 In this presentation, we will take a look at audit versus financial accounting. We'll also take a look at managerial assertions as we think about the creation of the financial statement with regards to an audit process taking place for them. When we think about financial accounting and audit, we usually study these in order. So if we're going to go into accounting, we typically start off with financial accounting and then at some point we might move to audit, studying audit. One of the reasons we have this process in that way, one of the reasons we don't learn audit and then the financial accounting is because the financial accounting is really where we learn to construct something. We start from nothing, transactions, concepts. We learn to then construct the financial statements, the end product with it. I would compare this in analogy to constructing something like a building. Now you would think that constructing the building would be more difficult than going back to the building and testing it to see if the building was put together in a structurally sound way, which is similar to what is done in an audit. If we audit something, then we're taking a look at the end product of financial statements typically with financial accounting types of audits. But if we compare that to a building, we'd be taking the building, we're saying is the building structurally sound, similar type of process with an audit. You would think of course the construction of the building or the construction of the financial statement more difficult than going back and saying, okay, is the thing that has been constructed, done well, done properly. In many cases, it is in a lot of ways. The financial statement creation is more difficult in a lot of ways because we're actually building something from nothing. We're taking the financial statement transactions, we're putting them together. We are constructing the end result, those being the financial statements. However, as we put this information together, it's pretty well detailed how we're supposed to do each particular step. We could think about putting the Lego set together to put our building together and the instructions are pretty straightforward. They're well defined. When we start to record the transactions, we say, I have a question about how to record this transaction, which account should be debited and credited, which account should be going up or down. We consult the regulations, we look at generally accepted accounting principles. We get the answer. We record the transaction in accordance with the rules, very specific rules. As we follow those rules in a very specific way, we construct our financial statements and get to that end result. So it's a long process, tedious process, takes a lot of work. But as we go through each step in the process, there usually are going to be a set of rules that we can go through and follow fairly closely. When we think about the audit side of things, now what we're doing is we're taking the end product, we could say the building or the financial statements, we're testing to see if it's going to be sound. Is the building structurally sound? Could it hold up, say, to an earthquake or something like that or like it's supposed to? Are the financial statements structurally sound? Are they complete? Do they have everything that should be in it? Do they have an accurate representation or reflection of the financial condition and performance of the company over a certain time period? Now you would think that would be easier to look into, but it's a little bit confusing to think about that. If we have the building, you can say, well, the building looks structurally sound. It's solid. How do I know it would stand up if you had an earthquake or something? It's supposed to stand up if you have a seven-point sum earthquake. How would I test for that? I don't know. It'd be a little bit difficult to go into that. In order to test for that, we're learning a few different things. One, we're going to be learning the financial accounting principles much more clearly, because oftentimes what we do is we memorize what we're doing. If I'm going to put something together like a building and you ask me why I put something together, I just say, hey, look, this is what the direction says and I follow the direction and I got to the end product of the building. The directions, of course, have reasons for them. They follow the accrual principle and they have more reasons, but oftentimes as we follow the directions, we just follow the directions. We can do that pretty clearly with financial accounting. When we get into the audit and we have to test whether or not something has been built in a structurally sound way, we not only have to follow the directions, we have to know the meaning of the direction, what are the actual principles being followed such as the accrual principle, revenue recognition principle, the matching principle or expense recognition principle. We have to know those well and then actually construct ways that we can test for soundness. If we're looking at the building, how could we test if this thing would fall over without actually having an earthquake to make it fall over? If we're testing the financial statements, how can we test that it's accurate, complete without actually basically testing the whole thing or taking the whole thing or part or doing so in some type of timeframe that's going to be easier to do? So learning audit will help us basically to better understand the concepts of financial accounting in a much more rigorous type of way. We're going to be deconstructing in some ways what's been put together in very strategic type of ways to do so in a way that's going to save the most amount of time as we do so, we have to know what's been built and why it's been built, how it's been built, how can we then find ways to test the construction of it to see if it has been built in accordance with rules and regulations and in order to know that, we need to know what the gist or why those rules and regulations have been put together. Therefore, the audit is going to be applying things over and above just normal principles to build the actual thing. We've got to look at analytical type of skills. We've got to think about what are the assertions behind the accrual principle of revenue recognition and expense recognition or matching principle? How can we test for things? How can we put something together to test to those principles, apply out those tests and then try to determine whether or not those tests are sufficient for us to be able to determine whether or not something has been put together accurately. So for example, if we take a look at the management type of assertions, we'll recall that the financial statements are built by the company, company run by management. Management's responsible for putting together the financial statements. The auditor then is responsible for testing the financial statements in some way. So by the company putting together the financial statements, they are making assertions. They're assertions involved, basically things that the management is saying, hey, these financial statements represent these assertions within them. They have been constructed in accordance with these assertions. We as the auditor then want to take those financial statements, look at those assertions and then determine whether or not that is indeed the case or not. As we go through these assertions, then we want to have an idea of them. We're not going to go and throw them in a lot of detail here, but we want to get them in our head as we go. So then when we start to create the audit, when we start to test these things, we really need to know exactly what assertion we are testing. Common test question that people miss all the time. Common conceptual problem that people have within audits is that we have the same thing that we have within financial accounting. We know the rule, we read the rulebook. We know we're supposed to do this process here. We know we're supposed to do this audit test here. We don't know why though. We don't know what the assertion is. We don't know what it is exactly that we are testing. That's where people often run into problems. So we want to basically list these assertions and then start to visualize in our mind and say, hmm, what kind of testing could we do to basically test for these types of assertions to