Overview of the audit process

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Auditing I Week 6

• Overview of the audit process
• Audit evidence
• Staffing the audit
• Documenting the audit
• Auditors confidentiality to client

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Overview of the audit process

• Evidence if collected through the audit process.
• All audits need careful planning, controlling and
  recording.
• The audit process is a series of logical
  well-defined steps.
• Audit objective object of investigation
• Audit procedure tests and techniques used.
• Overall audit objective Do the financial
  statements give a true and fair view of the
  entitys state of affairs, its profit or loss for
  the period and its cashflow.

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Hierarchy of audit objectives
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Overview of the audit process

• Formal steps to be taken
• Audit process (GM)
• Summary of the audit process (PSH)
• Summary from a firms perspective
• EY
• BDO

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Overview of the audit process

• How is the audit objective achieved
• Gather information/accumulate evidence.
• Observe the clients operations.
• Make enquiries.
• Inspect the entitys manuals/legal documents.
• Confirmation.
• Recalculation/reperformance.
• Analytical procedures.

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Audit evidence

• Concept of audit evidence
• is all the information used by the auditor in
  arriving at the conclusions on which the audit
  opinion is based, and includes the information
  contained in the accounting records underlying
  the financial statements.ISA 500 Audit Evidence.
  
• Accumulate audit evidence to meet specific audit
  objectives and from this you can form conclusions
  about general audit objectives.
• Eventually you will have sufficient, appropriate
  audit evidence to support the overall audit
  objective.

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Audit evidence

• The auditor should obtain sufficient,
  appropriate audit evidence to be able to draw
  reasonable conclusions on which to base the audit
  opinion ISA 500.
• Sufficient is the measure of the quantity of
  audit evidence e.g. the sample chosen should be
  large enough to be representative.
• Appropriateness is the measure of the quality
  of audit evidence. To be of good quality it
  should be relevant and reliable.

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Audit evidence

• It is the auditors judgement of what is
  sufficient appropriate audit evidence and will be
  influenced by the following
• Risk assessment.
• The nature of the accounting and internal
  controls.
• The Materiality of the item being examined.
• Experience gained during previous audits and the
  auditors knowledge of the business and the
  industry.
• The results of the audit procedures.
• The source and reliability of the information.

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Audit evidence

• In order to depend on the evidence the auditor
  must test the controls within the organisation by
  assessing
• The designs of the accounting and internal
  control systems capable of preventing and
  detecting material misstatements.
• Operation, does the system, in existence, operate
  effectively for the period under review.

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Obtaining Audit Evidence

• Inspection of records and documents.
• Reliability depends on source and nature of
  records and on effectiveness of internal controls
  over processing.
• Observation.
• Note ISA 501 Audit Evidence - additional
  considerations for specific items.
• Inquiries.
• Confirmation.
• Computations (recalculation/reperformance).
• Use of CAATs.
• Analytical Procedures.
• Note ISA 520.

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Obtaining Audit Evidence

• What evidence is collected depends on
• Relevance
• Reliability
• Availability
• Timeliness
• Cost
• Sources of evidence
• Direct personal knowledge
• External sources
• Internal sources

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Reliability of audit Evidence

• More reliable if
• Obtained from independent sources.
• Generated internally AND related controls are
  tested as being effective.
• Obtained directly by auditor.
• It exists in documentary form.
• It is an original document.

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Reliability of audit Evidence
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Audit Assertions

• Directors general assertion is that
• The financial statements prepared by them give a
  true and fair view.
• Auditors then break this general assertion down
  by firstly breaking the financial statements down
  into its various components.
• Then they test that component against relevant
  assertions (Genuine/accurate/complete).

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Audit Assertions

• Existence
• Rights and obligations
• Occurrence
• Completeness
• Valuation
• Measurement
• Presentation disclosure

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Audit Testing

• Need to establish if each financial statement
  amount and disclosure is fairly stated
• Review accounting system walk through tests.
• Testing effectiveness of internal control system
  to see if they can be relied upon compliance
  tests.
• Testing financial statement amounts and
  disclosures main audit objective therefore need
  to substantiate substantive tests.

