1audit-an overview.ppt
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Introduction to Audit
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Introduction to Financial Statements
Purpose of Financial Statements
Financial statements are a structured representation of thefinancial position (Balance Sheet) and financial performance(Income Statement) of an entity.
The objective of financial statements is to provide informationabout the financial position, financial performance and cashflows of an entity that is useful to a wide range of users inmaking economic decisions.
Financial statements also show the results ofmanagementsstewardship of the resources entrusted to it.
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Introduction to Financial StatementsUser
of Financial Statements
User of the financial statements Interest of the user
Equity investors (existing and potential) They are interested whether buy, hold or sell the shares in hand
and also enable them in payment of dividends.
Loan creditors i.e, existing and potential
holders of debentures and loan stock, and
providers of short-term loans
The amount will be paid when due and for continuation of the
business.
Employees (existing, potential and past) Interested in stability and profitability for employment
opportunities, remuneration and retirement benefits.
Business contacts including customers,
trade creditors, competitors and potential
take-over bidders
Whether the payment of loan will be made in due dates and
enable sustainability of business for future business with the
enterprise.
Government, including tax authorities,government departments and local
authorities
Interested in allocation of resources and also to regulate theactivities of an enterprise and determining tax policies and as a
basis for national income.
Public, including tax payers, ratepayers and
environmental groups
Trends and recent development in the prosperity of the entity
and range of its activities.
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What is Auditing?
It is asystematic process ofobjectively
obtaining and evaluating evidence regarding
assertions about economic actions and events
to ascertain the degree of correspondencebetween these assertions and established
criteriaand communicating the results to
interested users.
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Auditing is a systematic approach
It follows an ordered and structured series of
steps.
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An audit involves obtaining and evaluating
evidence regarding assertions about economic
actions and events
Assertionsare representations made by an
auditee about economic actions and events.
An auditor determines whether these assertions
are valid.
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An audit is conducted objectively
The auditor should conduct the audit without
bias. Impartial attitude must be maintained by
the auditor when evaluating evidence as wellas formulating a report.
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ascertain the degree of
correspondence between these
assertions and established criteria
Established criteria are needed to judge the
validity of the assertions. These criteria are
important because they establish and informthe users of the basis against which the
assertions have been evaluated or measured.
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Auditors communicate the audit
results to various interested users.
The communication of audit findings is the
ultimate objective of any audit. For the audit to
be useful, the results must be communicated tointerested users on a TIMELY BASIS.
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Why do we audit them
In this section we look at the following:
Need for audit
Objective of the audit
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Why do we audit themObjective of Audit
The objective of the audit is to express an opinion onthe financial statements whether or not the financial
statements present fairly.
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Basic Accounting Principles
Over all considerations of preparing and presenting financial
statements
Fair Presentation and Compliance with IFRS. Going Concern
Accrual Basis of Accounting
Consistency of Presentation
Materiality and Aggregation Off setting
Comparative Information
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Areas of Balance Sheet
In this section we will cover the following important areasof the Balance Sheet:
Property, Plant and Equipments
Investments
Loans and Advances
Stock in Trade
Trade Debtors
Cash and Bank Balances
Deferred Liabilities
Long term Loans from Baking Companies Trade Creditors
Taxation
Contingencies and Commitments
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Assurance Engagements
Performed to enhance the credibility of information
about a subject matter by evaluating whether the
subject matter conforms in all material respects with
suitable criteria, thereby improving the likelihood that
the information will meet the needs of an intended user.
Independence is required of an auditor.
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Assurance Services
Audit
- performed to enable the auditor to express anopinion whether the financial statements are prepared,
in all material respects, in accordance with identifiedfinancial reporting framework (e.g. Philippine FinancialReporting Standards)
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Assurance Services
Review
- involves investigations of limited scope than anaudit and are undertaken for the purpose of expressing
LIMITED ASSURANCE that the statements arepresented in accordance with GAAP.
