OVERVIEW OF

THE AUDIT
PROCESS
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1.
Nature of
Auditing
“ AUDITING
the accumulation and evaluation of
evidence about information to
determine and report on the degree of
correspondence between the
information and established criteria.
Auditing should be done by a
competent, independent person.
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THE AUDIT PROCESS

PRE-
ENGAGE- PLANNING EVIDENCE REPORTIN
MENT ACTIVITIES GATHERING G
ACTIVITIES
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2.
Pre-Engagement
Activities
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PRE-ENGAGEMENT
ACTIVITIES
▸ “Accept or Continue?”
▸ Two-fold assessment
▸ On the part of the auditor
▸ On the part of the client
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PRE-ENGAGEMENT
ACTIVITIES
▸ On the part of the auditor:
▸ Relevant ethical requirements satisfied
▸ Independence – Code of Ethics
▸ Competence – PSQC
▸ Characteristics of engagement – WARAS
▸ Written report
▸ Appropriate subject matter
▸ Rational purpose
▸ Access to sufficient appropriate evidence
▸ Suitable criteria
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PRE-ENGAGEMENT
ACTIVITIES
▸ On the part of the auditor:
▸ Responsibilities/Objectives – PSA 200
▸ To obtain reasonable assurance about whether
the financial statements as a whole are free
from material misstatement, whether due to
fraud or error
▸ To report on the financial statements, and
communicate as required by the PSAs
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PRE-ENGAGEMENT
ACTIVITIES
▸ On the part of the client:
▸ Integrity of management
▸ Predecessor auditor
▸ Other relevant source of information
▸ Responsibilities – PEPU
▸ Preparation of the financial statements
▸ Establishing and maintaining internal control
▸ Provide access to all information
▸ Unrestricted access to persons within the
entity
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PRE-ENGAGEMENT
ACTIVITIES
▸ Common Understanding or
Agreement
▸ Audit Engagement Letter – RORARO
▸ Responsibilities of auditor
▸ Objective and scope of the audit
▸ Responsibilities of management
▸ Applicable financial reporting framework
▸ Reports – expected form and content
▸ Other relevant information
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3.
Planning Activities
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PLANNING ACTIVITIES

1. to enable the auditor to

obtain sufficient
appropriate evidence
2. to help keep audit costs
reasonable
3. to avoid
misunderstandings with
the client
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PLANNING ACTIVITIES

▸ Establishing OVERALL AUDIT

STRATEGY and developing an AUDIT
PLAN
▸ Nature and Extent will vary:
▸ Size and complexity of entity
▸ Previous experience
▸ Changes in circumstances
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PLANNING ACTIVITIES

UPAD
▸ Understand the business and industry,
including internal control
▸ Perform preliminary analytical
procedures
▸ Assess risks and set materiality
▸ Develop overall audit strategy and
audit plan
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PLANNING ACTIVITIES

1. Understand the business and

industry, including internal
control
▸ Affects business risk and the risk of
material misstatements in the FS
▸ Business risk – risk that the client will fail to
meet its objectives
▸ Risks of material misstatements
▸ Inherent risk
▸ Control risk
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PLANNING ACTIVITIES

1. Understand the business and

industry, including internal
control - IBM-IMO
▸ Industry and External Environment
▸ Business Operations and Processes
▸ Management and Governance
▸ Internal Control
▸ Measurement and Performance
▸ Objectives and Strategies
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PLANNING ACTIVITIES

2. Perform preliminary analytical

procedures
▸ Purpose: To better understand the client’s
business and to assess client business risk
▸ Five types:
▸ Industry data
▸ Horizontal analysis
▸ Vertical analysis
▸ Financial ratios
▸ Using nonfinancial data
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PLANNING ACTIVITIES

2. Perform preliminary analytical

procedures
Purpose Plannin Evidenc Reportin
g e g
(Requir Gatheri (Require
ed) ng d)
Understand business and Primary
industry
Assess going concern Secondary Secondary
Indicate possible Primary Secondar Primary
misstatement y
Reduce detailed tests Secondary Primary
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PLANNING ACTIVITIES

3. Assess risks and set materiality

▸ Audit risk model: AR = IR x CR x DR
▸ Detection risk is the risk that audit evidence
for an audit objective will fail to detect
misstatements exceeding performance
materiality.
▸ Inherent risk measures the auditor’s
assessment of the susceptibility of an
assertion to material misstatement, before
considering the effectiveness of related
internal controls.
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PLANNING ACTIVITIES

3. Assess risks and set materiality

▸ Audit risk model: AR = IR x CR x DR
▸ Control risk measures the auditor’s
assessment of the risk that a material
misstatement could occur in an assertion and
not be prevented or detected on a timely
basis by the client’s internal controls.
▸ Audit risk is the risk that auditor expresses
an inappropriate opinion when the financial
statements are materially misstated.
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PLANNING ACTIVITIES

