 and welcome to this session in which we would look at an audit report that deals with unmodified opinion. The first thing I want you to think about is the word unmodified. It's the same thing as a clean or unqualified opinion. Now, why do we call it unmodified? Unmodified because we are dealing with a report for a non-issuer. Non-issuer means a private company. Now, a private company could be very large or a private company could be a mom-and-pop store. But private in contrast to public or in contrast to issuer. We could have an issuer. Issuer means they issue stocks to the public, like PepsiCo, Coca-Cola, Microsoft, Apple computers. Those are large companies that are issuer. Usually issuers are large companies. Private companies could be large, could be small. And the private companies, they follow the AICPA, the issuers, they follow the PCAOB. Now, obviously, we have a separate recording about the unqualified issuer opinion. But for this session, we're going to be going over a report for a non-issuer dealing with an unmodified opinion. What I'm going to do first is break down the report into its various components. And I'm going to take each component separately and talk a little bit more about it. Starting with the title, then we're going to have an address C, the opinion. How did you come up with that opinion, basis of the opinion? Key audit matters if they exist. Now, for an issuer, we have critical audit matter. We have a different type of CAM, right? CAM for the issuer. For the private, we call them key audit matters. We're going to have a paragraph about the responsibility of management. What is management responsible for? We're going to have a paragraph about the auditor's responsibility. We might have a paragraph about other information included in the audit report if that's needed. And we're going to have a signature block. Now, if you know anything about FARHAT, once I have a list of items, I'm going to go ahead and cover each item of this list separately, starting with the title. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. No obligation, no credit card required. So, the best way to review this report is to actually look at a report. The first thing we have in a report is the title. And this is the title. It's Independent Auditors Report. And I'm going to kind of basically make sure you understand what independent means. When we audit a company, we have to be independent. Why? Because without independence, the audit report is useless, because if someone is giving you an opinion about something, they have to be independent. In other words, the opinion is useless or it doesn't have as much value if that group is related or somehow biased. So, that's why we use the word independent. You're going to see the word that dependent will appear again in the report, but the title, it has to say Independent Auditors Report. That's the first thing, the title. The second thing, it's going to be the address C. Who is it addressed to? Now, for a public company, it's usually addressed to the board of directors or to the shareholders. For private companies, it will be addressed usually to the board of directors or if the small company to the owners themselves. Not management. The key here is we want to show that we are not auditing management. We are giving this report, we are auditing management, but we are not reporting to management. We are reporting to the owners of the company that hired us. Remember, management and the owners, they could be the same, but the point is you are not pleasing. You are not being hired by management. You are hired by the owners. Therefore, it's addressed to the owners. Usually, it's the board of directors or actual owners of the company. Then we're going to have the opinion. So, notice the opinion is the first paragraph. Well, it used to be not the first paragraph. We used to have a different report, but now it's the first paragraph because to illustrate its importance. That's why we moved it. So, in the opinion, we have to tell the users what are we doing. We have audited. Why? Because we could have reviewed. We could have compiled. No, we have audited. We tell them exactly what we did, the financial statement of the company, and we list the financial statement, the balance sheet, the income statement, the stockholders' equity, the cash flows, as well, of course, as the notes because they are an integral part of the financial statements. Obviously, we have to mention the date. Now, we come up to our opinion. Well, in the opinion, we say those financial statements present fairly in all material respect, the financial position of ABC company as of the date, and the result of its operation, its cash flow in accordance with generally accepted accounting principle in the US. So, here, we're using gap. We're following gap. So, we give our opinion. What did we, how did we, what are we following? We're following gap. Now, how did we come up with this opinion? This is the basis of the opinion. Now, we talk a little bit more about how they, how did we conduct this audit? We conducted this audit in accordance with the auditing standard generally accepted in the US, which is gas. What rules did we follow? Okay, in auditing and actual work, we followed gas. Now, what is the framework? The framework is gap. We compare everything to gap, but we followed gas in our work. Our responsibilities under gas are further described in the auditor's responsibility. Remember, I told you there is a paragraph called the auditor's responsibility. We're going to talk a little bit more, summarize those auditor responsibilities in general. Now, again, we are required to be independent. Again, we want to emphasize that we are not biased. We want to emphasize our credibility, the credibility of the report. And we meet all our ethical responsibilities in accordance with the ethical requirement relating to the audit. We believe the audit evidence we obtained is sufficient and appropriate to provide our basis of the opinion. So we gave you enough information. Now, the auditor could have also a key audit matters paragraph or CAMS, KAM. I told you for the public companies, it's going to be CAM, critical audit matters. And I talk about it in a separate report. If there's any key audit matters, they'll be listed here. So what are key audit matters? Those matters, they're included in the auditor's report based on a professional judgment were of the most significance to the audit of the financial statement of the current period. So there are certain issues that we consider significance in the audit for this period. They are selected from matters communicated with those charged