STUDY UNIT 8: THE AUDIT PROCESS: AN OVERVIEW
THE DIFFERENT STAGES OF THE AUDIT PROCESS
1. Engagement activities
2. Planning (overall financial statement level & assertion level)
3. Obtaining audit evidence (control tests & substantive tests)
4. Finalization & reporting
OVERVIEW
ENGAGEMENT ACTIVITIES
Objective:
- Determine the acceptability of new clients, or to consider the viability to carry on as auditors for
existing clients
Procedures and considerations:
1. Client investigation for new and existing clients:
- Consider:
- The independence of the auditor
- The integrity (risk) of the client and its management and the potential risk of
material misstatement
- Changes in the entity for existing clients
- Communication with predecessor auditors
2. Determine the skills and competence requirements for the engagement:
- Knowledge and experience requirements for the engagement
- Skill, experience and expertise required for the audit
- Experts required
- Sufficient audit staff, timing of work performed
3. Establish the terms of the engagement in an engagement letter
PLANNING
OVERALL PLANNING FINANCIAL STATEMENT LEVEL
• Understand the entity, its environment, and applicable financial reporting framework.
• Obtain an understanding of the entity’s internal controls, including the information system (IT)
• Identify and assess the risk of material misstatement (RMM) at the overall financial statement level
• Determine/calculate materiality
• Planning materiality
• Performance materiality for significant classes of transactions, accounts, and disclosures.
• Overall audit response:
Identify significant classes of transactions, Formulate the overall audit response
accounts, and disclosures, that are significant • General audit approach
by: • Areas of specific risk and focus that require
specific audit attention
Nature and inherent Quantitatively (R) • Direction and control for the audit and
risk engagement team (Admin)
DETAILED PLANNING AT ASSERTION LEVEL
For individual significant accounts:
❑ Perform risk assessment procedures to assess the risk at assertion level
▪ Inherent risk
▪ Identify controls to address the inherent risk
❑ Design further audit procedures whose nature, timing, and extent are based on assessed risk and are
responsive to the assessed risk
❑ Allocation of resources and coordination, and control of the audit of the specific account
❑ Perform audit procedures
For non-significant accounts:
❑ Verify through substantive analytical review procedures
OBTAINING AUDIT EVIDENCE
Objective:
- The auditor should obtain appropriate and sufficient audit evidence on which to base the audit
opinion
Methods of obtaining audit evidence:
The auditor obtains audit evidence:
- In some circumstances, through test of controls only
- In some circumstances, substantive procedures only
- In some circumstances, through a combination of tests of controls and substantive procedures
FINALISATION & REPORTING
- Overall review of the financial information, and evaluation of the audit evidence
- Conclude and formulate an audit opinion
- Reporting
What opinion do we have over Did we get enough audit Have errors been corrected?
FSs? evidence to conclude if
(Qualified or unqualified) significant accounts (i.e.
Revenue amount) is not
materially misstated?
