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AT - 003 Audit Process
AT - 003 Audit Process
AT - 003 Audit Process
B. Audit planning
1) Obtain knowledge of the client’s business.
2) Develop an overall audit strategy for the expected conduct and scope of the audit.
3) Review and preliminary evaluation of internal control
a) Review the accounting system and related internal control to gain an understanding of
the transactions and specific control procedures.
b) Identify internal controls on which it might be effective and efficient to rely in conducting
the audit.
c) Make a preliminary determination of whether to rely on internal control.
4) Prepare an overall audit plan.
An audit plan provides an overview of the engagement, describing the characteristics of client’s
business and industry, identifying special problems for the engagement, and outlining the overall
audit strategy.
5) Develop an audit program
An audit program contains the procedures designed to achieve the audit objectives.
Pre-engagement Phase
Pre-engagement planning includes procedures that are employed before the auditor begins to review the
internal control structure or to gather evidential matter. A CPA firm needs to establish policies and procedures for
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deciding whether to accept or continue a client in order to minimize the likelihood of association with a client
whose management lacks integrity. The reputation of a client’s management could reflect on the reliability on
representations and accounting records and on the CPA firm’s own reputation.
Acceptance and continuance of client relationships and specific audit engagements include considering:
The integrity of the principal owners, key management and those
charged with governance of the entity;
Whether the engagement team is competent to perform the audit
engagement and has necessary time and resources; and
Whether the firm and the engagement team can comply with ethical
requirements.
With regard to the integrity of a client, matters that the firm considers include, for example:
The identity and business reputation of the client’s principal owners, key management, related
parties and those charged with governance.
The nature of the client’s operations, including its business practices.
Information concerning the attitude of the client’s principal owners, key management and those
charged with governance towards such matters as aggressive interpretation of accounting
standards and the internal control environment.
Whether the client aggressively concerned with maintaining the firm’s fees as low as
possible.
Indications of an inappropriate limitation in the scope of the work.
Indications that the client might be involved in money laundering or other criminal activities.
The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm.
Information on such matters that the firm obtains may come from, for example:
Communications with existing or previous providers of professional accountancy services
to the client in accordance with the Philippine Code, and discussions with other third parties.
Inquiry of other firm personnel o third parties such as bankers, legal counsel and industry
peers.
Background searches of relevant databases
In considering whether the firm has the capabilities, competence, time and resources to undertake a new
engagement from a new or an existing client, the firm reviews the specific requirements of the
engagement and the existing partner and staff profiles at all relevant levels. Matters the firm considers
include whether:
Firm personnel have knowledge of relevant industries or subject matters;
Firm personnel have experience with relevant regulatory or reporting
requirements, or the ability to gain the necessary skills and knowledge effectively;
The firm has sufficient personnel with the necessary capabilities and
competence;
Experts are available, if needed;
Individuals meeting the criteria and eligibility requirements to perform
engagement quality control review are available, where applicable; and
The firm is able to complete the engagement within the reporting deadline.
A. Addressee – should be addressed to the body or person responsible for engaging and retaining firm’s
services. In the case of incorporated bodies, addressed either to the board chairman, the board of directors or
the appropriate representative of senior management.
B. Principal Contents – the form and contents of audit engagement letters may vary for each client, but
they would generally include reference to:
The objective of the audit of financial statements
Management’s responsibility for the financial statements
The financial reporting framework adopted by management in preparing the financial statements
The scope of the audit, including reference to applicable legislation, regulations, or
pronouncements of professional bodies to which the auditor adheres.
The form of any reports or other communication of results of the engagements.
The fact that because of the nature and other inherent limitations of an audit, together with the
inherent limitations of any accounting and internal control system, there is an unavoidable risk that even
some material misstatement may remain undiscovered.
Unrestricted access to whatever records, documentation and other information requested in
connection with the audit.
C. Other Contents
The auditor may also wish to include in the letter:
Arrangements regarding the planning of the audit
Expectation of receiving from management written confirmation concerning
representations made in connection with the audit
Request for the client to confirm the terms of the engagement by acknowledging
receipt of the engagement letter or by affixing the client’s signature on the space provided for in the
engagement letter for his conforme for the convenience of both the auditor and client
Description of any other letters or reports the auditor expects to issue to the client
Basis on which fees are computed and any billing arrangements
When relevant, the following points could also be made:
Arrangements concerning the involvement of other auditors and experts in some aspects of the
audit
Arrangements concerning the involvement of internal auditors and other client staff
Arrangements to be made with the predecessor auditor, if any, in case of an initial audit
Any restrictions of the auditor’s liability when such possibility exists
A reference to any further agreements between the auditor and the client
D. Audits of Components
When the auditor of a parent entity is also the auditor of its subsidiary, branch or division
(component), the factors that influence the decision whether to send a separate engagement letter to the
component include:
Who appoints the auditor of the component
Whether a separate audit report is to be issued on the component
Legal requirements
The extent of any work performed by other auditors
Degree of ownership by parent
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Degree of independence of the component’s management
E. Agreement on the Applicable Financial Reporting Framework
The terms of engagement should identify the applicable financial reporting framework.
