THE AUDIT PROCESS – ACEEPTING AN ENGAGEMENT

FINANCIAL STATEMENT ASSERTIONS

Assertions about classes of Assertions about account balances at Assertions about presentation and
transactions and events for the period the period end: disclosure:
under audit:
 Completeness  Rights and Obligations  Completeness
 Occurrence  Existence  Occurrence and rights and
 Cutoff  Completeness obligations
 Accuracy  Valuation and allocation  Classification
and understandability
 Classification
 Accuracy and valuation

AUDIT PROCEDURES

The procedures selected should enable the auditor to gather sufficient appropriate evidence about a particular
assertion.
 Inspection – involves examining of records, documents, or tangible assets.
 Observation – consists of looking a process or procedure being performed by others.
 Inquiry – consists of seeking information from knowledgeable persons inside or outside the entity.
 Confirmation – consists of the response to an inquiry to corroborate information contained in the accounting
records.
 Computation – consists of checking the arithmetical accuracy of source documents and accounting records or
performing independent calculations.
 Analytical Procedures – consist of the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate from
particular amounts.
Audit evidence – refers to the information obtained by the auditor in arriving at the conclusions on which the audit
opinion is based. Audit evidence will comprise source documents and accounting records underlying the financial
statements and corroborating information from other sourc

Forms a conclusion on FS (in

AUDIT PROCESS

AUDIT PLANNING

prospective client’s FS
ACCEPTING AN ENGAGEMENT

In deciding whether to accept or reject an engagement, the firm should consider:

1. Competence – acquired through a combination of education, training, and experience. The auditor should
obtain a preliminary knowledge of client’s business and industry to determine whether the auditor has the
degree of competence required by the engagement.
2. Independence – the auditor should consider whether there are threats to audit team’s independence and
objectivity and, if so, whether adequate safeguards can be satisfied.
3. Ability to serve the client properly – An engagement should not be accepted if there are no enough qualified
personnel to perform the audit. PSA 220 suggests that the audit work should be assigned to personnel who have
the appropriate capabilities, competence, and time to perform the audit enga gement in accordance with
professional standards.
4. Integrity of the management – PSA 220 requires the firm to conduct a background investigation of
the prospective client in order to minimize the likelihood of association with clients whose mgmt. lacks
integrity. This involves:
 Making inquiries of appropriate parties in the business community
 Communicating with the predecessor auditor

RETENTION OF EXISTING CLIENTS

 Clients should evaluate at least once a year or upon occurrence of major events such as changes in mgmt.,
ownership, nature of client’s business, etc.
 In general, conditions that would cause the firm to reject the prospective client may also lead to decision of
terminating an audit engagement.
ENGAGEMENT LETTER
 This serves as the written contract between the auditor and the client. This letter sets forth:
 The objective of the audit of FS which is to express an opinion on the FS.
 The mgmt.’s responsibility for the fair representation of the FS.
 The scope of the audit.
 The forms or any reports or other communication that the auditor expects to issue.
 The fact that because of limitations of the audit, there is an unavoidable risk that material
misstatements may remain undiscovered.
The responsibility of the client to allow the auditor to have unrestricted access to whatever records,
documentation, and other information requested in connection with the audit.
 Billing arrangements
Expectations of receiving mgmt. representation letter.
 Arrangements concerning the involvement of others (experts, other auditors, internal auditors, etc.)
 Request for the client to confirm the terms of the engagement

 Importance of the engagement letter – (1) to avoid misunderstanding with respect to the mgmt. and (2)
document and confirm the auditor’s acceptance of the appointment

 Recurring audits – the auditor does b=not normally send new engagement letter every year, unless (1)
client misunderstands the objective and scope of audit, (2) revised or special terms of the engagement (3)
recent change of senior mgmt., (4) significant change in nature or size of business (5) legal and gov’t
pronouncements

 Audit of components – the auditor will consider the factors whether they will send a separate letter to
component: (1) who appoints the auditor of component, (2) whether a separate audit report is to be issued on
the component, (3) legal requirements, (4) the extent of any work performed by other auditor (5) degree of
ownership by parent, (6) degree of independence of the component’s management.