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Audit Testing

• Substantive tests are always required!
• Tests of detail (tests of transaction and
  balances)
• Analytical procedures.
• ISA 500 states that TOCs are necessary in 2
  circumstances
• Where the risk assessment indicates an
  expectation of the operating effectiveness of
  controls.
• Where substantive procedures alone do not provide
  sufficient appropriate audit evidence.

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Staffing the Audit

• The staff hierarchy
• Engagement partner
• Engagement manager
• Audit staff
• Supervisor
• Senior
• Semi-senior
• Junior
• Other Auditors and experts

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Staffing the Audit

• ISA 220 Quality control for audit work
• For an audit to be effective and efficient it is
  essential that it is
• Adequately staffed by skilled and competent
  staff.
• Properly directed, supervised and reviewed.
• The audit practice is to be staffed by personnel
  who have attained and maintain the technical
  standards and professional competence required to
  enable them to fulfil their responsibilities with
  due care.
• Audit work is to be assigned to personnel who
  have the degree of technical training and
  proficiency required in the circumstances.

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Direction, supervision review

• Assigning audit work requires
• Proper direction
• Adequate supervision
• Detailed review

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Direction

• Responsibilities
• Nature of business
• Risk related issues
• Problems that may arise
• Detailed approach to performance of engagement.

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Supervision

• Tracking progress
• Considering capabilities and competence of team.
• Timing and pressures on team.
• Addressing significant issues.
• Identifying matters for consultation and
  consideration.

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Review and consultation

• Work has been performed in accordance with
  professional standards and legal requirements.
• Significant matters raised have been considered.
• Appropriate consultations held and documented.
• Revise nature, extent and timing of work.
• Work performed supports conclusions.
• Evidence is sufficient and appropriate.
• Engagement objectives have been achieved.

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Documenting the audit

• The auditor should document matters which are
  important in providing audit evidence to support
  the auditors opinion and evidence that the audit
  was carried out in accordance with ISAs
• ISA 230 Documentation

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Documenting the audit

• Documentation means
• Working papers prepared for and by and retained
  by the auditor.
• In connection with the performance of the audit.
• These may be in the form of papers, film and
  electronic media.

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Working Papers

• Working Papers
• Assist in planning and performance of the audit.
• Assist in supervision and review of the audit
  work.
• Record the audit evidence resulting form the
  audit work performed supporting the opinion of
  the auditor.
• They should be sufficiently complete and detailed
  to provide an overall understanding of the audit.

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Form and Content of working papers

• Prepared to be sufficiently detailed and complete
  to allow an overall understanding of the audit.
• The auditor should record the following
• The planning of the audit.
• The nature, timing and extent of audit
  procedures.
• The results of the procedures with relevant
  comments.
• The conclusions drawn with respect to the account
  balance investigated.

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Form and Content of working papers

• The extent of the working papers is
• Matter for professional judgement
• Must consider what would be necessary to provide
  another auditor who has no previous experience
  with the audit an understanding of the work
  performed.
• It is never appropriate to follow mechanically a
  standard approach to the conduct and
  documentation of the audit.

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Examples of Working Papers

• Information concerning the legal organisational
  structure of the client.
• Information concerning the clients industry,
  economic legal environment.
• Evidence of the planning process and any changes
  thereto.
• Evidence of the auditors understanding of the
  accounting and internal control systems.
• Evidence of inherent and control risk assessments
  and any revisions.
• Analyses of transactions and balances..
• Analyses of significant ratios trends.
• A record of the nature, timing, extent and
  results of auditing procedures.
• Copies of communications with other auditors,
  experts 3rd parties.
• Copies of correspondence with the client, reports
  to directors or management and notes of
  discussions with the entitys directors or
  management.
• A summary of the significant aspects of the
  audit.
• Copies of the approved financial statements and
  auditors reports