 In this presentation, we will discuss the audit process related to intangible assets. First question, of course, is what are intangible assets? We will define intangible assets. In other words, intangible assets are assets that they do not have. 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, giving 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. Physical substance that provide economic benefit for more than a year. So we're thinking about types of assets, but things that you can't touch, you can't kick, you can't feel. However, they do have value and they're going to be providing value for more than a year and therefore they're going to be assets, things that we would expect to see or would like to have on the financial statements, even though they don't have that physical substance. And you can imagine as an auditor, considering things, the fact that they're not physical, they're not tangible, can provide some problems for us in order to test for their existence. So types of categories of a tangible assets will be things like artistic things, anything that's got a copyright to it basically could be some form of intangible asset. Note that the copyright itself is kind of the intangible asset. If we have a book or if we have a painting or something like that, obviously the books and the paintings are physical type of things, but the copyright is the claim to the material, the idea, the concepts of them, and therefore those types of things, the copyright type of items are going to be intangible type of assets. Customers, things like lists, order backlogs, customer relations, these are types of things that are assets, they're not tangible assets. So they're not things that we would typically think of if we were to list our assets and liabilities. We wouldn't think about these things typically, but they clearly have value. Customer list order backlogs and customer relationships are clearly valuable assets. Marketing, things like trademark, brand names, domain names are going to be types of things related to marketing that are intangible types of assets. More categories include things like goodwill, goodwill resulting from an acquisition of a company. So you'll recall if we acquire a company, then what we're going to do is we could, there's a couple of different ways we could acquire the company, but it could result in goodwill because you can think of the company being assets minus liabilities or the value being the equity section. If the equity section assets minus liabilities equals what the company was worth, you would think that if we were purchasing the company, that's what we would pay for the company. However, oftentimes what we see is that a company buys another company and pays more than the book value of the company. Why would they do that? Well, the assumption is there's some type of intangible assets such as the brand name of the company, and that would be the result of goodwill. So goodwill is something that will typically often be recorded, but it'll typically be recorded only when there's a purchase type of transaction that happens. And we will have to of course somehow value that goodwill if it's on the financial statements. Technology, both those that have patented and unpatented types of technologies. Then we have contracts, things like licenses, franchises, broadcasting rights. These are contracts. Again, another kind of intangible type of asset. Now we're going to discuss inherent risks related to intangible assets. You'll recall once again, our goal as the auditors to think about the inherent risk, to think about the control risk, and then to set the detection risk so that we can think about how much substantive testing we need to do. The inherent risk control risk, things that are in the company's control by the business that they are in and the controls that they put in related to the risks of that business. The inherent risk, the risks that you can think about taking away the controls and thinking about just the inherent riskiness of those items without the controls. Now, when we think about intangible assets, they can cause a serious risk consideration. And again, you will list some of the items here, but of course, the fact that they're intangible and they're going to be on the balance sheet, there's things that we're reporting as value as assets and they don't have physical substance. It can be a little bit difficult for us to basically verify, test prove the value of these things as is our job. So risk can be great because accounting rules are complex. Accounting rules related to them will be complex because once again, these things are going to be difficult to value. And the transactions are difficult to audit. It's not, it's not as easy to audit these kinds of contracts that arise from these intangible assets, they can be quite complex in some cases. So accounting standards require different asset impairment tests for different classes of intangible assets. So when we think about the assets on the book, notice that what we want to do from a regulatory standpoint is to record it typically where we record assets like property, plant and equipment at cost, or, or we mark it down if it's been somehow impaired in some type of way, and possibly depreciate if we're talking about something like a property, plant and equipment. So that impairment, what we're worried about is for something to be recorded on the books as an asset and be overstated. Typically, we're more concerned, of course, with that overstatement of the assets. When we're talking about things that are not tangible, then it's, it's riskier for us to basically know when something is overstated and not. And therefore, we have these different kinds of asset impairment tests that are going to be seen. You can see more detail about those types of tests with the FASB ASC topic 350. Obviously, these type of issues will be specific to the specific types of intangible assets that are going to be owned by a specific type of company. If we're talking about companies that have movie rights or something like that, clearly, they're going to have some specialty area and we can go into those types of intangible assets. If we have other companies that have some kind of trademark situation, or if they have some type of technology that is going to be highly valued, and it's