 Hello and welcome to this session in which we will discuss the integrated audit from the auditor's responsibilities perspective What is an integrated audit? It's auditing the financial statement and the internal control over financial reporting at the same time in the prior session I introduce the concept of an introduction to Integrated audit and I spoke about management responsibility So I'm not gonna go ahead and repeat what's integrated audit is if you need to go to the prior session And I am no longer going to discuss management responsibility. I'm gonna move to the auditor's responsibility So what is the auditor's responsibility or what's the auditor's objective when it comes to integrated audit? Simply put the auditor's objective is to express an opinion on the company's internal control over financial reporting The question is how how do they get to that stage? How do they get to the point of expressing an opinion? Well, we're gonna break this into five steps The first step is they're gonna plan the engagement plan the integrated audit engagement to they're gonna use a top-down approach Three they are going to test and evaluate the design of internal control They are going to test and evaluate the operating effectiveness So first we're gonna test and evaluate the design then after we look at the design We're gonna see how effective it is We're gonna test it test the operating effectiveness and once we perform those four steps We are going to issue an opinion on the effectiveness of internal control, which is reach our objective now if you notice There are five steps in this process if you know anything about me far hat once I have series of steps I'm gonna cover each step separately Starting with plan the engagement and I'll have a different different session for the top-down approach test and evaluate the design test and evaluate operating effectiveness and we'll have a whole section about Forming an opinion before we proceed any further. I have a public announcement about my company farhat lectures calm Farhat accounting lectures is a supplemental educational tool That's gonna 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 through false questions as well as exercises. Go ahead start your free trial today No obligation no credit card required Let's start by plan the engagement. This is basically what we consider step one of five Integrated audit first must be coordinated with the financial statement audit because it is part of it It's very similar to the financial statement audit how you plan for the integrated audit. It's just simply Do you remember planning for the audit? What steps do you take during the planning process? Well, you would learn about the client industry. You would learn about any regulatory matters economic conditions that affect the client you would look at any technological changes that the that the client is Undergoing or the industry is undergoing you look at the client business itself You would learn about any recent changes in their operation. You would look at the economic condition You would look at their capital structure and the reason I am listing all these items because on the CPA exam They will try to kind of tell you What do we do at what stage so at what stage for example? We would evaluate the capital structure of the company during the planning stage not during learning about or evaluating or testing The internal control so you have to know what goes on during during the planning stage Now if you are familiar with the regular audit, it's basically the same thing Now also keep in mind that the client's knowledge at the planning stage might differ from client to client For example the nature of the client whether you have a prior client in this industry Or is this your first client in the software industry the auditor's experience? How much experience do you have in this industry where the client is operating? Any information obtained from the prior auditor? Will change your planning of the engagement if you have a lot of information versus a little if you are told that it's it's a It's a risky client versus it's it's not as risky as other at other clients any previously disclosed communicated deficiencies legal or regulatory Matters well not all clients will have those issues some will have it others will not is this your first client in this industry Or is this your first client? This is a first-year client versus a second or third-year client in a second or third-year client All what you need to do basically update your information There is less work than for example if this was a first-year client. So all these steps Are conducted During the planning stage of an integrated audit more about planning for an integrated audit Well, we should take into account the result of the financial statement Fraud risk assessment Again, because you have to pay closer attention to certain things. What are those certain things? Well significant or unusual transaction, especially that are reported toward the end of the year at the end of the year means the end of the period under audit Related party transaction that could be always a red flag Significant management estimate anytime we have estimates involved. Well, guess what we have to pay closer attention This could be a place where we can manipulate the financial statements You have to look at incentives for management Do they have incentive to falsify or inappropriately appropriately manage financial results because remember when you have incentive You already have one part of the triangle because incentive is one of them Opportunity is the second It doesn't have to be the second then Rationalization so if there is incentive If they are if they are trying to get this audit because they need the loan from the bank There is incentive if they are doing this audit to issue new shares of equity That's an incentive for management to manipulate the number potential incentive incentive or pressure whatever. It's the same thing Okay, then the opportunity is eliminated by proper internal control. So this is part of the fraud triangle Now you have to also differentiate between audit of financial statements And audit for internal control because remember Private companies they don't have to have their private means non issuer. They don't have their Internal control audited. So we have to know the difference, you know between the two if you're audit a financial statement Which is that's different versus you're auditing the financial statements and auditing the internal control The auditor consideration on internal control for financial statement audit is different Then that consideration of internal control For the internal control audit simply put when you audit the internal control, you're performing an audit on internal control The date is as a point of time as of the date. So it's a point of time usually the last Day of decline physical year. So that's about timing. So you have to obtain sufficient appropriate evidence Of the effectiveness of the control as of a date as of a point in time. This is if you're auditing The internal control if you are Learning about internal control for the financial statement audit. Well, remember the financial statement cover a Period of time. Therefore, you are dealing with a period of time Therefore test of control You have to do it throughout the year to meet the objective of obtaining sufficient appropriate evidence to support internal control And remember to do what to assess control risk. That's why we Perform those procedures to learn about internal control to assess control risk versus up here We have to issue an opinion about the internal control. So here audit audit on internal control here We're issuing an opinion all what we are doing here in the financial statement audit is learn about internal control to do What to assess the control risk? What for what purpose to determine whether we're going to rely or not rely? That's that's that that's the difference between the two Usually not usually the financial statement audit when we're assessing control risk It cover a longer period of time Also during the planning stage We have to be aware whether the client we have a small client versus large clients So the size does matter. Why because for small companies many internal control objectives Are achieved by direct senior management involvement and someone the involvement of the owner or the owners themselves Rather than formal policies and procedures So if it's a small company For a non issuer you might see the owner or the founder or the senior management involved in internal control They may not have formal procedures So the key under those circumstances is to do what is make sure that senior management are not overriding control So so your your take your approach is a little bit different during the planning stage because they don't have Formal policies and procedures. Why because they're too small. Therefore senior management is involved Therefore, you have to look at the audit from a different perspective Also, what becomes important in small companies is the role of the audit committee Why because you need that's oversight. So you need more involvement by the audit committee Also, the degree of operation between various companies matters So not only the size of the client the degree of complexity. For example, if you are dealing with financial derivatives well versus selling just Books two different type of risks. You have the financial derivatives. You have to understand Mathematically how it's derived How are we deriving the value? It may not have public information We might have to use discounted cash flow look at some Similar instruments versus just selling books. We buy a book for a certain cost We sell it at a certain price. That's the end of the story. So the complexity Is is not as as large as dealing with derivatives Now what I did in this session is I discussed planning the engagement plan the engagement when it comes to integrated audit And the reason I'm breaking this once again because on the CPA exam They will try to give you multiple choice and basically all what the multiple choice is asking This procedure, what does it fall under? Does it fall under plan the audit under the top down approach under test and evaluate internal control? And that's why I want to keep it separate and I teach I'm not trying to review it going Real quick through this. I want to break it into five different components in the next session We would look at the top down approach. I believe that's important to understand the top down approach What should you do? Meanwhile, go to far hat lectures and look at additional resources Multiple choice questions that's going to help you invest in yourself invest in your career Accounting is worth it. 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