6 Audit Process Flashcards
What are the four phases of the audit process
Phase 1 – Client Acceptance
Phase 2 – Planning
Phase 3 – Testing and Evidence
Phase 4 – Evaluation and Judgement
What is the objective of
Phase 1 – Client Acceptance
To decide whether to accept a new client or continue with a new one
Can’t just accept any work to maximise profits and must follow the procedures
What are the procedures for
Phase 1 – Client Acceptance
- Evaluate the clients background and reasons for the audit
- Determine whether the auditor is able to meet the ethical requirements regarding the client, and perform all of the audit work to an appropriate professional standard
- Determine the need for other professionals (if any)
- Communication with predecessor auditor (if any)
- Prepare an engagement letter
What is involved in evaluating the clients background
Need to get to know your clients as you cannot do a high quality audit if you do not know what basis for what you are investigating
Consider any ethical or business reasons you might not want them as a client
What is involved in meeting ethical requirements
Must only take work they are competent and capable to complete
This is based on the background research
When might other professionals be needed
To resolve any limitations found in ability to meet ethical requirements
Industry experts like geologists can be hired
Why must auditors communicated with their predecessor
There is never normally a change in auditor without a good reason and this needs to be communicated to the new auditor
Prevents opinion shopping and means directors can not get rid of auditors if they are about to give an adverse opinion
What is an engagement letter
Full and transparent communication exercise to ensure no misunderstanding
What is the objective of
Phase 2 - Audit Planning
Determine the amount and type of evidence and review required to give the auditor assurance that there is no material misstatement of the financial statements
The auditor determines the nature, timing, and extend of the audit procedures as well as the form of supervision
What are the key benefits of planning
Reflects professionalism
Audits are systematic
Enables the auditor to obtain sufficient evidence
Helps keep the audit costs at a reasonable level
Helps avoid misunderstanding with the client
No audit is better than the plan
Why can no audit be better than the plan
The quality of an audit cannot be better than the plan
This is created by the senior staff who have experience
Audit juniors (who do the work) lack that experience and need a good plan from the seniors to carry out the work
They would not be at fault if there was no plan and didn’t know what to do
What procedures are in
Phase 2 - Planning
- Perform audit procedures to obtain understanding of the entity and its business environment, including the entity’s internal control structure
- Perform analytical procedures
- Assess the risks of material misstatements withing the financial statements, and determine “materiality” for the purposes of the audit
- Prepare the planning memorandum and audit program, containing the auditor’s response on the identified risks
What is the objective of Phase 3 - Testing and Evidence
Obtain sufficient, relevant and reliable audit evidence, as the basis for the audit opinion
All audit evidence should be collected and analysed in a way to fulfil their primary objective
What are the procedures for Phase 3 - Testing and Evidence
- Tests of internal controls (compliance testing);
- Substantive tests of transactions and balances (substantive testing);
- Analytical procedures
What is the objective of Phase 4 - Evaluation and Judgement
- Complete the audit procedures, evaluate the evidence, and issue an audit opinion.
- Looking at all the work in stage 3 and consider if it is sufficient and if any more work needs doing
- Final decision is made by senior staff
