An Audit Process Overview
(a)Overall Objective of the Audit
The overall objective of the general purpose financial statements audit conducted by an independent auditor is the expression of an opinion as to whether the entity’s financial statements are prepared in accordance with applicable financial reporting standards (principally the applicable financial reporting framework, two major frameworks are GAAP by AICPA and IFRS by IFAC) and applicable laws and regulations, for example companies act of a particular country.
(b) Audit Planning
Auditor prepare planning memorandum based on his preliminary understanding of the entity activities and operations and the industry in which the client’s business operates. Planning audit is required under international standards. ISA 300 deals with the responsibilities of the auditor regarding the planning an audit of financial statements.
In normal practice planning of an audit starts quite a few months before the end of accounting period to be audited. Planning helps to reduce time and cost.
Planning involves two stages.
Developing Overall Audit Strategy
Overall audit strategy in the light of factors such as
-Applicable financial reporting framework
-Location of components
-Client’s internal audit function
-Applicable laws and regulations etc
Overall audit strategy describes the scope, timing and direction of the audit.
Developing Audit Plan(Audit Programme)
Once the overall audit strategy is established the auditor prepares the audit plan as to how audit is to be conducted to address the issues highlighted in the overall audit strategy. The audit programme relates as to how to implement the audit strategy. It contains the details of the audit procedures to be performed for each segment of the audit.
(c) Gather and Evaluate Information about the Entity and Its Environment, Including Internal Controls
The auditor performs procedures to obtain detailed understanding of the entity and the environment and takes into account the features of the internal controls that are in operation in the entity. Such an understanding is important for the following reasons;
- Determining materiality level
- Assessing the desired level of audit risk
- Identifying areas of high audit risks
Internal Control Considerations
- Review entity’s internal controls relating accounting and subsystems
- Check whether the internal control procedures, processes, tasks, behaviors and management’s policies are appropriate in the circumstances.
- Satisfy himself as to whether or not internal controls are operating effectively
(d) Assess Risks of Material Misstatement
Auditors risk assessment about the entity and its operations is a matter of professional judgment of the auditor and the results the auditor obtains in the course of obtaining an understanding of the entity, its operating environment and internal controls.
The auditor also apply analytical techniques such as audit risk model to set risks of material mis-statements. A risk of material misstatement is the risk that to what extent the un-audited financial statement prepared by the client contains errors.
(e) Designing Response to Assessed Risks of material misstatements
The auditor design appropriate responses to the assessed risks of material misstatements. The purpose of such response help as to how to eliminate or reduce the audit risks involved in the financial statements to a low level that is acceptable. Response imply the nature, timing and extent of audit procedures to be performed
Response is designed for two levels
- Overall Response at Financial Statement level
- More experienced staff deployment,
- Consulting experts,
- More professional skepticism.
- At the Assertion Level – determine the approach to test assetions.
- Performing tests of controls for particular assertions
- Performing Tests of details for particular assertions
(f) Perform Audit Procedures
Perform audit Procedures to obtain audit evidence for existence, accuracy, completeness, ownership and cutoff of account balances, transactions and disclosures.
The auditor also performs further audit procedures when the auditor encounters unusual circumstances during the audit. The audit procedures includes
- Tests of Controls – check whether the controls remained in operation in the period to be audited, if so, whether such controls were operated effectively and efficiently.
- Analytical Procedures – investigations as to the relationship between transaction and events. Relationship between financial and non-financial information.
- Evaluating reasonableness of Accounting Estimates – check whether the accounting estimates made by client’s management are based on reasonable grounds and basis.
- Communication with Predecessor Auditors – this required under code of ethics and in some jurisdictions under relevant law or regulations.
- Confirmations – obtain confirmations regarding account balances or disclosures from the parties outside and inside the entity.
- Observation – judging the operational activities, visiting the plant premises etc.
- Management’s Written Representations – Obtain written representation from management as to fulfillment of their responsibilities regarding financial statements and internal controls
- Inquiry of a Client’s Lawyer – communication with entitys lawyers to obtain information of the ongoing lawsuits, contingencies affecting the entity.
(g)Documenting & Review of Audit Work
The work performed during audit is appropriately documented and reviewed.
(h)Expression of Opinion
Unmodified – unqualified & Emphasis of Matter
The auditor expresses unqualified audit opinion when the auditor has concluded that the financial statements are free from material and pervasive misstatements.
In some unusual circumstances Emphasis of matter paragraph is included in the audit report to refer to any event and to clarify that the audit opinion is not qualified in this respect.
Modified – qualified, Adverse & disclaimer
Qualified opinion is expressed when misstatements are material but not pervasive.
Adverse opinion is expressed when the auditor has drawn conclusion that misstatements are material as well as pervasive to the financial statements.
Disclaimer of opinion us expressed when the auditor is unable to found any evidence on the events that in the auditors judgment are material as well as pervasive.
(I) Required Auditor Communications
Communication with client’s management
Consider whether there is any requirement of communication to third parties.