 In this presentation, we will take a look at the stages of an audit. We're going to take the full audit process. We're going to break that audit process down into stages, into chunks. And then as we consider and study the audit process, we will be studying them within these chunks. So we're just basically going to list out the chunks at this point. Support accounting instruction by clicking the link below, giving you a free membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Those stages at this point and then as we move forward, we'll be concentrating in on specific stages. Now, as we do so, we do want to point out that many times when we consider the audit, we're thinking about the completed financial statements and we're trying to think about whether they have been completed in accordance with a set of rules. So in essence, we're basically thinking about the end product drilling down on it in some way to try to see if it's structurally sound or put together in accordance with some type of rules. If we were going to go about doing that, the first thing you probably do is say, hey, give me the financial statements. Let me look at them. I'm going to take a look at the balance sheet and I'm just going to start it from top to bottom. Just give me that trial balance. I'm going to start from top to bottom. Cash is that accurate? Accounts receivable is that accurate? And I'm going to then go through and think about tests for me to test. Cash accounts receivable accounts payable. Property plan equal. I'm just going to go through the trial balance and start testing them. And so a lot of times we might be impatient to do that or think that that's going to be the first thing that's going to happen. However, that's not going to be the first. That actually going to be happening down here. At least that's when we go through the detail of something like that. That's going to be way down here. So we have all these activities happening before this process, before we get to the audit of business process and related accounts, before we basically say, hey, I'm just going to go through the balance sheet top to bottom, look at cash, look at accounts receivable, look at property plans and equipment and so on and so forth. Now that can be a little bit frustrating because of course, when we think about the audit, that's one of the things we probably think about doing. And when we have a really small type of audit, if we're auditing like a small type of company, we may get to this process relatively quickly. But when we think about a larger type of company, remember, we can't rely just on the testing of certain accounts because there's too many transactions. We just can't do it and therefore when we plan the audit, we're often going to have to consider and plan more strategically and that planning process will be strategically planning internal controls. So if you have a really small company that we're auditing, then in other words, you might get to the point where you can basically go through and do a lot more testing on just a substantive test as we'll go through and we'll consider when we go through the planning process. But just recall at this point in time, especially if you're talking about a large company that actually just going straight to those accounts and trying to put together substantive tests related to them is not something that's going to happen until later on in the audit process. It's also actually one of the more kind of interesting components because when you're thinking about the financial accounting, that's usually what you're doing. If you're preparing for an audit process, then yeah, you're going to be preparing your internal controls and whatnot, but those are already in place by the time the audit usually is happening at that point. Well, you might you might actually be going through and when we're thinking about how to apply our skills that we've learned related to audits, this is often some of the skills that we might think about. Well, how can we test for ourselves the in balance? In other words, if I'm a small company or a large company and I put together the financial statements and now I have my financial statements. If I don't if I don't have an audit, how can I use my auditing skills to then give myself some assurance that these financial statements are indeed accurate that these numbers represent what they should represent? Well, normally we would go through these type of activities that we will see in the auditing process. We're going to say, give me the balance sheet. I'm going to go from the balance sheet top to bottom and look at those accounts and look at the related type of income statement accounts as I look through those balance sheet accounts. That's usually what we would do. So when we get to this component, then it's going to be very useful for us, even if we're not in the audit process, even if we're GL accountants, we'll get to this component here. But note, larger companies, of course, are going to be dependent on internal controls. We, as auditors, are more dependent on internal controls. And therefore in the audit planning process, we're going to spend a lot of time in the audit planning process and in the process of considering the internal controls because we have to rely on them with the larger companies before we can just go into the testing process. So the stages that will be involved, the client's acceptance or continuance, two types of things could happen with a new client. Either we have a new client, completely new, where we're going to take it, the new client process and accept the basically the engagement. This is usually, of course, done by the partner. So if you're talking about a large firm, the partners are often the ones that are going to be taken on basically the new process, the new type of engagement, setting up the terms with a new potential client, a new potential engage. Or, of course, and actually possibly more common once we have an established type of relationship is going to be the continuing clients, that we have audited in the past, especially if you're talking about publicly traded clients, those are going to be needed to be audited every year. So we possibly have a continuing type of process. And that's going to be a lot easier, of course, because we would think that the new audit for the following year, we want to make sure that everything is rolling forward and that we're taking into consideration any new information, of course. But you would think that we would already have some of the preliminary type of information down and we would have the continuation process then. So those can be substantially different. Obviously, a new audit going to take in a lot more work. We'll talk about more of the details between those two than a continuing audit that we have done in the past and therefore have some idea of what the needs are of the company. Then we have the preliminary engagement type activities. The preliminary engagement activities include the perform procedures regarding the continuance of the client relationship and specific audit engagement, determine compliance with independent and ethics requirements, establish an understanding of the terms of the audit engagement with the audit committee in accordance with auditing standards. Then we're going to have the planning of the audit. We're going to go through the audit planning process, the nature and extent of the planning activities that are necessary depend on the size and complexity of the company, the auditor's previous experience with the company and the changes in circumstances that occur during the audit. The audit