3. Assess risks and set materiality

▸ Materiality is the magnitude of an omission
or misstatement of accounting information
that, in the light of surrounding
circumstances, makes it probable that the
judgment of a reasonable person relying on
the information would have been changed or
influenced by the omission or misstatement.
▸ Fraud risks – PSA 240
▸ Noncompliance – PSA 250
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PLANNING ACTIVITIES

4. Overall Audit Strategy

▸ Scope, Timing and Direction (STD)
▸ Scope of engagement
▸ Nature and timing of reports
▸ Factors significant in directing efforts
▸ Results of preliminary engagement activities
▸ Resources necessary (manpower,
competence, time, finances, etc)
▸ In the form of a MEMORANDUM
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PLANNING ACTIVITIES

4. Audit Plan
▸ Five types:
▸ Risk assessment procedures
▸ Further audit procedures
▸ Test of Controls (TOC)
▸ Substantive Tests of Transactions (TOT)
▸ Tests of Details of Balances (TDB)
▸ Substantive Analytical Procedures (SAP)
▸ In the form of a CHECKLIST
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PLANNING ACTIVITIES

4. Audit Plan
▸ Seven types of evidence – RIORICA
▸ Reperformance
▸ Inspection
▸ Observation
▸ Recalculation
▸ Inquiry
▸ Confirmation
▸ Analytical Procedure
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PLANNING ACTIVITIES

4. Audit Plan
In Re In
Procedure Rep O C A
s c q
Risk assessment x x x x
Tests of controls x x x x
Tests of transactions x x x x
Tests of details of balances x x x x x
Analytical procedures x x
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4.
Evidence Gathering
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EVIDENCE GATHERING

▸ Sources:
▸ Audit procedures performed
▸ Previous audit
▸ Firm’s quality control procedures
▸ Entity’s accounting records
▸ Information from management’s expert
▸ Absence of information
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EVIDENCE GATHERING

▸ Relate procedures to assertions:

▸ Occurrence/Existence
▸ Completeness
▸ Valuation/Allocation
▸ Rights and Obligations
▸ Presentation and Disclosure
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EVIDENCE GATHERING

▸ Transaction-related assertions:
▸ Occurrence
▸ Completeness
▸ Accuracy
▸ Cutoff
▸ Classification
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EVIDENCE GATHERING

▸ Balance-related assertions:
▸ Existence
▸ Rights and obligations
▸ Completeness
▸ Valuation and allocation
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EVIDENCE GATHERING

▸ Presentation and disclosure-related

assertions:
▸ Occurrence and rights and obligations
▸ Completeness
▸ Accuracy and valuation
▸ Classification and understandability
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EVIDENCE GATHERING

▸ Strategies
▸ TOC + SP
▸ To confirm initial understanding that
controls are working effectively
▸ To further reduce CR, thus increase
planned DR, thus decrease NTE of SP
▸ SP only
▸ Combination of TOT, TDB or SAP
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EVIDENCE GATHERING

▸ Nature, Timing and Extent

PROCEDUR
NATURE TIMING EXTENT
E
Reperformanc
e
Tests of Year-end or Sample size
Inquiry
Controls Observation
Interim Items to select
Inspection
Substantive
Tests Year-end or Sample size
RIORICA
(TOT, TDB, Interim Items to select
SAP)
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EVIDENCE GATHERING

▸ Sufficient Appropriate Evidence

▸ Matter of professional judgment
▸ Significance of misstatement in the assertion
▸ Likelihood of material effect
▸ Effectiveness of mgt’s responses to risks
▸ Experience during previous audit
▸ Source and reliability of available information
▸ Persuasiveness of evidence
▸ Understanding of entity, environment and
internal control
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5.
Reporting
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REPORTING

▸ Four Types of Opinion

▸ Unqualified
▸ Qualified
▸ Adverse
▸ Disclaimer of opinion
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REPORTING

▸ Circumstances
Material Scope
Misstatemen Limitation
t
Material Qualified Qualified
only
Material and Adverse Disclaimer of
pervasive opinion
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REPORTING

▸ Form of the report

▸ Title – “Independent Auditor’s Report”
▸ Addressee
▸ Opinion
▸ Basis for opinion
▸ Key Audit Matters – PSA 701
▸ Going Concern – when material uncertainty exists
▸ Other Information – PSA 720 Revised
▸ Responsibilities for the FS – management and TCWG
▸ Auditor’s Responsibilities
▸ Other Reporting Responsibilities
▸ Name of Engagement Partner – required for publicly listed
entities
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THANKS!
Any questions?