The Audit Process

Question 1

1. Preliminary Stage

Answer 1

This stage consists of preliminary engagement activities that need to occur prior to the acceptance of the audit engagement.

• Establishing whether the auditor the pre-conditions of an audit are present.
• Conducting procedures to determine whether the audit firm would like to continue the client relationship with the existing client or wishes to establish a new client relationship with a prospective client.
• Establishing whether the client can be appropriately serviced.
• Establishing whether the firm will be able to comply with the ethical requirements relating to the engagement.
• Establishing an understanding of the terms of the engagement which includes confirming that there is a common understanding between the auditor, management, and those charged with governance of the terms of the audit engagement.

Question 2

2. Planning stage

Answer 2

• Establishing the audit strategy which basically means planning how the whole audit process will be conducted.
• Considering materiality which entails the auditor applying his/her professional judgment in determining which information would be regarded as material and which information will be regarded as material.
• Planning risk assessment procedures
• Conducting risk assessment procedures.
• Planning further audit procedures like a test of controls and substantive tests.

Therefore the auditor developed the audit plan in two phases/sections.
Plan 1 - Describes the nature, timing, and extent of the procedures to identify and assess risks.
Plan 2 - Describes the nature, timing, and extent of the further audit procedure which is required as a response to the risks identified at the assertion level and also describes the other audit procedures which must be conducted to ensure that the audit complies with the ISAs

Question 3

3. Responding to Assessed Risk Stage

Answer 3

In responding to assessed risks, the auditor should obtain sufficient and appropriate audit evidence pertaining to the assessed risks of material misstatements by developing and implementing appropriate responses to those risks. The first response is to plan further audit procedures and then:

• Respond in a general sense to the assessed risk at the financial statement level.
• Respond specifically to the assessed risk at assertion level by carrying out tests of control and substantive tests in order to gather evidence that is sufficient and appropriate that material misstatement has not gone undetected.
• Carry out other procedures which are required to comply with ISAs.

Question 4

4. Concluding stage.

Answer 4

• Evaluating and concluding on the audit evidence gathered which means evaluating all the audit evidence gathered to determine whether it is sufficient and appropriate to draw a conclusion of fair presentation.
• Formulating the audit opinion and drafting the audit report which coveys that opinion.