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Other Assurance Services
Examination of future-oriented financialinformation
Effectiveness of internal control
Compliance with statutory, regulatory and
contractual obligations
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Trivia Question
The review of a companys financial statements by aCPA firm:
a. Is substantially less in scope of procedures than an
auditb. Requires detailed analysis of the major accounts
c. Is of similar scope as an audit and adds similar
credibility to the statements
d. Culminates in issuance of a report expressing the
CPAs opinion as to the fairness of the statements
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Non-Assurance Engagements
Engagements that do not provide any assurance
Independence is not required of a CPA performing non-
assurance engagement.
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Non-assurance Services
Related services
- include agreed-upon procedure engagements(AUP) and compilation of financial or other
information.
Other non-assurance engagements
- preparation of income tax returns with noconclusion conveying assurance is expressed andconsulting or advisory engagements.
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Related services
Agreed-upon procedures (AUP)
- the CPA is engaged to carry out thoseprocedures to which he and the client entity and any
appropriate third parties have agreed and to report onfactual findings.
Compilation
- the CPA is engaged to collect, classify andsummarize information.
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Agreed-upon Procedures
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Agreed-upon Procedures
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Compilation
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Trivia Question
Which of the following engagements is covered by theFramework for Assurance Engagements?
a. Consulting engagements
b. Preparation of tax returnsc. Independent financial statements audit
d. Agreed-upon procedures engagement
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Standards Related to ServicesProvided by CPAs
A. Quality Control* Phil. Standards on Quality Control (PSQC1) Quality Control for Firms that Perform Audits and Review ofHistorical Information and Other Assurance and Related Services
Engagements- establishes the basic principles and essential
procedures and provides guidance regarding a firmsresponsibilities for its system of quality control for
audits and reviews historical information and otherassurance and related services engagements
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Quality Control System
A set of policies and procedures designed toprovide reasonable assurance that the publicaccounting firm complies with professionalstandards and regulatory and legal requirements.
Checklist: Leadership responsibilities for quality within the firm
Ethical requirements
Acceptance and continuance of client relationships andspecific arrangements
Human resources
Engagement performance
monitoring
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Standards Related to ServicesProvided by CPAs
B. Assurance Engagements*Phil. Framework for Assurance Engagements
- defines and describes the elements andobjectives of an assurance engagements
- although the framework serves as a basis for thestandards, it DOES NOT itself establish standards or
provide procedural requirements for the performance ofassurance engagements.
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Phil. Framework for
Assurance Engagements
Phil. Standards on Auditing (PSAs) Phil. Standards on Review Engagements (PSREs)
Phil. Standards on Assurance Engagements(PSAEs)
Practice Statements are also issued to:
Provide interpretative guidance and practicalassistance to professional accountants inimplementing standards
Promote good practice
PAPSs, PREPSs and PAEPSs
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Standards Related to ServicesProvided by CPAs
C. Related Services*Phil. Standards on Related Services (PSRSs) PSRSPs)
- defines and describes the elements andobjectives of an assurance engagements
- although the framework serves as a basis for thestandards, it DOES NOT itself establish standards or
provide procedural requirements for the performance of
assurance engagements.D. Ethics
*Code of Ethics for Professional Accountants inthe Philippines
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Assurance vs. Consulting services
ASSURANCE CONSULTING
Parties to the contract Three two
Purpose To lend credibility to
the subject matter
provided by
management in the
eyes of the intendedusers.
To be used by the
client in improving the
matter subjected to
consultancy.