with the governance. So what are those matters? Anything important that it required us to speak or communicating speak means communicate with those charged with governance, like the board of directors. We communicated certain items. Those could be potentially not everything could be potentially CAMS, could be potentially CAMS. Why? Because they are important. So areas of higher assessed risk of material in the statement or significant risk identified in understanding the entity and its environment and assessing the risk of material in the statement. Those could be items that we could have communicated with those in charge of governance. And and we could have selected to talk about in the and the CAMS significant auditor judgment relating to areas of financial statement that involve significant management judgment. So if the judgment is making if management is making judgment about revenues about certain expenses about certain liabilities and those judgment those estimates are they have a high uncertainty. They have a high estimation of uncertainty. They are important. We want to we discuss one management. How do you come up with this number? We believe it's incorrect. We believe we should increase it. We believe we should decrease it. It's important items that we discuss that require judgment. Those we it's a good possibility. We communicated with those charged with governance. And as a result, we could include them as CAMS. So what's the what's the overall idea of CAMS? So it's maybe it's it's important to understand this. We want to tell the users that when we conducted the audit, these items were kind of think of them as challenging. It doesn't mean they're going to give you an a clean or an unclean opinion. That's now what we're talking about here. We just want to tell the users those are the main issues. Those are the challenges in this audit in each audit. Each company will have different issues, but we want to let them know the effect on the audit of significant event or transaction that occurred during the period. If there's anything significant event or transaction, we might select this as a CAM and we want to discuss it. We just want to tell the users what are some of the challenges we faced here? And how did we resolve this sometimes? Sometimes we even discuss how did we resolve it? Now, the auditor should determine which of the matter were of the most significance. Remember, it's a professional judgment by the auditor, but those items are usually not usually they have been communicated with those charged with governance. So they there must be they must have been important. Most significance in the audit of the financial statement in the current period and therefore there are key audit matters. Key audit matters means important and they usually you only mention the one that's happened in the current period. Now you might also mention other stuff. What could be an actual example? For example, if the company is implementing a new IT system, a new IT system, or significant changes to an existing IT system, especially if those changes has significant effect on the overall audit strategy or related to significant risk. For example, the way to recognize revenue after this changes have changed. So that's important. Now we have to you know, we have to tell the users they implemented a new system, the revenue recognition. Now it's being affected and we looked at this little bit closer. That's all what key audit matters is. You can maybe Google a key audit matter report and take a look at some examples. But this is the overall idea. Now again, the topic will be again mentioned when we discuss scam critical audit matters. The same idea. So if you're interested, look at my cam. So it might give you a better understanding if you're not okay with this and sometime none. There should be no cam. That's fine. But again, if something happened, if the auditor was sued and there is no cams, they're going to be asked really, there was no cams, you did not really find anything that's significant. So you really want to have some cams just to make sure you're you to make the users aware of what's going on. Now let's talk about the responsibilities of management. What is the responsibility of management? You should know this inside out. The management is responsible for the preparation and the fair presentation of the financial statement in accordance with again, the framework we are using is gap. Also management is responsible for the design, implementation and maintenance of internal control. It's not only responsible for the financial statement. Also the design, implementation and maintenance of internal control. You want to know this by heart. And the fair presentation of the financial statements that are free from material misstatement, whether due to error or fraud. In preparing the financial statement, management is required to evaluate whether there are conditions or event considered in the aggregate that raise that raise substantial doubt about the company ability to go as a going concern. If there's any issues, in other words, the company may not survive. Well, we need to know this and it's the management responsibility to evaluate this. Now, of course, we're going to be on the lookout, but also it's the company's responsibility to tell us, look, we might be running into trouble. Here's the we could have some issues. And again, substantial doubt. We discussed this little bit more in details and a separate recording. So this is the management responsibilities. Now we're going to talk about the auditor's responsibilities for the audit here. We're going to be a little bit, we're going to expand, we're going to have two or three paragraphs. What is the auditor's responsibility? Well, make sure you know this by heart, obtain reasonable assurance, whether the financial statements are free from material misstatement, whether due to error or fraud, and to issue the report that we're looking at now that includes our opinion. Now we define what's reasonable assurance. Reasonable assurance is the highest level of assurance. However, it's not absolute. We're not guaranteeing anything, but this is the best we can do. Therefore, it's not a guarantee that an audit conducted with gas will always detect material misstatement when it exists. The risk of not detecting the material misstatement resulting from fraud is higher from one resulting from error. Now we also tell them, look, we could be facing fraud. We could be facing an error. It's easier to detect an error because if someone makes an error, they don't try to cover the error. If you made an error by its nature, it's an error. You