 In this presentation, we will discuss the audit process related to prepaid expenses. We'll start off with discussing what prepaid expenses are. Prepaid expenses are a type of other assets, which lead to the question of course of what are other assets? Other assets are assets that provide economic benefit under a year. When we consider prepaid expenses, what we're thinking about are those types of things where typically we have made a payment before we have received the benefit, the most common type of prepaid expense that we learned in financial accounting and would be audited for within audit is prepaid insurance. So insurance is the classic example because of course whenever we pay for insurance, the definition of insurance means that we're buying the insurance for something that's going to be insured in the future. Therefore, we haven't received anything at the point in time that we paid for the insurance. We're going to be receiving the benefit, the coverage, the coverage against risk in the future. And typically when we're talking about large companies, they'll be buying insurance that might be at least a year into the future. Why? Because it's typically cheaper in order to do that rather than paying on a month-to-month type basis. We need to consider in that case the prepaid insurance. But of course, we can't have prepaid types of any types of items where we pay for the item before we actually receive the item. A little bit unusual, remember, because typically you would think that we would pay for the item at the point in time we receive it, whether it be goods or services or possibly after in this case we're paying before we receive the goods or services, typically being prepaid insurance. But we could prepay things like rent. Rent's another item that we could have circumstances in which prepaying the rent would be a smart thing to do. If that was the case, then we would treat the prepayment and the audit of it in a similar fashion as we would for prepaid insurance. We could have prepaid interest as well and similar kind of fashion there, anything that we of course decide that we're going to pay before we get the goods or services. Typically we try not to do that because most of the time the company will want to pay after because it's the time value of money. If at all possible delay the payment as much as possible, the place where we cannot do that typically is prepaid insurance and there might be negotiation or agreement type formats which would lead us to want to be in a situation where we would prepay the rent or some other type of expense. And so the inherent risk related to prepaid expense, recalling that inherent risk is the risk that's just basically inherent to the process we're looking at. So if we were to remove the internal controls, what would the inherent risk, recall that inherent risk, we want to consider inherent risk, we want to consider control risk. The two things that we as the auditor don't really have control over, those are in control by the company, inherent risk by the choice of business they are in, control risk by the controls they put in to deal with that inherent risk. We then set detection risk, which is going to be the level of audit or substantive testing we will think about. So we want to think about inherent risk, control risk, set detection risk. So generally determined to be low the inherent risk, the accounts do not generally involve complex, continuous accounting issues. So because prepaid insurance is pretty straightforward given the other types of things that can go on, we do have to consider the calculation of prepaid insurance, but oftentimes it's going to be something that may not be the most material of factors in terms of dollar amounts. And it's not that complex to really figure out the prepaid insurance, we get the policy, and we can figure out how much has expired and how much has not expired. It's not not too difficult other than knowing the components that will be involved that typically be in the insurance policy and then the payments considering those two items to figure out the amount that has expired and that has not expired the control risk. So now we could consider the control risk, the controls that the organization has to put in place. Once we consider control risk and inherent risk, we could set detection risk to see the level of testing we want to do procedures related to the purchasing process should ensure that each item is properly authorized and recorded because prepaid insurance are usually processed through the purchasing process. So when we consider, in other words, prepaid expenses, we are going through a purchase process within the prepayment process. And therefore, when we audit the prepayment cycle, we should be auditing