Audit Process

Overview of the
Financial Statement Audit

Process
People forget how fast you did the job, but they remember how
you did it.
–Howard W. Newton
Overall Objective of the
Independent Auditor
To obtain reasonable assurance

about whether the financial
statements as a whole are free
from material misstatement,
whether due to fraud or error
Preparation of Financial
Statements
Financial statements subject to
audit are those of the entity,
prepared and presented by
management of the entity with
oversight from those charged
with governance.
Preparation of Financial
Statements
Responsibilities of Management
Identify the financial reporting
framework to be used
Prepare and present the FS in
accordance with the financial
reporting framework
Design, implement, and maintain
internal control relevant to the FS
preparation
Select and apply appropriate
accounting policies
Making accounting estimates that are
Basic Concepts Underlying a
Financial Statement Audit
Auditor Independence
Professional skepticism
Conduct and Scope of an Audit in
Accordance with PSAs
Audit Evidence and Financial Statement
Assertions
Audit Materiality
Audit Risk
Professional Judgment
Inherent Limitations of an Audit
Auditor Independence
The independence of the auditor
from the entity whose financial
statements are subject to audit
safeguards the auditor’s ability to
form an audit opinion without
being affected by influences that
might compromise that opinion.
Professional Skepticism
An auditor makes a critical
assessment, with a questioning
mind, of the validity of audit
evidence
Conduct and Scope of an Audit
Conduct of an Audit
- should be done in accordance with
PSAs
- PSAs contain basic principles and
essential procedures
Scope of an Audit
-refers to the audit procedures that, in
the auditor’s judgment and based on
the PSAs, are deemed appropriate in
the circumstances to achieve the
objective
Audit Evidence and
Financial Statement Assertions
“An audit involves performing

procedures to obtain audit evidence
about the amount and disclosures in the
financial statements. The procedures
selected depend on the auditor’s
judgment, including the assessment of
the risk of material misstatement of the
financial statements, whether due to
fraud or error.”
Audit Evidence and
Audit Evidence
- all the information used by the
auditor in arriving at the conclusions
on which the audit opinion is based
- can come from accounting records
and other information (minutes of
meetings, confirmations from 3rd
party, analysts’ reports, benchmark
data, controls manuals, etc.)
Audit Evidence and
Audit Procedures According to
Purpose
Categor Description/Purpose
y
Risk Used for obtaining an understanding of
assessm the client entity and its environment,
ent including internal control. Performed
procedur during audit planning and internal
es control phases of an audit
Test of Used to test the operating effectiveness
controls of controls in preventing, detecting, and
correcting material misstatements
Substanti Used to detect material misstatements
ve tests in account balances, classes of
transactions and disclosures
Audit Evidence and
Assertions about classes of

transactions and events for the
period under audit
 Occurrence
 Completeness
 Accuracy
 Cut-off
 Classification
Audit Evidence and
Assertions about account balances

 Existence
 Rights and obligations
 Completeness
 Valuation and allocation
Audit Evidence and
Assertions about presentation and

disclosure
 Occurrence and rights and
obligations
 Completeness
 Classification and
understandability
 Accuracy and valuation
Audit Materiality
Steps in Applying Materiality
During planning
1. Establish a preliminary judgment
about materiality
2. Determine tolerable misstatement
At audit completion
3. Estimate likely misstatements and
compare the totals to the preliminary
judgment about materiality
Audit Materiality
Materiality criteria commonly used
by practicing auditors are:
 percentage effect on net income
before taxes
 percentage effect on total
revenues
 percentage effect on total assets
Audit Materiality
Tolerable misstatement
- the amount of planning
materiality that is allocated to an
account balance or class of
transactions
Audit Risk
Audit Risk
=
Inherent Risk x Control Risk x
Detection Risk
Audit Risk
Effect of Audit Risk on Audit
Procedures
The lower the acceptable detection
risk, the greater the amount of
audit procedures to be performed
in order to reduce the chances of
not detecting misstatements
Audit Risk
The Relationship Between Audit
Risk and Materiality
The higher the materiality, the

lower the audit risk and vice
versa.
Professional Judgment
- Application of relevant knowledge
and experience, within the
context provided by auditing,
accounting, and ethical standards

Audit Process

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Audit Process

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Overview of the

Financial Statement Audit

To obtain reasonable assurance

“An audit involves performing

Assertions about classes of

Assertions about account balances

Assertions about presentation and

The higher the materiality, the

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