Company Netflix

Subject:BusinessPrice:15.89 Bought3

Share With

Company Netflix. Please answer the following questions about Critical Audit.

Critical Audit Matters

1. Review the PCAOB Staff Guidance on Critical Audit Matters (CAM) on Blackboard. What is a CAM? What information should be identified and reported? What is the benefit of including this information in the audit opinion?
2. Refer to the most recent audit opinion on the financial statements for Netflix. Discuss the CAM(s) identified by the auditor and the way the auditor addressed the matter through their procedures. As a reader of the financial statements, do you appreciate the inclusion of this information? (You can be honest!)

Formatting guidelines:

font – Times New Roman size 12; single spaced; standard margins

STAFF GUIDANCE Implementation of Critical Audit Matters: The Basics Overview Requirements for auditors to communicate critical audit matters (CAMs) in the auditor’s report will phase in starting in 2019, based on the PCAOB’s new standard, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. The determination of CAMs is principles-based and depends on the facts and circumstances of each audit. The Board adopted these changes to inform investors and other financial statement users about significant matters in the audit and how they were addressed. This document provides a high-level overview of the CAM requirements based on PCAOB Release No. 2017-001. What is a CAM? A CAM is defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: ?? Relates to accounts or disclosures that are material to the financial statements; and ?? Involved especially challenging, subjective, or complex auditor judgment. Matters communicated or required to be communicated to the audit committee CAMs are drawn from matters required to be communicated to the audit committee—even if not actually communicated—and matters actually communicated—even if not required. The standard does not exclude any required audit committee communications from the source of CAMs. Relates to accounts or disclosures that are material to the financial statements A CAM is required to relate to accounts or disclosures that are material to the financial statements. A CAM may relate to a component of a material account or disclosure and does not necessarily need to correspond to the entire account or disclosure in the financial statements. What’s included? ?? ?? ?? ?? ?? ?? ?? ?? Overview What is a CAM? Communication of CAMs Required Introductory Language Documentation of CAMs Engagement Quality Reviewer Interactions with the Audit Committee and Management CAM Interaction with Explanatory and Emphasis Paragraphs When are CAM requirements effective? ?? Audits of large accelerated filers: Fiscal years ending on or after June 30, 2019. ?? Audits of all other companies to which the requirements apply: Fiscal years ending on or after December 15, 2020. This guidance was prepared by PCAOB staff to help firms when implementing CAM requirements. This staff guidance document sets forth the staff’s views on issues related to the implementation of the rules and standards of the PCAOB. It does not constitute rules of the Board, nor has it been approved by the Board. It supplements PCAOB Release No. 2017-001, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards (June 1, 2017). Staff Guidance March 18, 2019 1 Implementation of Critical Audit Matters: The Basics A CAM may not necessarily relate to a single account or disclosure, but could have a pervasive effect on the financial statements if it relates to many accounts or disclosures. A matter that does not relate to a material account or disclosure cannot be a CAM. Involved especially challenging, subjective, or complex auditor judgment The standard provides a list of factors for the auditor to take into account when determining whether a matter involved especially challenging, subjective, or complex auditor judgment: ?? The auditor’s assessment of the risks of material misstatement, including significant risks ?? The degree of auditor judgment related to areas in the financial statements that involved the application of significant judgment or estimation by management, including estimates with significant measurement uncertainty ?? The nature and timing of significant unusual transactions and the extent of audit effort and judgment related to these transactions ?? The degree of auditor subjectivity in applying audit procedures to address the matter or in evaluating the results of those procedures ?? The nature and extent of audit effort required to address the matter, including the extent of specialized skill or knowledge needed or the nature of consultations outside the engagement team regarding the matter ?? The nature of audit evidence obtained regarding the matter The auditor should also take into account other factors specific to the audit. Communication of CAMs When communicating CAMs in the auditor’s report, the auditor is required to include introductory language in the “Critical Audit Matters” section of the auditor’s report. For each CAM communicated in the auditor’s report, the auditor must: Which audits do not require CAMs? CAMs are not required for audits of: __ Brokers and dealers __ Registered investment companies other than business development companies __ Employee stock purchase, savings, and similar plans __ Emerging growth companies Auditors may early adopt CAM requirements or apply them voluntarily to audits for which they are not required. ?? Identify the CAM; ?? Describe the principal considerations that led the auditor