Overview of an audit of financial statements

An Audit of financial statements usually follows a logical sequence of major steps or

phases(five), theses are:
1- understanding the client .
The auditor must obtain or update an understanding of the client's operations
and circumstances including management policies , the company's position in
its industry and the economy , and its legal obligations .
2- understanding the internal control structure .
obtain an understanding of the internal control structure , which consists of
the following five components :
* Control environment .
* Risk assessment .
* Information and communication .
* Control activities .
* Monitoring .
 Overview of an audit of financial statements

3- Tests of transaction classes.

The next step is application of audit procedures to the accounting
record transactions . the auditor examines the support for them
with procedures such as tracing , vouching , and recompilation .
4- Direct test of balances:
This step consists of substantive tests of balances in the
accounting records. The tests arc of two types analytical
procedures and tests of details .
5- Completion and review .
The final step in the audit consists of following up issue raised in
earlier step certain procedures , such as review of working
papers .
 Work papers
The auditor must prepare and maintain audit work papers
, but the specific form and content of them is determined
by the circumstances of the particular engagement .
The function of work papers:
1. Work papers are a direct aid in the conduct and
supervision of the audit.
2. Work papers provide the principal support for the
auditor's opinion , including that the audit was
conducted in accordance with generally accepted
auditing standards.
 The contents and requirements of
work papers
There are two main divisions of audit work papers, the permanent
audit file and the current audit file :
The permanent file : are those papers which are continuing interest
from year to year.
Examples of permanent files:
1- Excerpt of the corporate charter or articles of copartnership
2- Charts of accounts and accounting procedure manuals.
3- Documentation of the internal control structure , such as flowchart
and notes on the accounting system and related controls from prior
audits.
4- Continuing analyses of fixed assets.
5-Terms of capital stock and bond issues.
6 - Organization charts and excerpts from job manuals.
7- Excerpts of pension plans , patent agreements , profits sharing
plans , labor contracts, and other, contracts .
 The contents and requirements of
work papers
The current file
information included contains all papers accumulated during the current year's
audit.
Examples of current files:
1- Original draft of the report
a - The financial statements, Draft the auditor's opinion.
2- A documentation of the auditor's conclusions about the assessed level of control
for the risk of current period under audit.
3- The audit plan and program.
4- Work papers concerning general matters, such as:
a- Excerpts from minutes of the meetings of the board of directors.
b- Notes on conferences with client officers and employees.
c- Excerpts from new corporate bylaws and important contracts
5- Working trial balance.
6- Adjusting and reclassification journal entries.
7- Lead and supporting schedules procured for all accounts from cash through
operations.
 General requirements of working papers
1. The engagement has been planned (such as by
use of audit programs) and the work of any
assistants has been supervised and reviewed .
2. An understanding of the internal control
structure has been obtained in planning the
audit and in determining the nature , timing ,
and extent of tests to be performed .
3. The auditing procedures followed and testing
performed in obtaining sufficient competent
evidential matter indicate observance of the
third standard of field work .
 The purposes of working papers
Planning : auditors document their planning
activities in working papers to provide evidence
that planning was adequately performed.
Documentation: document the audit evidence
accumulated during the audit and the auditor's
conclusions.
 The Objectives of working papers
• Aid the auditor in providing reasonable
assurance that an adequate audit was conducted
in accordance with generally accepted auditing
standards .
• Provide an important source of information to
assist the auditor in deciding the appropriate
audit report
• useful for evaluating the adequacy of audit scope
and the fairness of the financial statements.
 Essential terms
Acceptable audit risk : is a measure of how willing the auditor is to accept that
the financial statements may be materially misstated after the audit is completed
and an unqualified opinion has been issued.
Bylaws : the rules and procedures adopted by a corporation's stockholders,
including the corporation's fiscal year and the duties at powers of its officers.
Corporate charter : a legal document granted by the state in which a company is
incorporated that recognizes a corporation as a separate entity; it includes the
name of the corporation the date of incorporation, capital stock the corporation
is authorized to issue, and the types of business activities the corporation is
authorized to conduct .
.Corporate minutes : the official record of the meeting or a corporation's board of
directors and stockholders, in which corporate issues such as the declaration of
dividends and the approval of contracts are documented
Engagement letter : and agreement between the CPA firm and the client as to the
terms of the engagement for this conduct of the audit and related services.
Inherent risk : a measure of the auditor's assessment of the likelihood that there
are material misstatements in a segment before considering the effectiveness of
internal control.
 Essential terms
Current files : all working papers applicable to the year under audit.
Permanent files : auditors' working papers that contain data of historical or continuing nature
pertinent to the current audit such as copies of articles of incorporation bylaws bond
indentures, and contracts.
Preplanning the audit : involves deciding whether to accept of continue doing the audit for the
client, identifying the client's reasons for the audit, obtaining an engagement
Related party : affiliated company, principal owner of the Client Company, or ally other party
with which the client deals Where one of they parties can influence the management of
Operating policies of the other.
Deleted party transaction: any transaction between the client and a related party.
Supporting schedule working paper— detailed schedule:
Prepared by the client or the auditor in support of specific amounts on the financial statements.
Risk marks : symbols used on a working paper that provide Additional formation or details
of audit procedure Performed.
Working papers : the records kept by the auditor of the procedures applied, the tests
performed, the information Obtained, and the pertinent conclusions reached in the
Engagement.
Working trail balance : a listing of the general ledger account and their year-end balances.