we will document the responses that we get to them and put them in our working papers as our piece or a part of our audit evidence, procedures done to identify and assess the risk of material misstatement due to error and fraud. So obviously, as we go through, we're going to set up the procedures, we're going to document those procedures that were done as we go, we're going to do the procedures, and we're not just going to basically say, oh, the procedure went well, we're going to move forward, and then issue an opinion, we want to be able to five years later go back and say, what were the exact procedures that were done? And what was the result of those procedures and be able to look back through it? The way to do that, of course, is with documentation, fraud, risk or other conditions that result in additional audit procedures. As we go through, if we look at the types of results that we're getting from our testing, and we determine, hey, there could be more risk of something such as fraud, then a typical next step will be to add more procedures that will be in alignment with that that type of risk. So we'll put more procedures in place. And as we do so, of course, we want to document that type of information as well, the nature, timing and extent of procedures performed in response to fraud risks identified and the result of the work. So the nature, timing and extent, we're going to put that within the documentation. We'll take a look at this documentation in more depth as we go towards specific types of things that we will be testing assertions on, especially when we go through the substantive type testing, actually looking at the accounts and testing each of these accounts in accordance with those assertions related to them. Nature of the communications about errors or frauds made to management, the audit committee and others. Now fraud communication, this is always a big question, because the question always comes up like what if fraud is is found? What's our responsibility? Because of course, our responsibility overall, what we've been engaged to do is to give an opinion on the financial statements. Remember, that's always our main goal to see whether or not the mature the miss the financial statements are materially misstated or not. Our goal isn't to detect fraud necessarily, except in to the extent that it's going to be misstating materially the financial statements. However, when we do detect fraud, we're saying, Hey, this could be this is an illegal thing happening here. What's our responsibility for the detection of fraud? And how do we go about that? Because obviously it's a it's a touchy type of situation. So how much what do we have to do exactly once if fraud is detected, what's going to be the steps that we need to take within that situation while still keeping our eye towards the goal towards the process of what we're engaged to do given opinion on the financial statements as a whole. So fraud communications, if evidence that fraud may exist is found, the issue should be brought to the attention of the appropriate level of management. So remember, most of the time the fraud is committed by some lower level type of employee, the lower level type of employee trying to benefit in some way, possibly through some format of theft. And so if that's the case, then we can report the fraud to the appropriate level of management. And the management then and we could advise the management to take corrective action, possibly take the legal counsel athletes as we have discussed in prior presentations, and then we can possibly go back forward to what our focus is on. And that's going to be the reporting of the financial statements fraud involving senior management. However, and fraud that causes material misstatement of the financial statements should reported directly to the audit committee. So note, if we're if we're concerned about the senior management, the risk of senior management committing fraud or not being able to rely on senior management, then we're going to go directly to the top level that we can go to within our audit commitment, that's going to be to the audit committee. Now you might be thinking, well, wouldn't the audit committee then possibly be involved in the fraud as well? Or can we trust basically the audit committee? Note that the incentives between the audit committee and the senior staff aren't always lined up. It is possible that the audit committee could be involved or in some way or have some understanding of fraud. But it's not necessarily the case. So if we just explore that for a little bit here, note that the structure of the corporation is that first we have the owners of the corporations, the shareholders, the shareholders for vote for the board of directors. Part the board of directors then is what is created or the audit committee is created from the board of directors, the board of directors and the audit committee with regards to the audit specifically, then the board of directors hires management and therefore they're going to give some oversight on management. So if you look at the incentives of management and the incentives of the board of directors, the board of directors are pretty lined up to incentivize generally the owners of because they're the ones that vote for the board of directors. Management is supposed to be acting as an agent of the owners and being oversawed by the board of directors, but management can have different type of agency problems as well. For example, if we're talking about a type of organization that has large bonus incentive plans. So if you if you reach a certain if management reaches or if the company does well and reaches a certain incentive level in terms of revenue generation, then possibly they get a large bonus. Well, in that case, obviously the owners of the company, the stockholders might