to determine that the matter is a CAM; ?? Describe how the CAM was addressed in the audit; and ?? Refer to the relevant financial statement accounts or disclosures that relate to the CAM. Identify the CAM For each CAM communicated in the auditor’s report, the auditor is required to identify the CAM. Describe the principal considerations that led the auditor to determine that the matter is a CAM The description of the principal considerations should be specific to the circumstances and provide a clear, concise, and understandable discussion of why the matter involved Staff Guidance March 18, 2019 2 Implementation of Critical Audit Matters: The Basics especially challenging, subjective, or complex auditor judgment. The communication should be tailored to the audit to avoid standardized language and to reflect the specific circumstances of the matter. Describe how the CAM was addressed in the audit In describing how the CAM was addressed in the audit, the auditor may describe any, or a combination, of the following: ?? ?? ?? ?? The auditor’s response or approach that was most relevant to the matter A brief overview of the audit procedures performed An indication of the outcome of the audit procedures Key observations with respect to the matter When describing CAMs in the auditor’s report, the auditor is not expected to provide information about the company that has not been made publicly available by the company unless such information is necessary to describe the principal considerations that led the auditor to determine that a matter is a CAM or how the matter was addressed in the audit. If the auditor chooses to describe audit procedures, the descriptions are expected to be at a level that investors and other financial statement users would understand. In addition, the objective is to provide a useful summary, not to detail every aspect of how the matter was addressed in the audit. Limiting the use of highly technical accounting and auditing terms in the description of CAMs, particularly if the auditor chooses to describe audit procedures, may help financial statement users better understand these matters in relation to the audit of the financial statements. Language that could be viewed as disclaiming, qualifying, restricting, or minimizing the auditor’s responsibility for the CAMs or the auditor’s opinion on the financial statements is not appropriate and may not be used. The language used to communicate a CAM should not imply that the auditor is providing a separate opinion on the CAM or on the accounts or disclosures to which they relate. Which audit period is covered by CAMs? The standard requires that CAMs only be communicated for the current audit period. When the current period’s financial statements are presented on a comparative basis with those of one or more prior periods, the auditor may communicate CAMs relating to a prior period. This may be appropriate, for example, when: ?? The prior period’s financial statements are made public for the first time, such as in an initial public offering. ?? Issuing an auditor’s report on the prior period’s financial statements because the previously issued auditor’s report could no longer be relied upon. Refer to the relevant financial statement accounts or disclosures that relate to the CAM For each CAM communicated in the auditor’s report, the auditor is required to refer to the relevant financial statement accounts or disclosures. Required Introductory Language The CAM section of the auditor’s report is required to be titled “Critical Audit Matters.” When communicating CAMs in the auditor’s report, the following introductory language is required to be included: Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) Staff Guidance March 18, 2019 3 Implementation of Critical Audit Matters: The Basics involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. If the auditor communicates CAMs for prior periods, the introductory language should be modified to indicate the periods to which the CAMs relate. If the auditor determines that there are no CAMs, the following language is required: Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. Documentation of CAMs Can an audit have no CAMs? The determination of CAMs is based on the facts and circumstances of each audit. It is expected that, in most audits to which the CAM requirements apply, the auditor will determine at least one CAM. However, there also may be audits in which the auditor determines there are no CAMs. For each matter arising from the audit of the financial statements that: (1) Was communicated or required to be communicated to the audit committee; and (2) Relates to accounts or disclosures that are material to the financial statements; the auditor must document whether or not the matter was determined to be a CAM (i.e., involved especially challenging, subjective, or complex auditor judgment) and the basis for such determination. Consistent with the requirements of AS 1215, Audit Documentation, the audit documentation is required to be in sufficient detail to enable an experienced auditor, having no previous connection with the engagement, to understand the determinations made to comply with the provisions of AS 3101. ?? For matters determined to be CAMs, the description in the auditor’s report (which, among other things, must describe the principal considerations that led the auditor to determine that a matter was a CAM) will generally suffice as documentation. ?? For matters determined not to be CAMs, the amount of documentation required could vary with the circumstances. A single sentence