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Trivia Question:
Who has the primary responsibility for the fairness ofthe representations made in the financial statements?
a. clients management
b. Audit committeec. Independent auditor
d. Board of accountancy
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Elements of an Assurance Engagement A three-party relationship
a. practitioner
b. responsible party
c. intended user
An appropriate subject matter
Suitable criteria
Criteria standards or benchmarks used to evaluate ormeasure the subject matter of an assurance engagement.
a. relevance
b. reliability
c. neutrality
d. understandability
e. completeness
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Elements of an Assurance Engagement The outcome of the evaluation or measurement of a subject matter is the
information that results from applying the criteria to the subject matter. For
example: The recognition, measurement, presentation and disclosure
represented in the financial statements (outcome) result from applying a
financial reporting framework for recognition, measurement, presentation and
disclosure, such as Philippine Financial Reporting Standards, (criteria) to an
entitys financial position, financial performance and cash flows (subject
matter).
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Elements of an Assurance Engagement Sufficient appropriate evidence
a. sufficientthe measure of QUANTITY of evidenceobtained
b. appropriate evidencemeasure of the QUALITY ofevidence obtained
Reliabil ity of evidence is inf luenced by its source and its nature. Sourcesof evidence:
a. evidence from external sources
b. evidence generated internally
c. evidence obtained directly from practitionerd. evidence in the form of documents
The practitioner should document matters that are important (auditoruses professional judgement) in providing evidence to support theconclusion expressed in the report and in providing that the assuranceengagement was performed in accordance with applicable standards.
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Elements of an Assurance Engagement Written assurance report
- contains a conclusion conveying the assuranceobtained about the subject matter
- it should include:a. title
b. addressee
c. description of the engagementd. identification of subject matter
e. statement to identify the responsible party anddescribe the practitioners responsibility
f. identification of the parties to whom the report is
restrictedg. purpose when restricted
h. identification of the standards under which theengagement was conducted
i. report date
j. name of the firm of the practitioner
k. place of issue of the report
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Trivia Question
Assurance engagements should exhibit the followingelements except:
a. Subject matter
b. Suitable criteriac. An engagement process
d. Appropriate professional fees
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Assertion-based engagements Engagements where the evaluation or measurement of the subject
matter is performed by the responsible party and the subject matterinformation is in the form of an assertion by the responsible party
that is made available to the intended users.
ASSERTIONresponsible partys conclusion about the subject
matter based on identified suitable criteria
Example:In our opinion, the responsible partys assertion that the
internal control is effective, in all material respects, based on XYZ
criteria, is fairly stated..
Or : In our opinion, internal control is effective, in all materialrespects, based on XYZ criteria.
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Direct Reporting engagements Engagements where the practitioner either directly performs the
evaluation or measurement of the subject matter or obtainrepresentation from the responsible party that has performed the
evaluation or measurement that is not available to the intended
users. The subject matter information is made available to the
intended users in the assurance report.
Example:In our opinion, internal control is effective, in allmaterial respects, based on XYZ criteria.
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Trivia Question
The level of assurance provided by a professionalaccountant on an audit report is:
a. low
b. reasonablec. moderate
d. absolute assurance
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Assurance Provided by the Practitioner
Reasonable assurance engagement
- an engagement performed to reduce assurance
engagement risk to an acceptably low level to be able to
express a positive form of conclusion.- The practitioner uses extensive evidence to
support his conclusion.
- high but not absolute assurance
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Assurance Provided by the Practitioner
Limited assurance engagement
- an engagement performed to reduce assurance
engagement risk to a level acceptable for a specific
engagement to be able to express a negative form ofconclusion.
-practitioner uses only a significant amount if
evidence as a basis for his conclusion.
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Remember these..Engagement Level of Assurance Form of Conclusion
Audit High, but notabsolute assurance
Positive
Review Limited Negative
Agreed-uponprocedures
No assurance Findings
Compilation No assurance Identification ofinformation complied
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Reports on Non-assurance Engagements A practitioner reporting on an engagement that is not an assurance
engagement within the scope of this Framework, clearly distinguishes
that report from an assurance report. So as not to confuse users, a
report that is not an assurance report avoids, for example:
Implying compliance with this Framework, PSAs, PSREs or
PSAEs.
