 Hello and welcome to the session. This is Professor Farhad in which we would look at the standard audit report issued under the PCA OB guidelines, which deals with public entity. When we say public entity, public entity in contrast to private entities to private companies, public entity is also called issuer. Remember, if we are dealing with AI CPA, then we are dealing with private issuer private companies or non issuer issuers are public company that can issue stocks to the public. Now this is a complete picture of the report in the same the same way I did the go over the report with the AI CPA. I'm going to do the same thing for the PCA OB. I'm going to go and break it down into component one, two, three, four, five, six, seven. Matter of fact, critical audit matters because it's critical audit matter. It's critical. I'm going to have a separate recording for this one. So in this session, I will go over the rest explaining each topic separately. And in the next recording, I will focus on critical audit matters because I believe it's important and it's new. Therefore, it deserves more attention, one separate recording. Let's go ahead and start with the first part of the report. And that's the report title. The report title would read report of independent register public accounting firm. Well, it means this firm is independent and registered with the PCA OB. Well, why is independent? The word independent is important. Well, simply put, the auditor is passing an opinion about the financial statement. If the auditor is not independent. Well, the opinion is worthless in a sense that you cannot really rely on it because for an audit to be useful. Independence should be the cornerstone of this audit. If I'm passing an opinion about my friend, about someone who paid me to do so, or about a friend who's who I have a vested interest in, you should not trust my opinion. You should be skeptical. Well, when you show an opinion, when an auditor is shown opinion about a public company, you have to be independent. In fact, in an appearance, and we're going to talk a lot more about whether an audit firm is independent or not. But the point here to remember is the word independent is in the report and there are certain criteria that we have to discuss later on. Second part of the report is the audit report address. Who's it addressed to? It's addressed to the board of directors and the stockholders of Adam Company. Well, I would say they're both the same group because the stockholders elect the board of directors. The shareholders elect the board of directors. Why is this important? Well, it's important because the auditor is working for the stockholders. The auditor is not working for management. Why? Because if you are working for management, you are passing a judgment on the management work. Well, that's not a good idea. If that's the case and they're paying you, you're working for them, then you may not be independent. And that's why the report is addressed to the board of directors to convey independence. You don't want to show anything that could jeopardize your independence because I'm going to repeat this one more time. Independence is the cornerstone of your opinion. If you're not independent, I'm going to have some doubts. I'm going to have some questioning about your opinion. So let's talk about the opinion since this is important. This is the auditor's opinion. This is what matters. Now we're going to say what is our opinion on the financial statements? Now on the old report, I hope you don't have a copy of the old report, the auditor's opinion was the last paragraph, was the conclusion. The PCAOB as well as the AI CPA believed the auditor's opinion should be at the beginning of the report. Right now, the audit opinion is at the beginning of the report. Let's go ahead and see how do they state their opinion. First, we have audited. That is important. Audited means we did not prepare the financial statements. Audited means we did not have a compilation. We did not have a review. We audited the financial statements. Auditing is the highest level of assurance. The accompanying balance sheet as of December 31st, they'll put the date as well as the income statement, changes in stockholders' equity and cash flow for each period and the December 31st, 20x2 and the related notes collectively referred to as financial statements. So here they tell us what they did. They audited and what did they exactly audit? The financial statement plus the notes. And the notes will have the disclosure. This is important now. In our opinion, the financial statements present fairly. So this is called unqualified or what we learn about with the AI CPA unmodified. It's a clean report. In all material respect, the financial position of Adam Company as of December and the result of operation of its cash flow in conformity with GAAP. It's important. So okay, the financial statements are presented. Well, I need presented according to what? I need a framework. Well, this company, Adam Company appears to be a US company. Therefore, the auditor used US generally accepted accounting principle. This is the framework. This is the yardstick that they used to determine whether the financial statements are fairly presented or not. Maybe in Europe or in Asia, they might use as a framework the IFRS. That's fine. Now we have also audited. So notice they audited the financial statements. That's fine. But let's look what else they did. We have also audited in accordance with the standard of the public company accounting oversight board, the PCAOB of the United States, the company's internal control over financial reporting. So hold on a second. So are you telling me you perform two audits? Yes, we did two separate audits, one for the financial statements and one for the internal control of the company. What is the framework? What did we follow? Well, the criteria established in the internal control and integrated framework issued by the committee of sponsoring organization of the Treadway Commission known as COSO. So the framework for our work was COSO. Because we need a framework. And our report dated February 12, 2020, expressed an unqualified opinion. Now we have to be careful that this report here, I'm going to have a separate recording about this report because the auditor also issued a report about the internal control. We have to go over this report. It will be a separate session. But the point I'm trying to make is under the PCAOB, you audited the financial statements. You also audited the company's internal control over financial reporting. The next thing we're going to discuss is the basis of opinion. So how did you come up to that opinion? Before we look at the basis of the opinion, I would like to share with you a public announcement about my company. For had 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. Let's take a look at basis for opinion. So how did we base our opinion? Well, first thing we have to determine or let the users know that the financial statements that we audited are not our responsibility. They are the responsibility of the company's management. So simply put the first thing we say, just hold on a second. We are not responsible for those financial statements. They prepare them. Our responsibility as an auditor is to express an opinion on the company's financial statement. So be careful. Don't confuse us preparing the financial statement versus us passing an opinion. All we're doing is we are passing an opinion. Our responsibility is to express an opinion. It's an important opinion, but it's just an opinion. It's a level of assurance. We are a public accounting firm register with the PCAOB again. We repeat this and are required to be independent. So again, we'll remind the new here that our opinion is coming from someone who's independent from the entity with respect to the companies and according with the U.S. Federal Securities Law and the applicable rules and regulation of the SEC and the PCAOB. Great. How did we conduct our audit? Well, we conduct our audit in accordance with the standard of the PCAOB. Now we need to find procedures. We need to find a way to conduct the audit. What did we follow? The PCAOB standard. Those standards require that we plan and perform the audit to obtain reasonable assurance. That's another important term. We cannot promise absolute assurance. We're going to provide reasonable assurance whether the financial statements are free of material misstatement, whether due to error or fraud. And what are we doing? We're saying they're free from material misstatement due to error and fraud. How did we do? How did we do so? Our audit included performing procedures to assess the risk of material misstatement of the financial statements whether due to error or fraud and performing procedures that respond to those risks. So we were looking for errors and fraud and we undertook steps in discovering those errors and fraud. Those procedures include examining on a test basis. This is important. We sampled. We did not look at everything on a test basis. Evidence regarding the amount and the disclosure in the financial statements. So we look at the dollar amount. We looked at the disclosure as appropriate for these accounts. Our audit also included evaluating the accounting principle used and significant estimate. So notice what we did. We evaluated. We did not made those judgments, those estimates. Who made those estimates? Management. We just evaluated their judgment as well as evaluating the overall presentation of the financial statements. And that's what we did. We believe that our audit provide a reasonable basis for our opinion. Again, nothing is absolute. It's reasonable. It's a reasonable basis. So this is the basis for our opinion. After the basis for the opinion, here comes the critical audit matters. I'm going to skip over this for now because I'm going to have a whole recording for the critical audit matter. That's important. And then we will sign the audit report. The firm will sign the audit report, GBO. We have served the company since 2002 and we date the report. Date auditor has obtained sufficient appropriate evidence as of February 12, 2020 X3. So what should you do now to learn more, to really take advantage of your knowledge, go to far hat lectures and work multiple choice MCQs that test your knowledge about this topic. Good luck. Study hard. And of course, stay safe.