may be sufficient, for instance, when the auditor’s documentation prepared in the course of the audit includes sufficient detail about why the matter did not involve especially challenging, subjective, or complex auditor judgment. Other matters may require more extensive documentation. Engagement Quality Reviewer (EQR) The objective of the EQR is to perform an evaluation of the significant judgments made by the engagement team and the related conclusions reached in forming the overall conclusion on the engagement and in preparing the engagement report. Staff Guidance March 18, 2019 4 Implementation of Critical Audit Matters: The Basics The EQR is required to evaluate the engagement team’s determination, communication, and documentation of CAMs (see paragraph .10j of AS 1220, Engagement Quality Review). The documentation requirements for CAMs will facilitate review by the EQR. Interactions with the Audit Committee and Management Any matter that will be communicated as a CAM should already have been discussed with the audit committee, and the auditor is required to provide a draft of the auditor’s report to the audit committee and discuss the draft with them (see paragraph .21 of AS 1301, Communications with Audit Committees). As the auditor determines how best to comply with the communication requirements, the auditor could discuss with management and the audit committee the treatment of any sensitive information. CAM Interaction with Explanatory and Emphasis Paragraphs CAMs and explanatory paragraphs CAMs are not a substitute for required explanatory paragraphs. There are circumstances in which the auditor is required to add explanatory language to the auditor’s report, such as when there is substantial doubt about the company’s ability to continue as a going concern or a restatement of previously issued financial statements, among others. There could be situations in which a matter meets the definition of a CAM and also requires an explanatory paragraph, such as going concern. Stay Connected to PCAOB For these situations, both the explanatory paragraph and the required communication regarding the CAM would be provided, by either: Contact Us for ?? Including the required communications for a CAM in the explanatory paragraph, with a cross-reference in the CAM section to the explanatory paragraph, or ?? Including both the explanatory paragraph and the CAM communication separately in the auditor’s report, with a cross-reference between the two sections. When both an explanatory paragraph and a CAM communication are provided, the CAM description should not include conditional language that would not be permissible in the explanatory paragraph (see footnote 5 of AS 2415, Consideration of an Entity’s Ability to Continue as a Going Concern). Inquiries Standard-Related Subscribe to the Research and Standard-Setting Updates CAMs and emphasis paragraphs LinkedIn If a matter that the auditor considers emphasizing meets the definition of a CAM, the auditor would provide the information required for a CAM, and would not be expected to include an emphasis paragraph in the auditor’s report. @PCAOBNews Staff Guidance March 18, 2019 5 PART 1 1. Fraud risks related to the governance structure A) Who is the CEO and how long have they had a leadership role within the company? Discuss how the CEO’s leadership style (as determined from news coverage and communications to the shareholders) has an effect on investor confidence and fraud risk. Reed hasting is the CEO of Netflix. He has been working as the CEO of Netflix since 1997. He has been performing a duty for 23 years and 5 months for the development of Netflix. Reed Hastings has a unique way of working to make things creative and how he deals with the trade-offs. Which puts Netflix in a good picture in front of the world as an entertainment company. His leadership style can be considered as transformational and unburdened. He transformed the whole networking activities, and also he tries putting Netflix on the trend. He attacks any accusations made to Netflix in a very decent way which does less damage to the reputation of the company as a whole. His good reputation has a positive effect on investor confidence and if the tone at the top trickles down the ladder effectively there are less likely rationalizations for fraud. Employees who feel valued by upper management and are surrounded by encouraging corporate culture are less likely to justify their actions like theft or collusion. B) Who is on the Board of Directors? Who is on the audit committee? Discuss your impression about the independence and competence of the board members and note any concerns. How does the governance structure contribute to the fraud risk assessment? There are 13 Board of directors working to minimize fraud risk. Ted Sarandos is the coCEO of Netflix. Ernst and Young are responsible for auditing the books of Netflix. KPMJ used to audit the books of Netflix but they were dropped in 2012. The reason was not stated by the CEO of Netflix or why the switch was made from KPMG to EY. The governance structure plays a major role in the fraud assessment of Netflix because they aim for transparency. They have monthly meetings for their top 7 executives, quarterly meetings for 90 senior executives, and quarterly 2 day meeting with top 500 employees on for reviews of the business, issues, and education. Their board memos consists of links with supporting analysis and open access to all date on their company’s secured intranet. Reed puts importance on the sharing of information, transparency and “context not