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The Audit Process

The audit process involves 4 main phases: 1) pre-engagement activities to identify potential issues, 2) planning to establish strategy and assess risks, 3) evidence gathering through procedures like confirmation, observation, and documentation, and 4) reporting with the auditor's opinion on whether the financial statements fairly represent the entity's financial position. The primary purpose of audit procedures is to obtain sufficient evidence to support the audit opinion.

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71 views

The Audit Process

The audit process involves 4 main phases: 1) pre-engagement activities to identify potential issues, 2) planning to establish strategy and assess risks, 3) evidence gathering through procedures like confirmation, observation, and documentation, and 4) reporting with the auditor's opinion on whether the financial statements fairly represent the entity's financial position. The primary purpose of audit procedures is to obtain sufficient evidence to support the audit opinion.

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The Audit Process

The audit process starts when a reporting entity engages the


services of an independent auditor for an independent examination
of its financial statements and concludes when an auditor issues
an audit opinion based on the assessment of the evidence
gathered in the course of the conduct of audit procedures and
assessment of evidence gathered therefrom.

The following are the major phases in a financial statement audit:

a) pre-engagement activities
b) audit planning and evaluation of internal control
c) evidence gathering
d) reporting

Preliminary engagement activities assist the auditor in identifying


and evaluating events or circumstances that may adversely affect
the auditor’s ability to plan and perform the audit engagement.
Such activities help ensure that:

a) There are no issues with client management’s integrity that


may affect the willingness to continue the engagement
b) The auditor maintains the necessary independence and
ability to perform the engagement
c) There is no misunderstanding with the client as to the terms
of the engagement

Audit planning involves establishing the overall audit strategy for


the engagement and developing an audit plan, in order to reduce
audit risk to an acceptably low level so that the audit will be
performed in an effective manner. It includes the following tasks:

1) obtaining and understanding of the client, its business,


industry and accounting policies;
2) obtaining an understanding of the client’s internal control
system;
3) assessing materiality and audit risk;
4) identifying audit objectives;
5) determining whether reliance can be placed on certain
controls in the system;
6) determining the nature, extent and timing of substantive tests
to be performed; and
7) designing and finalizing the audit program

Most of the auditor's work in forming the auditor's opinion consists


of obtaining and evaluating audit evidence. The auditor shall
conclude whether sufficient appropriate audit evidence has been
obtained based on his professional judgment.

• Audit evidence refers to all the information used by the auditor


in arriving at the conclusions on which the audit opinion is
based. Thus, audit evidence supports the opinion and the
auditor's report.

• Sometimes called as evidential matter, it is the main


output/product of performing audit procedures.

Audit Evidence Relationship with Assertions: Audit evidence


comprises both:

a) Information that supports and corroborates management's


assertions, and
b) Information that contradicts such assertions.

Audit Opinion and Audit Report: Audit opinion:

• In a financial statement audit, the auditor obtains


sufficient appropriate audit evidence to be able to draw
conclusions on which to base that opinion. The auditor’s
opinion is on the fairness of the audited financial
statements.
• The auditor's opinion helps establish the credibility of
the financial statements.

Auditor’s report:

• the primary product of an audit engagement


• the end product of the audit process
• a written report that contains auditor’s opinion about the
fairness of the FS
• the medium through which the auditor communicates
the results of his or her work

Audit documentation

The auditor should prepare, on a timely basis, audit documentation


that provides:

a) A sufficient and appropriate record of the basis for the


auditor’s report; and

b) Evidence that the audit was performed in accordance with


PSAs and applicable legal and regulatory requirements.

Audit documentation:

• It refers to the documentation of audit evidences


collected and evaluated by the auditor to support the
audit opinion.
• The records kept by the auditor that documents:

a) The procedures applied

b) The tests performed

c) The information or evidenced obtained, and

d) The conclusions the auditor reached in the engagement

• Also called “working papers” or “workpapers” or audit


file 9

Primary Purpose of Audit Procedures:

Audit procedures are performed to gather necessary (not all)


corroborative evidence to achieve audit objectives in order to result
to sufficient appropriate audit evidence on the fairness of the
presentation of the entity’s financial statements.

Audit procedures are the means for obtaining sufficient appropriate


audit evidence to satisfy financial statement assertions and to
support audit opinion on the fairness of the financial statements.
They are the detailed instructions for the collection of a particular
type of evidence that is to be obtained during the audit. Since audit
procedures are performed to verify management assertions, they
would differ depending on the particular assertion or account
audited.

The following are the most common audit procedures applied by


the auditor:
• Confirmation – obtaining written statements from a third
party;
• Physical count and observation;
• Inquiry – obtaining written and oral information from
management, employees and others;
• Documentation – obtaining internal evidence and
external evidence (for example: contracts, minutes of
meetings, vouchers, bank statements, etc);
• Comparisons – establishing trends and valid
relationships of information;
• Recalculations – establishing correctness of account
balances; and
• Mechanical tests of data – verifying mathematical
accuracy of accounting data (tracings, footings, and
cross-footings).

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