Financial Statement Audit: Microsoft Corporation

Examine Microsoft's five-year growth in gross margin, operating income, and net income from the 10-K, identify drivers by products and services, and outline key audit procedures for revenues and expenses.

Analyze Microsoft’s income statements and trend analysis over five years, highlighting product revenue fluctuations and services and other growth driving gains; auditors should assess revenue recognition and revenue composition.

Explore the going concern assumption by evaluating a company's ability to operate within 12 months, including debt covenants and cash flow indicators, using Microsoft as an example.

Assess Microsoft's balance sheet through a five-year trend of assets, liabilities, and equity, and evaluate year-over-year changes from an external auditor’s perspective.

Apply a balance-sheet and trend-analysis approach to Microsoft, evaluating asset existence and valuation, liability completeness, and equity transactions, with risk-based substantive procedures outlined.

Identify the financial statement assertions for the balance sheet—existence, completeness, valuation, rights and obligations, and presentation and disclosure—and apply them to account balances in an audit.

Audit the cash and cash equivalents balance by testing existence, rights, and valuation through bank confirmations and year-end reconciliations, and verify cash cutoff and policy-based classification for three-month liquids.

Examine audit procedures for Microsoft short-term investments, confirming existence and rights, valuing at market value, recognizing unrealized gains or losses and interest or dividend income, while applying fair value hierarchy.

Audit Microsoft accounts receivable to verify existence and valuation, including revenue recognition policy adherence, using confirmations, reconciliations, aging analyses, and post-year-end adjustments to assess the allowance for doubtful accounts.

Perform key inventory audits, including existence counts, cut-off, and valuation, assess rights and allocations across raw materials, work in progress, and finished goods, using average-cost policy and analytical procedures.

Assess property and equipment assertions—existence, valuation, and ownership—by performing procedures to vouch additions to invoices, physically inspect assets, verify title, recalculate depreciation, and evaluate capitalization versus repairs.

Examine the Keota procedures for equity investments, focusing on valuation risk, existence and rights, impairment indicators, and when to use specialists for investments with no readily determinable fair values.

Audit goodwill by evaluating existence and valuation risk, performing annual impairment tests, and comparing carrying amounts to fair value while examining key inputs and potential need for a valuation specialist.

Assess the integrity of intangible assets by testing existence, rights and obligations, valuation, amortization, useful life, impairment indicators, and no material impairment of intangible assets.

Assess the existence, valuation, and rights of other long-term assets by vouching additions and reviewing capitalization. Allocate tax specialist input to Microsoft's net deferred tax assets for valuation validation.

Outlines key audit procedures for the accounts payable balance at Microsoft, focusing on completeness and potential understatement, with sampling, vouching to purchase orders and invoices, and subsequent events testing.

Audit professionals learn substantive procedures for long-term debt, including confirmations, reviewing debt agreements and covenants, current versus long-term classification, and reconciling note disclosures to schedules.

Assess the accrued compensation account by reviewing stock awards, vesting periods, and the completeness and valuation risks, and confirm disclosures of dividends, interest rates, and the Black-Scholes model.

Audit procedures center on valuing and disclosing income tax balances and uncertain positions. Rely on multiple tax specialists to assess management's estimates, documentation, and responses to changing tax laws.

Analyze unearned revenue accounts for microsoft, focusing on completeness, valuation, and rights and obligations, and verify future period allocations and segment variance through substantive procedures.

Explore audit procedures for other liabilities, focusing on completeness, valuation, and rights and obligations, including unrecorded liabilities, vouching invoices, a management breakdown, and subsequent events testing.

Audit the equity account by examining retained earnings and dividends, confirming common shares outstanding, and vouching share issuances, buybacks, and cash transfers to ensure proper presentation and disclosures.

Examine the cash flow statement and cash flow proof to verify proper classification of operating, financing, and investing activities, with attention to Microsoft’s figures.

The lecture covers Keota procedures for earnings per share, emphasizing the weighted average outstanding shares calculation, audit relevance, and recalculating EPS with the dilutive impact of stock-based awards.

Evaluate contingent liabilities and commitments by reviewing note disclosures on pending cases and antitrust claims, and apply procedures including legal confirmations, litigation reports, and vouching invoices to test completeness.

Explore high-profile fraud cases like Waste Management, Enron, and WorldCom, revealing fake earnings, off-balance-sheet debt, and inflated revenues, identified by whistleblowers and audits to teach fraud risk awareness for auditors.

Explore the external audit process as an independent evaluation of the financial statements, assessing risks of material misstatement, testing evidence, and forming an audit opinion.

Discover how materiality guides audits under IFRS, considering diverse users and using professional judgment to set thresholds like 5% pretax income or 1 to 2% total assets, plus qualitative factors.

Compare tests of controls with substantive procedures to assess internal controls, reduce substantive work when controls are effective, and use confirmations, inspections, and analytical procedures to obtain audit evidence.

Understand audit sampling and sampling risk as auditors apply procedures to a subset to infer conclusions about the entire population using random, haphazard, block, systematic, and monetary unit sampling.

Analytical procedures use trend and ratio analyses to evaluate financial information in the audit process. Compare current results to prior periods, flag variances, and guide substantive procedures.

Identify and engage specialists to support the audit, including tax valuations, actuaries, IT experts, engineers, and other consultants, to validate complex assets, liabilities, and disclosures.

Analyze audit report and critical audit matters for Microsoft, including Deloitte's opinion that financial statements present fairly under US GAAP, and procedures addressing revenue recognition and income tax liabilities.

Examine internal control over financial reporting (icfr) at Microsoft, focusing on management's responsibility and the ceo/cfo disclosure conclusions. Review auditors' opinion under coso and pcaob standards and note inherent limitations.

Explore management inquiries and the letter of representation, including fraud risks, controls, whistleblower tips, unusual or related party transactions, and management's disclosure of the financial statements to external auditors.

Demystify the external audit process and show what auditors look for in financial statement audits, using Microsoft’s financial statements to illustrate key audit concepts.