control”. The governance struct lessens the chances of fraud risk assessment and makes it easier for auditors to substantially test risk. 2. Fraud risks related to incentive structures and stock performance A) To what extent are executives and board of directors incentivized with shares and stock options (see Proxy Statement)? Please be specific regarding performance measures involved in their compensation scheme. How might these pay structures create pressures/incentives for fraud? Netflix’s 2019 Proxy Statement, filed with the Securities and Exchange commission, states that Netflix offers a Stock Option Program in which executives and board of directors have the option to be compensated with stock options. The company allows its executive officers to allocate a certain amount of their compensation between stock options and cash at an agreed- upon price. The agreed-upon price is also referred to as exercise price. For example, in 2019, the Chief Operating Officer, Reed Hastings, had $30,000,000 in allocatable compensation and chose to receive a cash salary of $690,000 and $29,310,000 in stock options. 97.7% of Hastings allocatable compensation was in stock options which is a large amount of his salary. Stock options are meant to motivate executives to do better however the use of stock options as compensation could lead to fraud and abuse of the stock market. Stock options offer a strong incentive to Netflix’s executives to raise the stock price above the exercise price because the stock price must rise above the exercise price for executives to profit from their options. This incentive motivates some executives to intentionally manipulate corporate reports and misrepresent financial outcomes to raise the stock price. Some ways fraud can be committed include: improper revenue recognition, overstating existing assets, understanding expenses and liabilities, etc. B) Review the company’s stock performance over the last several years. What recent events have affected the stock price? What fraud pressures does this stock performance create? Netflix is one of the highest-earning streaming service providers in the market valued at $1.2 billion. According to Nasdaq as of February 23, 2021 Netflix’s current stock price is $546.15 per share with approximately 203 million subscribers as of the fourth quarter of 2020 (Stroll, 2021). Over the past five years, Netflix’s stock has returned 390% from $140 to $546 which suggests that the company has been experiencing significant growth. However, in September 2019 the company saw a drastic stock price fall of 28% in just two months likely due to an increase in external competition; new service providers such as Amazon Prime, Apple TV, Disney Plus, and Hulu were a threatening factor for Netflix. Despite the widespread adverse effect of the COVID-19 pandemic on the markets and stock prices, Netflix stock prices continued to perform well. Net income increased from $1,866,916 in 2019 to $2,761,395 by the end of 2020 (Netflix, 2021). One explanation is the significant number of lay-offs and a working from home schedule left millions of people in need of entertainment which led to increased subscriptions to the streaming service. In addition, Netflix’s focus on original content strengthens the brand’s reputation which in turn leads to an increase in subscriptions. However, as states begin to loosen lockdowns and quarantine restrictions, Netflix’s subscriber growth may fall, reverting stock prices back to pre-COVID figures. This could lead executives and board of directors to partake in fraudulent activities such as breaching their fiduciary duties to prevent a loss of income. References https://s22.q4cdn.com/959853165/files/doc_financials/2019/ar/Netflix-2020-Proxy_Updated.pdf https://www.statista.com/statistics/250934/quarterly-number-of-netflix-streaming-subscribersworldwide/ https://ir.netflix.net/financials/financial-statements/default.aspx 3. Fraud risks related to revenue recognition and business risks A) How does this company account for revenue? Do their revenue recognition practices create opportunities, incentives, and/or rationalizations for fraud? The majority of Netflix’s revenue is generated through its streaming. service which makes up 99% of revenue. The main source of revenue comes from subscriptions and monthly fees. The DVD service only generates 1% of revenue and has been on a continuous decline.[1] Its streaming revenue is broken down into four geographic segments: 1) the U.S and Canada 2) Europe, Middle East and Africa 3) Latin America and 4) Asia-pacific. Netflix offers the first 30 days free and then on the first day afterwards, they charge a subscription fee of $8.99 for the Basic Plan, $13.99 for the Standard, or $17.99 for the Premium. Customers may be given a free upgrade to a higher plan during their first month when they sign up or rejoin. If a customer is on a plan with a free upgrade, Netflix will ask if they want to keep the higher plan before their free upgrade ends. [2] The subscription fee is considered paid in advance and is not completely recognized as revenue until the 30 days of streaming service are fulfilled. Customers can cancel or change their plan anytime. If the company only gives the customer a certain number of days and the service stops the revenue becomes deferred and Netflix needs to refund the amount owed back to the customer or make arrangements to deliver the service agreed upon. Their subscription-based service revenue can create opportunities, incentives, and rationalizations for fraud. The opportunity for fraud may arise in