Inappropriately using the words assurance, audit orreview.
Including a statement that could reasonably be mistaken for a
conclusion designed to enhance the degree of confidence of intended users
about the outcome of the evaluation or measurement of a subject matter
against criteria.
Exception: The practitioner and the responsible party may agree to apply
the principles of this Framework to an engagement when there are no
intended users other than the responsible party but where all other
requirements of the PSAs, PSREs or PSAEs are met. In such cases, the
practitioners report includes a statement restricting the use of the report to
the responsible party.
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Important Considerations
Ethical considerations- a practitioner should comply with the
requirements of the Code of Ethics for ProfessionalAccountants(to be thoroughly discussed in the next
chapters to follow) Engagement Acceptance
- a practitioner should accept an engagement onlyif the subject matter is the responsibility of another
party.- acknowledgement by the responsible party in
written form is secured to form part of thedocumentation
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Important Considerations
Engagement Acceptance (cont.)- a practitioner should accept an engagement only
if the subject matter is identifiable and in a form thatcan be subjected to evidence gathering procedures andthe practitioner is not aware of any reason for believingthat a conclusion about the subject matter based onsuitable criteria cannot be established
Planning
- a practitioner should plan and conduct theassurance engagement in an effective manner to meetthe objective of the engagement
- the practitioner should plan and conduct anassurance service engagement with an attitude of
professional skepticism
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Important Considerations
Planning
- a practitioner should obtain knowledge of theengagement sufficient to identify and understand theevents, transactions, and practices that may have asignificant effect on the subject matter and engagement
- a practitioner should assess whether the criteriaare suitable to evaluate the subject matter
- a practitioner should consider materiality andengagement risk when planning and conducting an
assurance engagement in order to reduce the risk ofexpressing an inappropriate conclusion that the subjectmatter conforms in all material respects with suitablecriteria
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Engagement risk It is the risk that the practitioner will express an
inappropriate conclusion that the subject matterconforms in all material respects with suitablecriteria.
(i)Inherent risk: the susceptibility of the subject matter
information to a material misstatement, assuming that there are norelated controls; and
(ii) Control risk: the risk that a material misstatement that
could occur will not be prevented, or detected and corrected, on a
timely basis by related internal controls. When control risk isrelevant to the subject matter, some control risk will always exist
because of the inherent limitations of the design and operation of
internal control; and
(iii) Detection risk: the risk that the practitioner will not
detect a material misstatement that exists.
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Other factors: Reducing assurance engagement risk to zero is very
rarely attainable or cost beneficial as a result of factors:
The use of selective testing.
The inherent limitations of internal control.
The fact that much of the evidence available to thepractitioner is persuasive rather than conclusive.
The use of judgment in gathering and evaluating evidence
and forming conclusions based on that evidence.
In some cases, the characteristics of the subject matterwhen evaluated or measured against the identified criteria.
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Materiality relevant when the practitioner determines the nature,
timing and extent of evidence-gathering procedures,
and when assessing whether the subject matter
information is free of misstatement
Professional Skepticism
- An attitude of professional skepticism means the
practitioner makes a critical assessment, with a questioning mind,
of the validity of evidence obtained and is alert to evidence that
contradicts or brings into question the reliability or documents or
representations by the responsible party.
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Important Considerations
Subsequent events
- a practitioner should consider the effect ofsubsequent events up to the date of the practitionersreport.