plan is going to be a very important process and often one that's overlooked when we start to think about the audit and how to put the audit together because the plan is going to help us to be more efficient. We want to put the plan together so that we have a roadmap so that we can be as efficient as possible as we actually conduct the audit. So we're going to talk about the audit plan in some depth as we move forward. Then we want to consider and audit the internal controls. Once we have the plan note, we're going to audit the internal controls before we do what we wanted to do or we talked about in the first part of this presentation, which is to jump in and just look at those financial statements and start testing doing substantive tests. So notice what we've done here. We've gone through the engagement. We set up an audit plan. Part of that audit plan is going to include us first looking at the internal controls. Now, the reason we're going to do that, of course, is because better internal controls checks and balances just like with the government. If you say, hey, the government has some system of checks and balances in place, that should make it less likely that there's going to be a type of problem that we're looking for, because those checks and balances are in place in order to regulate against those types of problems. Therefore, if the checks and balances are properly in place, then we should be able to do less substantive testing. So now that once we have the audit plan, we have to consider the internal controls and basically the relationship that we will consider and we'll discuss this more as we go is that if they have a good system of internal controls and they are in compliance and actually implementing those internal controls, those of the two things we're typically looking for, do you have a system of internal controls? Is it good? Does it work? Will it work if implemented? And then of course, did you actually implement it? Once we've determined that, then we can consider what the audit tests that we will need. So then we go into the actual things that we would want to do from day one. If we were just starting out an auditing, give me that balance sheet and let me start testing top to bottom cash and whatnot. Now we can take a look at that balance sheet and look at it more objectively. We could say now we've tested internal controls with relation to cash. We tested internal controls with relation to a counter-receivable property, plant and equipment. Given those internal controls, we can now think about the types of transaction and number of transaction that we need within say sample sizes of transactions in order to get to the level of assurance necessary for an audit without basically overkill, without spending all of our time doing substantive testing here, hopefully spending our time less time doing internal controls that will restrict or limit the amount of substantive testing that we'll do here. So that's why it's always going to be in this relationship. We got to do the internal control testing, then the substantive testing. Note again, if you're a small company, if it's a small company and you don't have a lot of internal controls, I mean, if you're talking about a sole proprietor, you don't have internal, you don't have many because, you know, if it's just one or a couple people in turn, they don't have any separation of duties and we'll talk about more, you know, that relation of separation of duties and internal controls with regards to it. But just it's something just to keep in mind because as we look at an audit process went for a large publicly traded company, we start to get in our mind that that's just the way things are again, and not and learn what the procedure is rather than the principle. Then when we look at these small companies, it's, you know, auditors of large companies tend to say, well, that's small companies doing it all wrong. They're just a mess. They don't have any internal controls. And that's just obviously that's I mean, if you think about it, that's because they're a small company. It's not wrong. It's just that's they don't have the resources to be doing internal controls. If you're a small company, if you're a very large company, as you grow, the internal controls then need to increase. So if you're auditing or doing some type of review or testation agreement for a small company, you would expect the internal controls to be far less because there's less controls needed. If you had too many controls in a small company, you would not survive in the industry because it would cost too much. The internal controls wouldn't be cost effective. So in that case, if you were to audit a small company and they weren't publicly traded for something like a bank loan or something like that, the bank needs an audit, you would expect to have fewer internal controls, do more substantive testing. You would expect to be doing something more like, give me your balance sheet and let me just test it from top to bottom, actually looking at more transactions within our sample size, basically in that case. So there's always going to be that relationship between these two within a large company. Our expectation, if it's publicly traded, is that they have a good set of internal controls that they've implemented the set of controls. We expect its internal controls to be good. If they're not, we're in big trouble because we don't have enough time to test all the internal controls. So we're hoping that that should be the case where their internal controls need to be good in order for the audit to go well. Small company, we're actually expecting that the company is not going to have the best internal controls. They can't. They don't have the resources to do that. That's OK. We're just going to note that and we're going to say, well, we're auditing a small company, one that doesn't have those internal controls and therefore we're going to be reliant more on substantive type testing as opposed to internal controls. Then of course, the next stage is to complete the audit. And once we do that, we'll evaluate results and issue the audit report. So once we have the evidence, we've gathered our evidence like our detective work. We've got it all put together. We're going to evaluate it. We're going to put it together. We're going to then put together the audit report. And of course, the expectation of the hope is that the audit report is confirming that the assertions being made by management, the assertions that they have made the financial statements in accordance with whatever regulations they said they were doing it according to typically generally accepted accounting principles for US type companies that the evidence does indeed confirm that assertions. And hopefully we can then issue a clean audit report saying that they did this financial statements are representing within a material, you know, taken into degree audit risk in accordance with the assertions that they said they were going to issue them with. Now, of course, it could quite be possible that we came up with evidence that says that that's not and that's not the case or that we couldn't get enough evidence to support that decision. And therefore we can't really we can't give a clean decision on that. We'll talk about those situations. But obviously the hope is that we gathered evidence in order to prove the assertion being made by management, correct financial statements then being reported in accordance with whatever regulation that they said they were going to be reported with. And that would be the opinion that would be presented in the audit report.