don't try to cover it because you were not even aware of it. However, when people are conducting fraud, fraud may involve collusion, forgery, intentional admission, misrepresentation, or the override of internal control. So just want to let you know that if there was fraud, it's much harder to detect. Why? Because the nature of the fraud, people try to hide what they did. Misstatements are considered material. If the substantial likelihood that individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. How do we know if something is important? Well, if it's going to change your mind, it's important. So in performing an audit in accordance with gas, now we're going to kind of point out a few things that we did. What we think is important to let the users know. One, we exercise professional judgment and professional skepticism throughout the audit. When we were on the lookout, we had a questioning mind. We used our judgment. We used our experience. We used our prior knowledge. We used common sense. We used analytical procedures. Identify and assess the risk of material in a statement, whether due to error or fraud and design and perform other procedure responsive to those risks. What are those procedures? Include examining on a test basis. We did not cover everything. We sample. It's a test basis. Okay, we did not cover everything 100%. Evidence regarding the amount and disclosure in the financial statement. We also obtained an understanding of the internal control relevant to the audit in order to design or the procedure that are appropriate in the circumstances, but not for the purpose of expressing an opinion about the effectiveness of internal control. What are we saying here? Okay, we're saying yes. We looked at the internal control. We understand. We obtain an understanding not to assure a report. We did not obtain an understanding to assure a report because that could be the case, but that's not the purpose for this. We obtained an understanding in order to design the audit procedures, but not to assure reports. We're not expressing an opinion, a report about this, because you're going to see later for issuers, you have to issue a report. So for private companies, you might have to engage you. That's a different story, but for the audit, you are not. So accordingly, no such opinion, no opinion is expressed, no such opinion express. Well, in circumstances where the auditor has responsibility to express an opinion, that's a different story. Okay, then you have to express an opinion. We also evaluated the appropriateness of accounting policies and the reasonableness of significant estimate made by the judgment, as well as evaluate the overall presentation. Now here, if there's any issues, we can mention them in CAM. And we concluded whether in our judgment there are conditions or event considered in the aggregate that raise substantial doubt about ABC ability. Remember that the management evaluate the ability to, as a going concern, we also evaluated this. We did not just accept what they said. Also in the auditor's responsibility, we have to say we are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit finding. Again, this is where the CAMs might be coming from, and certain internal control related that we identified during the audit. Now if we find something wrong with the internal control, although we're not expressing an opinion, but we might communicate this to the people in charge with governance. So this is the auditor's responsibilities. That's a lot of information. We might have other information included if applicable. So sometime there's other information in the audit report. We want to just let you know what they are, but we're not including those. In our opinion, we can talk about this. Management is responsible for the other information included in the audit report. The other information comprises and we list them, whatever they are. Maybe the various schedules, something else we don't know, but does not include the financial statement that our auditor report on. So be aware, there are other information, but we are not expressing an opinion on those. Our opinion on the financial statement does not cover the other information. We do not express an opinion or any assurance on that other information. Just want to let you know this. If you see other things in the audit report, that's now what we are doing. In connection with our audit, which is the financial statement, our responsibilities is to read the other information, we read them, consider whether they are material inconsistency with the information on the financial statement. Now we read the other information, we compare them to what we audited and we just want to look at, basically, does it make sense? Are they lying in the other information? So let's assume revenue is a million dollars and revenue grew by 10%. That's on the financial statement from the prior year. Now in the other information, if they said revenue grew by 20%, we have to say something that they appear to be materially misstated. If based on the work performed, we concluded that an unrecorded hearing statement of the other information exists, we are required to describe it in our report. Then we just learn some other information we don't agree with because it does not jive with the numbers that we audited. Then we're going to have a signature block. We're going to have the signature of the audit firm, basically the name of the firm. We're going to have the city where the audit report is issued and we're going to have a date of the report. The date should be no earlier than the date of the sufficient appropriate evidence was obtained. Simply put, when was the last time we were looking for evidence? This is where the date should be listed. Now sometime we might have to do something after that date. We'll talk about that later on, do a report. Well, basically, we audited up until February 15th. Then something happened on 222, you know, seven days later. It's one event. Then we have to say, we looked at that one event specifically, but we finished our work on 215. So the date is important. What should you do now? Go to far hat lectures and look at MCQs through false multiple choice that's going to help you understand this concept better. Study hard. The reports are important whether you are an accounting student or a CPA candidate. And this report is for what? It's for a non issuer, private company, unqualified or unmodified. The corrector is unmodified opinion, unmodified opinion for a non issuer. Later on, we'll talk about the issuer and also an unqualified opinion. Good luck, everyone. Study hard and stay safe. Stay motivated.