Speaker 1: In this video, I'm going to give you an overview of the audit process. So it all begins with client acceptance or continuance. Client acceptance means that you've never done an audit of the company before, and this is your first time doing the audit. Continuance means that you've audited this company's financial statements in the past, and you're trying to determine should you continue with that client as your client. You could always withdraw from the engagement and say, you know what, I don't think I want to do the audit anymore. I don't want to continue. Maybe you think that the client has engaged in some sketchy behavior, some stuff that might be illegal or fraud, and you decide I don't want to continue. But if you do decide that you want to accept the client and you want to continue, and by the way, if you're curious in how will you go about doing that, so when you're doing it for the first time, you would ask the prior auditor, which is called the predecessor auditor. You would ask them to tell you about the company's integrity, of their management, and that's actually confidential. So you have to ask the client, hey, can you waive confidentiality? I want to talk to your prior auditor and see if your management is honest. There's a lot more that goes on. Ultimately, it culminates in we have a thing called an engagement letter. And the engagement letter spells out, it's basically a written contract, and it spells out what the auditor is going to do, what management is supposed to do. It says, look, here's management's responsibilities, here's the auditor's responsibilities, and it just lays that all out. It might mention things such as like the use of a specialist on the audit, maybe it's a natural resource company and you need like a geologist or something like that. There might be, maybe you need an IT auditor, some kind of specialist. So things like that could be mentioned. Any other services are going to be provided other than the audit itself. Maybe there's some tax consulting services that are going to be provided. So if there's other services going to be provided as part of the audit, that would be mentioned in the engagement letter. Now, when we go to the planning phase, now what happens is the auditor is trying to get an understanding of this company's business and the industry in which they operate and try and say, okay, what are the types of things that we might have issues with and so forth? And they're also going to set the materiality threshold. I'm going to make another video separate on materiality because it's such an important thing. Materiality threshold might be set at $10,000. So that would mean if you're doing an audit of Walmart and you see that revenue is off by $500, you say, look, it's not material. That's not big enough of a problem that it would affect an investor or creditor's decision. So you're going to set this materiality threshold. And so as you're doing the planning, you're also going to get into risk assessment. Specifically, one of the things you're going to do is you're going to decide what is the extent to which you want to rely on this company's internal control. And when you're thinking about that company's internal control, remember that company probably has internal auditors who are setting up controls to try and prevent fraud and so forth. When you're thinking about those controls, you want to think about the competence of the internal auditor. So are they competent? Are they able to do a good job? Are they a licensed CPA or something like that? Do they have technical expertise enough that they could set up effective internal controls? And then are they objective? Now, this is different than independence, although they're related. The internal auditor is never going to be objective because the internal auditor works for the company being audited. However, we could say there's different degrees of objectivity. For example, if the internal auditor happens to be related to the CEO, their brothers, then we say, okay, they definitely can't be objective or anything like that. And that actually brings me back. So this is talking about internal auditor and thinking about objectivity. Back when you're at the client acceptance stage, the external auditor who's thinking of taking this job or not taking this job needs to think about, would they be independent? Could they be independent, the external auditor back here, if they were to perform the audit? So now we've got the risk assessment. We're trying to say, okay, to what extent can we rely on the internal controls of this company? Are the internal controls really, really strong? And then if that's the case, we don't have to do as many tests during the next stage when we do substantive procedures. Substantive procedures, I'll make a whole video on this, but for right now, just think of it as tests. And I will give you an example of one test. We'll talk about confirmation of accounts receivable. So think about it. The company, because of accrual accounting, the company is going to occasionally make credit sales. And so because they make credit sales, they have this account on the balance sheet called account receivable, but cash has not been collected yet for the account receivable. So there's always the risk that management has overstated the amount of credit sales. And that in fact, maybe they say they have $50 million of account receivable. They really only have 10 million. So what you would do, the auditor, you mail confirmation letters to all the different people that are owed money or excuse me, that owe money to the company. So you would go through the list and say, okay, this person supposedly owes $30 million to our client. Let's do a confirmation. Let's see if they in fact say, yes, we do owe $30 million. And we'll go over confirmation in more detail on substantive procedures and tests. We'll talk about that in a specific video. Finally, now, so we've done our tests and we've tested management's assertions. Remember, management is making a number of assertions. They're saying things like existence, saying, okay, this fixed asset actually exists. Things like occurrence to this transaction, to this sale actually occur and so forth. So, and I'll talk about the different management assertions in the future, but we're making these assertions and these substantive tests are trying to test and say, okay, is this legitimate? Do we have, there actually, is there a reason to believe that they do have that amount of account receivable that management is claiming to have? And if so, and if the auditor finds that, look, there are the financial statements are free from material misstatement. Remember, it doesn't mean to be guaranteed that there's no fraud. So it's reasonable assurance. The auditor is not providing a guarantee. They're providing reasonable assurance that the financial statements and the notes are free from material misstatement. Again, there could be a mistake due to error, due to fraud, but they're trying to say, look, there's a very small chance we're issuing this opinion and saying that we believe that these financial statements follow generally accepted accounting principles and are free from material misstatements. So that's the auditor report, and that's the culmination of the entire audit process.