OVERVIEW OF THE AUDIT ROCESS AND PRELIMINARY ACTIVITITES
AUDIT PROCESS – General Approach
Entity prepares
The auditor The auditor
and presents Auditor expresses
performs audit gathers audit
financial an audit opinion
procedures evidence
statements
1. Entity prepares and presents financial statements – serves as assertions
Classes of transactions and events – normally pertains to income statement accounts
- Completeness, Occurrence, Cut-off, Accuracy, Classification
Account balances – pertains to balance sheet accounts
- Valuation and allocation, Existence, Rights and obligations, Completeness
Presentation and disclosure – notes to financial statements
- Completeness, Occurrence, rights and obligations, Classification and understandability,
Accuracy and valuation
2. Auditor performs audit procedures – should enable the auditor to gather SAAE about the assertion
Risk Assessment Procedures - performed
to obtain understanding and identify &
assess ROMM present
Test of Controls - designed to evaluate
Major Audit operating effectiveness of controls in
Procedures preventing, detecting, and correcting MM
Substantive Procedures - designed to detect
material misstatements
Audit Procedures
* Test of Details & Substantive Analytical
Procedures
Specific Audit Inspection, Observation, Inquiry,
Procedures Confirmation, Recalculation,
Reperformance, Analytical Procedures
3. Auditor gathers audit evidence – will prove / disprove the validity of management assertions
4. Auditor expresses audit opinion – written audit report containing a conclusion or an opinion
regarding the fairness of preparation and presentation of the financial statements
Unmodified – FS are prepared in accordance with FRF
Modified – qualified, adverse, and disclaimer
o Qualified and Adverse – FS as a whole are not free from material misstatements
o Qualified and Disclaimer – the auditor is unable to obtain sufficient appropriate
audit evidence conclude that the FS are free from material misstatements
Sub-phases of audit process
Investigative Phase – performance of audit procedures ancd gathering of audit evidence
Reporting Phase – expression of opinion, preparation of report, and communication of results to
different users of the audited financial statements
AUDIT PROCESS – More Detailed Approach
Completing the Audit Issuance of Audit Report
(Assist the auditor in (To communicate the
START assessing conclusion conclusions reached by the
reached is consistent with auditor to various intended
evidence gathered) users)
Preliminary Engagement
Evidence-gathering Post-audit Responsibilities
Activities
(Ascertain the degree of (Assess and evaluate the
(To minimize the likelihood
correspondence between quality of services delivered
of being associated wto a
FS and financial reporting to identify areas of
client whose management
framework) improvement)
lacks integrity)
Planning the Audit Study & Evaluation of
(Assess the different risks Internal Control
associated with audit to (Establish a basis for END
determine nature, timing, reliance on internal
and extent of FAP) controls)
PRELIMINARY ENGAGEMENT ACTIVITIES
Considerations in Accepting an Engagement:
Competence
Independence
Ability to serve the client properly
Integrity of the prospective client’s management
1. Obtain a preliminary knowledge of the client’s business and industry to determine whether the
auditor has the degree of competence required by the engagement
- To determine whether the auditor has the degree of competence required
2. Consider whether there are any threats to the firm’s independence and objectivity, if so, whether
adequate safeguards can be established
- Independence in mind and in appearance must be considered
3. Evaluate the firm’s ability to serve the prospective client
- Consider the firm’s resources
4. Evaluate auditability
- Accounting records, documents and other supporting information must be made
available to the auditor to avoid significant doubts about its auditability
5. Investigate the integrity of the prospective client’s managements
- Consider whether acceptance or continuance of an engagement would create any
threats to compliance with the fundamental principles
- Matters to be discussed with the previous auditor:
o Reasons for change in auditor
o Integrity of the management
o Disagreements between the previous auditor and the management
6. Agree on the terms of the engagement and prepare an engagement letter
- After accepting the engagement, the auditor and management must agree on the
terms of engagement
PRELIMINARY ENGAGEMENT ACTIVITIES
To accept or continue the engagement only when the basis upon which it is to be performed has
been agreed through the following:
o Establishing whether the preconditions for audit has been agreed
Use by management of an acceptable FRF in preparation of the FS
Agreement of management to the premise on which an audit is conducted
Limitation on Scope Prior to Audit Engagement Acceptance – if imposed by the
management or those charged with governance, the auditor shall not accept such
o Confirming that there is a common understanding between the auditor and management on
the terms of audit engagement (Agreeing on the terms of audit engagement)
- Must be recorded in an audit engagement letter or other suitable written agreement
To avoid misunderstandings with respect to the audit
Forms as a written contract between the auditor and management
Contents:
o Objective & scope of the audit
o Responsibilities of the auditor
o Responsibilities of the management
o Identification of applicable financial reporting framework
o Reference to the expected form and content of reports to be issued
Audit of Components
- When an auditor audits a parent entity and its subsidiary, branch, or division
- Factors affecting the decision whether to send a separate engagement letter:
o Who appoints the component auditor
o Legal requirements in relation to audit appointments
o Degree of ownership
o Whether a separate auditor’s report is to be issued
o Degree of independence of component’s management
Recurring Audits – auditor does not normally send a new engagement letter except:
Indication that the management misunderstands the objective and scope of audit
Any revised or special terms of the engagement
Recent change of management, BOD or ownership
Significant change in nature or size of client’s business
Change in legal or regulatory requirements
Change in financial reporting framework adopted in the preparation of FS
Change in other reporting requirements
ACCEPTANCE OF A CHANGE IN ENGAGEMENT (to a lower level of assurance)
- Auditor shall not agree to changes when there is no reasonable justification of doing so
Circumstances Reasonably justifiable?
Change in circumstances affecting the need for the service
Misunderstanding as to the nature of the audit or services originally requested
Restriction on the scope of engagement
If the change relates to information that is incorrect, incomplete, or otherwise
unsatisfactory
Auditor is unable to obtain sufficient appropriate audit evidence regarding
assertions