The auditor should accept an engagement for an audit of financial statements only when
the auditor concludes that the financial reporting adopted by the management is acceptable or when it is
required by law or regulation.
When law or regulation requires use of financial reporting framework fro general purpose
financial statements that the auditor considers to be unacceptable, the auditor should accept the
engagement only is the deficiencies in the framework can be adequately explained to avoid misleading
users.
F. Recurring Audits
On recurring audits, the auditor should consider whether circumstances
require the terms of the engagement to be revised and whether there is a need to remind the client of the
existing terms of the engagement.
The auditor may decide not to send a new engagement letter each
period. However, the following factors may make it appropriate to send a new letter:
Any indication that the client misunderstands the objective and
scope of the audit
Any revised or special terms of the engagement
A recent change of senior management, board of directors or
ownership
A significant change in nature or size of the client’s business
Legal requirements and other government agencies’
pronouncements
A change in the financial reporting framework adopted by
management in preparing the financial statements
20) Which portion of an audit may not be completed before the balance sheet date?
A. Tests of controls C. Issuance of management letter
B. Substantive testing D. Assessment of control risk
21) Which of the following audit procedures would generally performed last?
A. obtaining management representation letter C. testing the purchasing function
B. reading the minutes of directors’ meetings D. confirming accounts payable
22) A prospective client’s refusal to grant a CPA permission to communicate with the predecessor auditor will bear
directly on the CPA’s ability to
A. study and evaluate the client’s system of internal control
B. determine the integrity of the management
C. determine the beginning balances of the current year’s financial statements
D. establish consistency in application of GAAP between years
23) If the auditor has concerns about the integrity of management, which of the following would not be an
appropriate action?
A. refuse to accept the engagement because a client does not have an inalienable right to an audit
B. expand audit procedures in areas where management representations are normally important by
requesting outside verifiable evidence
C. raise the audit fees to compensate for the risk inherent in the audit
D. plan the audit with a higher degree of skepticism including specific procedures that should be effective in
uncovering management fraud
24) After preliminary audit arrangements have been made, an engagement letter should be sent to the client. The
letter usually would not include
A. a reference to the auditor’s responsibility for the detection of errors and irregularities
B. an estimate of time to be spent on the audit work by staff & management
C. a statement that management advisory services would be made available upon request
D. a statement that management letter will be issued outlining comments and suggestions as to any
procedures requiring the client’s attention
25) Which of the following is not included in the engagement letter?
A. restriction on cash balances, lines of credits or similar arrangements
B. accessibility to all financial records
C. client imposed limitation in the scope
D. limitation in the scope of examination as imposed by circumstances
26) Which of the following statements would least likely appear in an auditor’s engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket
expenses
B. During the course of our audit we may observe opportunities for economy in, or improved controls over
your operations
C. Our engagement is subject to the risk that material errors or irregularities, including fraud and
defalcations, if they exist, will not be detected
D. After performing our preliminary analytical procedures we will discuss with you the other procedures we
consider necessary to complete the engagement
27) Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new
engagement letter to the client?
A. Recent change in partner involved in the audit engagement
B. Change in the terms of the engagement
C. Recent change of the client’s management
D. Significant change in the nature or size of the client’s business
28) Which of the following audit procedures would generally be performed during the year-end field work?
A. Count of petty cash
B. Analysis of cut-off bank statement
C. Comparison of data on purchase orders and payment vouchers
D. Examination of lease agreements
29) Which of the following procedures is least likely to be performed before the balance sheet date?
A. Confirmation of accounts receivable
B. Search for unrecorded liabilities
C. Observation of inventory
D. Review of internal accounting control over cash disbursements
30) To be proficient as an auditor, a person must first be able to accomplish which of these tasks in a decision-
making process:
A. Identify evidence relevant for the audit of assertions management makes in its unaudited financial
statements and notes.
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B. Formulate evidence-gathering procedures (audit program) designed to obtain sufficient,
competent evidence about assertions management makes in financial statements and notes.
C. Recognize the financial assertions made in management's financial statements and footnotes.
D. Evaluate the evidence produced by the performance of procedures and decide whether
management's assertions conform to generally accepted accounting principles and reality.
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