overstatement of revenue, deferred revenue being mishandled, liabilities being understated, expenses being overstated. There is a clear direct correlation with the number of monthly subscribers and revenues. The company may be incentivized or pressured to commit fraud because goals to reach business targets, maintaining prior revenues, and the growth of other streaming services (i.e. Disney, Hulu, Amazon, Starz, Discovery). Due to the ease of online subscriptions, numerous fake accounts could be created with 6-month to yearly subscriptions to boost revenue, and then later through cancellations, refunds, defer the revenue. Management could rationalize the use of fraud in their revenue recognition due to these pressures of the industry, growing competition, or effects of Covid-19. B) Review the business risks disclosed by the company (in most 10-Ks, refer to Item 1A Risk Factors and Item 7 MD&A). How might some of these business risks from the external environment also create fraud risks within the company? Select three of the business risks to discuss. 1. “COVID-19 pandemic and the global attempt to contain it may harm our industry business, results of operations and ability to raise additional capital” The global spread of COVID-19 had governments close all businesses not deemed “essential”. Their partners for operations, development, production and post-production of content have all been disrupted resulting in their inability to produce new content for Netflix. Some vendors are soon to go out of business, have supply constraints, have increased costs and delays in productions. If new content is not available, the company runs the risk of retaining its subscribers. The business risks can create fraud risks in financial statement reporting: overreporting of expenses, overstated costs, inflated invoices, and creation of fictitious vendors. 2. “If our trademarks and other proprietary rights are not adequately protected to prevent use or appropriation by our competitors, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.” Competitors in the streaming services are on the rise with networks switching over to similar platforms as Netflix had created. Netflix needs to protect their intellectual property, trademarks, copyrights, patents, technology, licensing rights, etc. from being used by competitors they’ll lose business. This business risk can develop into the risk of improper asset valuation especially with intangible assets, accounting estimates, depreciation and amortization. 3. “Foreign Currency Risk”- (7A.Quantitative and Qualitative Disclosures about Market Risk) Netflix had revenues held in currencies other than the U.S. dollar which accounted for 54% of their total for the year ended December 31, 2020. The foreign currency risk is associated with the euro, the British pound, the Brazilian real, the Canadian dollar, the Mexican Peso, the Australian dollar and the Japanese yen. Their revenue would have been $596 million higher if the currency rates did not globally weaken and remained constant to the 2019 rates. These external environment changes negatively impact Netflix’s revenue and operating income in U.S. dollars. Fraud risks within the company could increase due to the weakening of foreign currencies. These fraud risks may include fictitious revenue, inappropriately reported expenditures, or improper valuation for accounts receivable. Rationalizations could be made by management to justify fraud since the entire world’s rates have been affected in 2020 by the pandemic. [1] https://www.investopedia.com/insights/how-netflix-makes-money/ [2] https://help.netflix.com/en/node/24926 PART 2 Date: February 25, 2021 Length of Session: 102 minutes Purpose of the Session: Examination of Fraud Risks Part A – Assessment of Fraud Risks Fraud Risk Factor Possible Fraud Schemes Balances Affected The stock option program reliant on the company’s performance may cause Board of Directors and CEO’s to partake in fraudulent activities 1. Inflating revenue at year-end with fictitious journal entries 2. Estimation of bad debt allowances 3. Overriding certain internal controls - Sales - Accounts receivable - Allowance for bad debt - selling and administrative expenses Revenue Recognition principles can create opportunities and incentives for fraud 1. Creation of fake subscriptions 2. Posting Revenue but then deferring revenue for cancellations 3. Improper valuations of assets 4. Manipulation of depreciation/amort ization -Liabilities -Revenue -Intangible assets -Expenses -Research & development Increasing profits by tax avoidance 1. Failure of recognizing profits. 2. Conflicts of - Gross Profits - Sales - Revenue Likelihood Significance of Fraud of Fraud Moderate Moderate Moderate High Low Low which can create opportunities for fraud interest 3. Compliance of laws and regulations - Expenses Part B - Overall Fraud Risk Assessment The Three fraud risks we have identified to have the greatest impact on the company are: incentives provided from stock options, revenue recognition principles, and increasing profits by tax avoidance. As a group we rate the overall potential of a risk of material misstatement due to fraud at this client as moderate. Stock options offered to a company’s executives and board members often leads to increased company financial fraud. Stock options offer a powerful incentive to raise the stock price above the exercise price; in order for top management to profit from their options, the stock price must be above the exercise price. Depending on the date in which managers can exercise their options, they