being recorded as highly valued, then we want to make sure that it is being properly recorded as well. Auditors often assess the inherent risk of high as high, given the factors above. So we might say, hey, the risk factors in these areas are high, there might, it depends on the industry as to know how much of this types of intangible assets will be in place once again. And when we see the, these intangible assets will typically put the risk as high, if they're going to be material factors to the financial statements, they're things that we're going to want to look into. Now we're going to consider the control risk assessments. So the control risk, the types of controls that are going to be put in place as the auditor, we want to basically be able to rely on controls to some extent that we can, and then consider the substantive tests after the consideration of the controls. So the controls relevant factors related to them, expertise and experience of those calculating the fair value of the assets. So notice when we think about these intangible assets, it really depends on who is, is the one that's calculating the value of these intangible assets. How did the value of these intangible assets be put on the books? Now again, this will differ with the type of intangible asset, but we want to basically know where the, did this intangible asset come from? Who came up with the calculation? How did it get recorded so that we can consider if they have the experience and expertise in order to do the proper type of calculation related to them? Controls over the process used to determine fair value measurement, like controls over data and segregation of duties between people committing the entity to purchase and people assigning the valuation. So we want controls over the people that are basically in charge of the purchase of these types of things, like intangible assets and the people that have the valuation that are going to be calculating the valuation of them that are going to be on the books. We want to basically have those two things, a segregation of duty there as an internal control factor. How much the business relies on and employs valuation specialists? So we have certain types of intangible assets. Again, if we're in a movie industry or something like that, we're going to need specialists in order to get in there and figure out what the value is with regards to these intangible assets. And we want to know to what degree people are relying on specialists or who are the specialists are that are applying the valuation of these intangible assets. We want to consider any significant management assumptions in determining the fair value as well. So anytime we think about something, if there's an estimate being involved, and there's basically assumptions within the valuation process, then that could be a place that there could be problems. Of course, we want to have some understanding of what the management assumptions would be with regards to valuation. We also want to consider the integrity of change controls and security procedures for valuation models and information systems. We also want to have controls over the approval processes as well. Now we've considered the inherent risk and the control risk related to intangible assets. Now we're going to consider these substantive procedures, same kind of process we have here. We got the inherent risk. We've got the control risk. And then we consider the detection risk relation to the substantive testing, how much substantive testing we would have to do. Then tests related to valuation and impairment of intangible assets are often necessary because of the complexity and degree of judgment increase the risk of material misstatement. So we want to test basically the valuation and any type of impairment process because again these intangible assets being on the books, one, what was the valuation process they were put on the books, and two, how would we know if they decreased in value? If you're talking about something like goodwill, then we're concerned with basically the decrease in value. We'd have to put in some tests in order to do that, may take specialists for us to go in and determine whether or not there's been a decrease, a problem within the valuation of some of these intangible assets, things like trademarks, things like goodwill. Substitive evidence is required for all significant accounts and substantive analytical procedures alone are not generally enough to provide sufficient evidence for significant transactions involving intangible assets. So we can't really just rely on, in other words, the analytical procedures with regards to significant amounts with intangible assets. You'll recall that the analytical procedures are those types of procedures that I just envision, you can envision the auditor nice and cozy in their little, in their auditing office at their company office or their firm's office as opposed to the substantive test that we would typically think of as going to the business and doing more calculations at the business. So the normal kind of comparison to the industry standards or comparisons to other companies or comparisons year over year that we may do, substantive analytical procedures are not typically going to be sufficient if we're talking about transactions or large transactions related to intangible assets. We want to do more things usually related to the valuation and the impairment, of course. So the assertion considerations for tests of details will typically include existence. Is there existence of the intangible assets? Again, they're intangible. So we want to make sure that they exist and we can't just go out and look at them as we would if it was property plans and equipment. So that's going to be a concern for us to consider the valuation of them. Again, they're intangible and oftentimes they're somewhat unique. If we're talking about book rights, copyrights, movie rights, or goodwill to one particular type of company, then we want to, we're concerned with evaluation, completeness, rights and obligations to the rights and obligations of the assets actually belong to the company, especially if there's legal rights with relation to things like goodwill or things like copyrights. We want to make sure that they have the legal rights to them and then, of course, classification.