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Auditing Process

The document defines auditing and describes the basic phases of an audit: pre-engagement activities, planning activities, evidence gathering, and reporting. It discusses key considerations and responsibilities in the pre-engagement phase for both the auditor and client. This includes assessing independence and competence, understanding management's responsibilities, and establishing the terms of the audit engagement through an engagement letter. The document also covers recurring audits, accepting changes to the engagement, and the importance of planning in the audit process.

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Juliana Cheng
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150 views

Auditing Process

The document defines auditing and describes the basic phases of an audit: pre-engagement activities, planning activities, evidence gathering, and reporting. It discusses key considerations and responsibilities in the pre-engagement phase for both the auditor and client. This includes assessing independence and competence, understanding management's responsibilities, and establishing the terms of the audit engagement through an engagement letter. The document also covers recurring audits, accepting changes to the engagement, and the importance of planning in the audit process.

Uploaded by

Juliana Cheng
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Auditing Auditing, defined.

Considering Performing
Accepting an Audit Completing Issuing a
the Internal Substantive
Engagement Planning the Audit Report
Control Test

The accumulation and evaluation of evidence about information to


determine and report on the degree of correspondence between the
information and established criteria. Auditing should be done by a
competent, independent person.

 Information – financial statement; assertions


 Established criteria – PFRS, PAS
 Auditors – competent and independent

4 Basic Phase of Auditing


1. Pre-engagement activities
2. Planning activities
3. Evidence gathering
4. Reporting

PRE-
ENGAGEMENT Pre engagement Activities
ACTIVITIES  “accept or continue?”
 Two-fold assessment
1. On the part of the auditor
2. On the part of the client

Consideration: On the Part of the Auditor Considerations


Auditor’s part - Relevant ethical requirement satisfied
1. Independence – Code of Ethics
2. Competence – PSQC

Characteristics of - Characteristics of Engagement – WARAS


Engagement W – written report
(WARAS) A – appropriate subject matter
R – rational purpose
A – Access to sufficient appropriate evidence
S – suitable criteria
Auditor’s - On the Part of the Auditor
Responsibility
Responsibilities/ Objectives – PSA 200
1. To obtain reasonable assurance about whether the financial
statement as a whole are free from material misstatement,
whether due to fraud or error.

Note: Not absolute but only reasonable. High, not absolute.

2. To report on the financial statements, and communicate as


required by the PSAs.

Note: There are only 2 responsibilities mentioned in PSA 200.

On the Part of the Client


- Integrity of management
Consideration: How to determine integrity?
Client’s Part 1. Communicate to predecessor auditor; or
Note: the consent of the management before communication
takes place
2. Check other relevant source of information (e.g. website,
news, articles)

- Responsibilities of the management that must be clear to them –


PEPU
Management/
Client P – preparation of the financial statement
Responsibility E – establishing and maintaining internal control
(PEPU) P – provide access to all information
U – unrestricted access to persons within the entity

Note: Any of the responsibilities mentioned above that the


management cannot perform is a consideration before you accept or
continue a relationship with a client.

COMMON UNDESRTANDING
Audit - The agreed term would need to
Engagement be recorded in an AUDIT ENGAGEMENT
Letter LETTER or other suitable form of contract.

- Engagement letter confirms:


1. The auditor’s acceptance of the appointment
2. The objective and scope of the audit
3. The extent of the auditor’s responsibilities to the client;
and
4. The form of any reports

Contents of the
Audit
Engagement - Contents of Audit Engagement Letter – RORARO
Letter R – responsibilities of auditor
(RORARO) O – objective and scope of the audit
R – responsibilities of the management (PEPU)
A – applicable financial reporting framework (AFRF) - PFRS
R – reports – expected form and content
Factors that O – other relevant information (e.g. audit fee, billing information)
influence whether
to send a When Parents, Subsidiary, Branch and Division Have Same Auditor
separate When the auditor of the parent entity is also the auditor of its subsidiary,
engagement branch or division (components), the factors that influence the decision
letter when whether to send a separate engagement letter to the components include:
parents,
subsidiary and  Who appoints the auditor of the component.
division shared  Whether a separate audit report is to be issued on the component.
the same auditor  Legal requirements.
 The extent of any work performed by other auditors.
 Degree of ownership by parent.
 Degree of independence of the component’s management.
Recurring Audit

Recurring Audits
On recurring audits, the auditor should consider whether circumstances
require the terms of the engagement to be revised and whether there is a
need to remind the client of the existing terms of the engagement.
The auditor may decide not to send a new engagement letter each period.
However, the following factors may make it appropriate to send a new
letter:

 Any indication that the client misunderstands the objective and


scope of the audit.
 Any revised or special terms of the engagement.
 A recent change of senior management, board of directors or
ownership.
Acceptance of a  A significant change in nature or size of the client’s business.
change in  Legal requirements
engagement
Acceptance of a Change in Engagement
A request from the client for the auditor to change the engagement may
result from:
1. a change in circumstances affecting the need for the service;
2. a misunderstanding as to the nature of an audit or related service
originally requested; or
3. a restriction on the scope of the engagement, whether imposed by
management or caused by circumstances.

Note: Items 1 and 2 would ordinarily be considered a reasonable basis for


requesting a change in the engagement. In contrast a change would not
If auditor agreed be considered reasonable if it appeared that the change relates to
to a change of information that is incorrect, incomplete or otherwise unsatisfactory.
the engagement
If the auditor agreed to a change of the engagement:
 the auditor and the client should agree on the new terms;
 the report issued would be that appropriate for the revised terms
of engagement; and
 in order to avoid confusing the reader, the report would not
include reference to:
a. The original engagement; or
b. Any procedures that may have been performed in the
original engagement, except where the engagement is
changed to an engagement to undertake agreed-upon
If auditor in procedures and thus reference to the procedures
unable to agree performed is a normal part of the report.
to a change of
engagement If the auditor is unable to agree to a change of engagement and is not
permitted to continue the original agreement:
 the auditor should withdraw; and
 consider whether there is any obligation, either contractual or
otherwise, to report to other parties, such as the board of directors
or shareholders, the circumstances necessitating the withdrawal.
PLANNING
ACTIVITIES

Planning Activities
“If you fail to plan, you plan to fail”

“Planning” means developing a general strategy and a detailed approach


for the expected nature, timing and extent of the audit. The auditor plans to
perform the audit in an efficient and timely
manner.

GOAL OF PLANNING: To establish OVERALL


AUDIT STRATEGY and developing an AUDIT PLAN

Purposes of Planning:
1. To enable the auditor to obtain sufficient appropriate evidence
2. To help keep audit cost reasonable (because the failure to
appropriately plan might result to inefficiency. Thus, ballooning or
bubbling up the audit cost.
3. To avoid misunderstandings with the client

Extent of Planning
The extent of planning will vary according to the following:
1. Size of the entity;
2. Complexity of the audit; and
3. Auditor’s previous experience with the entity and knowledge of the
business. (so, it is easier if recurring).

4 MAIN ACTIVIES IN PLANNING – UPAD


U – understanding the business and industry, including internal
control
P – perform preliminary analytical procedures
A – assess risks and set materiality
D – develop overall audit strategy and audit plan

1. U – understanding the business and industry, including internal


control
 Affects business risk and risk of material misstatement in
the FS
 Business Risk – risk that the client will fail to meet
its objective (could be a going-concern issue)
 Risk of material misstatement
 Inherent risk

Control risk


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