may have a direct interest in a short-term stock price increase. In addition, options offer massively greater financial returns to CEO’s than other forms of compensation. Thus, management will be more likely to partake in actions that are only beneficial to their success. Although the likelihood of this type of fraud is moderate, the significance is high because the falsified and misrepresented financial results can lead to a restatement of a company’s earnings by millions, if not billions of dollars. This negatively affects the reputation of the company as well as the users of accounting information such as shareholders, creditors, senior managers, and society in general. The online streaming platform Netflix is modeled on makes certain fraud risks like inventory low, but creates heightened risks in financial statement accounts such as revenue, assets, and liabilities. Most of their inventory consists of serialized movies, shows, and documentaries which are managed and controlled through IT Personnel and ABC Analysis. Revenue recognition may create opportunities for material misstatement due to 99% of their profit coming from monthly subscriptions. Free trials, complimentary upgrades, and plans consisting of pre-payment over 3months to a year increases risks of fraud due to deferred revenues and liabilities not being properly accounted for. Their departments are spread over 4 segments globally, and consolidating data in addition to many foreign laws, regulations, currency rates can produce opportunities and incentives to hide assets, overstate expenses and costs, or abuse deductions. Intellectual property and intangible assets like trademarks, licences, copyrights, tech trade secrets run the risk of being overvalued or amortized incorrectly. More effort and attention should be placed in these areas by external auditors for substantial and control testing. When it comes to Increasing profits, tax avoidance is usually one of the most profitable ways. But at the same time it is a huge risk and may be a considered fraud. Failure of recognizing profits, Conflict of interest, and Compliance of laws and regulations are possible fraud schemes. The main balance accounts that are affected in this process would be basically Revenue and Expenses. More cash is made and less cash has been expensed since they are avoiding the taxes. The probability of the tax avoidance happening is really low because when it comes to increasing your profits it puts a question mark and a red line on the company itself. This may affect the company as a whole for future scenarios. If the company wanted to expand in other countries it may be rejected just from this particular reason. Most Likely it won't happen, but if the company was suffering from a loss they might consider avoiding paying taxes. 1 Netflix Revenue GAAP Principles Consistency is the first principal accountants should ensure when making financial reports. The consistency principle is assigned to Netflix accounts to compare financial reports between one period to the other. The consistency principle ensures the same standards meet the reporting process. Netflix has its accountants explain and disclose the full reason why there has been a shift in the standards stated through the financial statement's footnotes. With this consistency principle comes the permanence method principle that relates. The principles are significant in determining Netflix's financial information comparison between two fiscal periods. The Materiality Principle sees Netflix accountants state every required information in Netflix financial reports. This principle requires the accountants to be fully inclusive and disclose accounting and financial data without excluding anything. This relates to the Good Faith Principle that requires honesty prevails between parties involving in financial transactions. Also, through the Continuity Principle, there is an assumption that business operations should not come to an end while valuing assets. Netflix's financial reports are not an overestimation or underestimation of Netflix’s liabilities and revenues, translating to its financial reports' realistic perspective. This principle is fact-based that is significant in loss minimization. Then there is the Regularity Principle that sees Netflix accountants stick to U.S. Generally Accepted Accounting Principles. Auditing Standards The Public Company Accounting Oversight Board has stated its auditing procedures relating to companies like Netflix for financial years that end after or on 15 December 2020 ("Auditing Standards," 2021). The first procedure is audit planning, where the auditor plans the auditing strategy that incorporates material misstatement planned responses to risk assessment procedure planning. In this procedure, the auditor is required to comply with ethics and independence requirements. The auditor plans activities considering Netflix's size and considers elements ranging from Netflix's operations relative complexity, regulatory and legal aspects Netflix is aware of, any recent changes along its financial reporting and internal control relating to Netflix's business affects Netflix's industry. The auditor performs risk assessment procedures that aim at assessing misstatement material risks. The auditor tests material misstatement risks due to fraud or error to better understand and analyze material misstatement risks that could arise from internal factors like its financial reporting control or external factors like its industry. The risk assessment procedures by the auditor are. • • • • • Getting