agree with that type of incentive plan because they want to incentivize growth. But the management could have an incentive then to inflate the numbers in order to achieve the bonus. So you can see that in that case it could be possible that management would have an incentive to do something deceptive in order to achieve a bonus whereas the incentives of the committee members, the board of directors, the owners wouldn't have that same type of incentive. And therefore it's quite possible that we we could report and go to the board of directors and they would take action in that situation given the fact that the management might be deceiving them in that case as well. But it's also possible that the you know, the board of directors is looking for inflated numbers possibly because they think that the value of the stock would go up for it and maybe they were aware of management doing things that are possibly distorting the financial statement representation. So just note that as we do this we go we go to the highest level when it's management we go to the highest level we go to the board of directors and we go to the audit committee which is basically a subset of the board of directors. And again you might think well what's that going to do because they're the ones that hired management and again consider that the incentives aren't the same. It's possible that management could be doing stuff because of an agency problem that would benefit them and be deceptive to the board of directors or possible not. But that's the highest level that of course we go to because that's what the engagement is with us. That's who engaged us in order to work on the on the project. So an understanding should be reached with the audit committee regarding the expected nature and extent of the communications about misappropriations perpetrated by lower level employees. It's important to note that disclosure of fraud to parties other than the client's senior management and audit committee is usually not part of the auditor's responsibility. So in other words if we were to detect fraud you're saying OK this is a criminal type of thing happening here. What's our responsibility for it. Do we have to report it to the public. Do we have to report it to the police. What's going to be basically our responsibility for it. Now note once again that if the fraud is going to be on a lower level type of fraud if it's by an employee then typically our responsibility is to report it to upper management and possibly the audit committee if it's something that's going to have a material effect on the financial statements. We don't. We typically don't need to go further from there. The action then should be taken at that point. We advise that the management and the company take legal action at that point as well and then they can take it from there and pursue whatever path needs to be pursued given the fact that of course the fraud or the illegal act was done and they were the people that were harmed by it so we can inform. We can advise and that's typically where we go from that point. Now if it's at an upper level than that note that our engagement the engagement that we have at the upper level is in order to give an opinion on the financial statements. So if we see that the frauds is causing a material misstatement and we continue with the engagement and there's no adjustment or correction of the errors involved we'd have to give it an adverse opinion. So we would give an adverse opinion and of course no one would be happy with an adverse opinion. The other thing we might do is simply disengage from the engagement again if we don't have feel like there's integrity within the upper management and we don't feel that we can give an opinion on the financial statements then typically we can disengage from the engagement at that point. So the following are going to be exceptions. So when are there's going to be exceptions to the rule that we would basically go outside of the audit committee and possibly have to discuss any kind of illegal type of acts or fraudulent type acts outside of the audit committee and with the entity that we are engagement. So in compliance with legal and regulatory requirements so if there's some type of legal or regulatory requirements that warrants us to basically discuss then we would go outside the normal the normal pattern. When a successor auditor makes inquiries of the predecessor auditor about the client. So within the audit profession note the audit profession is going to want to communicate with and amongst ourselves because that's going to be part of the professionalism of the audit process. Part of that is that if you're going to pick up a new client you typically call the prior auditor and ask them you know how did the engagement go. What's what's going on with this client. Are they you know is this a client that you recommend or was there any issues or problems that happened or arose from this client that you have any disagreements over auditing standards that the client had a problem with and this and that that's a typical type of call that we're going to have within the profession of of audit and in the CBA and therefore within that professional setting from one auditor to the next typically thinking about whether we want to engage with the client that would be another area where you could discuss these type of items as well. When a subpoena is received so if there's a subpoena then that's a requirement by the you know the court that we'd had so it's possible that we'd have to discuss the information is subpoenaed and a funding agency or other specialized agency in accordance with requirements for the audits of entities that receive government financial assistance so in special type of search situations where there's where they're receiving government financial assistance as well.