Using the work of an expert
- the practitioner and the expert, on a combinedbasis, possess adequate knowledge and proficiencypertaining to the subject matter
- things to consider by the practitioner:
a. professional competence of the expertsb. reasonableness of assumptions used, methods and data
c. reasonableness and significance of the experts findingsin relation to the objective of the engagement and the conclusionon the subject matter
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Trivia Question
An assurance engagement should involve three separate parties. Which ofthe following statements concerning these parties is incorrect?
a. The responsible party and intended users may be from different
entities or the same entity.
b. The term practitioner as used in the Framework for Assurance
Engagements is broader than the term auditor as used in PSAs andPSREs.
c. In an assertion based engagement, the responsible party is responsible
for the subject matter information (the assertion) and may be
responsible for the subject matter
d. An entitys senior management (the responsible party) may engage a
practitioner to perform an assurance engagement on a particular
aspect of the entitys activities that is the immediate responsibility of
a lower level of management (the intended user)
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Trivia Question
In an assurance engagement, the person or class of person forwhom the professional accountant prepares the report for a
specific use or purpose is the
a.Intended user
b.Responsible party
c.Management
d.client
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Trivia Question
What type of assurance engagement is involved when thepractitioner expresses a positive form of conclusion?
a.Limited assurance engagement
b.Positive assurance engagement
c.Reasonable assurance engagement
d.Absolute assurance engagement
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Trivia Question
In assertion-based assurance engagements, the evaluation ormeasurement of the subject matter against criteria is performed
by the
a.Intended users
b.Responsible party
c.Practitioner
d.AASC
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Trivia Question
Which of the following standards are to be applied, asappropriate, in the audit of historical financial information?
a.PSREs
b.PSAEs
c.PSRSs
d.PSAs
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Trivia Question
Which of the following standards are to be applied tocompilation engagements, engagements to apply agreed-upon
procedures to information and other related services
engagements as specified by the AASC?
a.PSRSsb.PSAs
c.PSAEs
d.PSREs
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Trivia Question
These statements are issued by the AASC to provideinterpretative guidance and practical assistance to auditors in
the implementation of PSAs and to promote good practice
a.PREPSs
b.PAPSs
c.PAEPs
d.PRSPSs
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Trivia Question
What assurance is provided by the auditor in an agreed-uponprocedures engagement?
a.Reasonable
b.Absolute
c.Moderate
d.No assurance
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Trivia Question
Which of the following least likely indicate an objective of anassurance engagement?
a.It is intended to enhance the credibility of information about a
subject matter
b.It is intended to prevent the issuance of materially misleadinginformation
c.It is intended for a professional accountant to express a conclusion
that provides the intended users with a level of assurance about the
subject matter.
d.It is intended to provide a level of assurance to be issued by a
professional accountant about the information of being in
conformity, in all material respects, with suitable criteria.
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Trivia Question
Which of the following statements are correct?
I. The subject matter of an assurance engagement may take
any forms.
II. Internal control may be the subject matter of an assuranceengagement.
a. I only
b. II onlyc. Both I and II
d. Neither I nor II
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Trivia Question
Which of the following statements is false?a. Evidence is more persuasive when items of evidence from
different sources or of different nature are consistent.
b. In case of evidence from different sources that are consistent,
the practitioner may obtain cumulative degree of confidence thatis higher than from items of evidence considered individually
c. When evidence obtained from one source is inconsistent with
that obtained from another, the practitioner refrains the
gathering of further evidence.
d. It is generally more difficult to provide assurance on subject
matter covering a period of time than on subject matter covering
a point in time.
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Trivia Question
Which of the following statements is true?a. The extent of documentation is not within the discretion of the
practitioner.
b. It is neither necessary nor practical to document every matter the
practitioner considers.c. It is necessary but not practical to document every matter the
practitioner considers.
d. Documentation includes a record of the practitioners reasoning
on all matters considered by the practitioner.
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Trivia Question
The following should be included in the practitioners reportexcept one:
a. Identification of the parties to whom the report is restricted
b. A statement to identify the responsible party and described the
practitioners responsibilitiesc. Report date
d. Name of the firm or the practitioner
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Trivia Question
Which of the following statements is true?a. A practitioner should assume that the responsible party is
dishonest.
b. The practitioner should assume that the responsible party has
unquestioned honestyc. Both A and B
d. Neither A nor B
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Any QuestionsThank You