a better view of Netflix's environment with procedures beginning from public data relating to the evaluation process, reading company transcripts, knowing Netflix's holdings and securities Getting a better view of financial reporting internal control, Analyzing past audits, audit planning activities, client retention evaluation and acceptance Analytical procedure implementation, Talking material misstatement risks with engagement team members 2 • Making inquiries with the management and audit committee regarding material misstatement risk. In the case of supplementary information, the auditor applies specific procedures. First, the auditor confirms with the management on information preparation inclusive of if it is within the policies, whether measurement methods have shifted from the previous period, make a comparison of consistency in the information with audited financial statements and how the management responds to inquiries, consider if specific written representations should be included on supplementary information, application of surplus procedures prescribed for supplementary information, inquire additionally if the current procedures may elicit the auditor's belief that the applicable guidelines have not been considered ("Auditing Standards," 2021). On AICPA standards planning an audit is the first stage to developing a strategy to complete the audit process. The planning and timing procedures give auditors an upper hand in identifying and resolving problems in time while ensuring supervision and direction of the engagement team members. The second is vital engagement team members. Their engagement is another effective procedure, although, in audit planning, this group should be involved ("Auditing Standards Board," 2021). While taking responsibility for audit performance and engagement, an engagement partner is present as the standards state. Relevant ethical requirements are complied with by the engagement team and the engagement partner, all of whom value independence. The independence guidelines require the engagement partner to access appropriate Netflix information from the company itself, evaluate and analyze relationships and circumstances that may be an independence threat. Next is identifying breaches by evaluating information to determine if the audit engagement is under threat from Netflix's procedures and policies that would be a threat to independence. Safeguards are a procedure that can eliminate threats to independence. The engagement partner takes a swift move to report to Netflix how bad the situation is for them to do and what action is necessary to take ("Auditing Standards Board," 2021). Client relationships and acceptance and audit engagement procedures are to satisfy the engagement partner. A review process sees the engagement partner's responsibility and should be satisfied with the documentation audit. Consultation is the engagement partner's responsibility, where the engagement team is to consult on complex issues and ensures the consultation procedure sees final consultation conclusions implemented. The last procedure is an engagement quality control review which a quality control engagement reviewer does before releasing the auditor's report. Company Information As of 31 December 2020, the total end-year balance was $24,996,056 compared to 31 December 2019, which was $15,635,455 (de Oliveira Dias, 2020). From an audit perspective, the risk associated with these accounts is the risk of material misstatement. Revenue accounts are at a higher risk of material misstatement given the internal control under revenue has no power to detect or prevent misstatements. There is the inherent risk where the revenue account allows misstatement before control procedures are considered. For instance, the management may overstate the revenue to attain a certain amount given the pressure they may be under or record revenue information for the wrong period. There is fraud risk for revenues where fictitious invoices may be created to fix figures, or sales that never happened may be recorded. There is also the control risk where the revenue account's material misstatement cannot be detected or prevented by the control procedures. The improper execution of these control procedures or the lack of proper control procedures is the leading cause of the control risk. Netflix revenue account was impacted in two ways. One, subscriptions increased due to social distancing. Although the 3 company predicted a decrease in subscription growth after easing social distancing guidelines, the stay-at-home policy saw a subscription growth. Over 15 million international subscribers paid for Netflix's services, opposing to Wall Street's expectation of 7 million (de Oliveira Dias, 2020). The company projected its numbers to be affected by factors like lockdowns and stay-athome rules, although it insisted that they expect a decline in viewing when people return to their everyday lives. The other factor is the international pricing affected by the strong U.S. dollar. For instance, the foreign exchange rates in April 2020 made Brazil's standard subscription plan decline to $6.50 compared to the initial $8.50 monthly. The average subscription price can offset the membership growth. 4 Reference Auditing Standards Board. AICPA. (2021). https://www.aicpa.org/research/standards/auditattest/asb.html. Auditing Standards. Public Company Accounting Oversight Board. (2021). https://pcaobus.org/oversight/standards/auditing-standards. de Oliveira Dias, M. (2020). NETFLIX: FROM APOLLO 13 TO THE CORONAVIRUS PANDEMIC. GSJ, 8(8).