Overview of Audit

Process and
Preliminary Activities
 What is an Audit?

An audit is a systematic process of objectively obtaining and

evaluating evidence regarding assertions about economic
actions and events to ascertain the degree of correspondence
between these assertions and established criteria and
communicate the results thereof. (American Accounting
Association)

Audit Process – being a systematic process, an audit

engagement is performed using an ordered or structures
series of steps.
 Objective of an Auditor

PSA 315 provides that the objective of the auditor is to identify

and assess the risks of material misstatement, whether due to
fraud or error, at the financial statement and assertion levels,
through understanding the entity and its environment,
including the entity’s internal control, thereby providing a
basis for designing and implementing responses to the
assessed risks of material misstatement.
 Audit Process: General Overview

Entity
prepares The auditor The auditor The auditor
and performs gathers expresses
presents audit audit an audit
financial procedures evidence opinion
statements
 Audit Process: General Overview

Entity
prepares The auditor The auditor The auditor
and performs gathers expresses
presents audit audit an audit
financial procedures evidence opinion
statements
 Audit Process: General Overview

Entity
prepares The auditor The auditor The auditor
and performs gathers expresses
presents audit audit an audit
financial procedures evidence opinion
statements
 Audit
Procedures

Major Audit Specific Audit

Procedures Procedures

Risk
Test of
Assessment Inspection Observation
Controls
Procedures

Substantive
Inquiry Confirmation
Procedures

Reperformanc
Recalculation
e

Analytical
Procedures
 Audit Process: General Overview

Entity
prepares The auditor The auditor The auditor
and performs gathers expresses
presents audit audit an audit
financial procedures evidence opinion
statements
 Audit Process: General Overview

Entity
prepares The auditor The auditor The auditor
and performs gathers expresses
presents audit audit an audit
financial procedures evidence opinion
statements
Unmodified or
Qualified
Unqualified

Audit
Report

Disclaimer of
Adverse
Opinion
 Auditor’s Judgment about the
Pervasiveness of the Effects or Possible
Circumstance Effects on the Financial Statements
Material but Not Material and
Pervasive Pervasive
Financial
Statements are Qualified Opinion Adverse Opinion
material misstated

Inability to obtain
sufficient Disclaimer of
appropriate audit Qualified Opinion
Opinion
evidence
Audit Process: Detailed Approach
Preliminary Planning an audit Study and
engagement of financial evaluation of
activities statements internal control

Evidence-
Issuance of the Completing the gathering
audit report audit (Substantive
Testing)

Post-audit
responsibilities
Audit Process: Detailed Approach
Preliminary Planning an audit Study and
engagement of financial evaluation of
activities statements internal control

Evidence-
Issuance of the Completing the gathering
audit report audit (Substantive
Testing)

Post-audit
responsibilities
 Does the auditor Does the auditor
have the maintain
competence? independence?

Accept or
Reject?

Does the auditor

Does the client’s
have the ability to
management have
serve the client with
integrity?
due care?
Preliminary Obtain a preliminary knowledge of the client’s business and industry to
determine whether the auditor has the degree of competence required by
activities of the engagement.
an auditor: Consider whether there are any threats to the firm’s independence and
objectivity, and if so, whether adequate safeguards can be established.

Evaluate the firm’s ability to serve the prospective client.

Evaluate auditability.

Investigate the integrity of the prospective client’s management.

Agree on the terms of the engagement and prepare an engagement

letter.
 Audit of Components
Who appoints the Component Auditor

Legal requirements in relation to audit

appointments

Degree of ownership by parent

Whether a separate auditor’s report is to be

issued on the component

Degree of independence of the component’s

management from the parent entity
 Audit of Any indication that the client misunderstands the
objective and scope of the audit
Components
Any revised or special terms of the engagement

A recent change of management, board of

directors or ownership

A significant change in ownership

A significant change in nature or size of the

client’s business

A change in legal or regulatory requirements

A change in the financial reporting framework

adopted in the preparation of the financial statements

A change in other reporting requirements

 Acceptance of a Change in Engagement
Is there a
reasonable
justification?

YES NO

Stop performing Stop referring to the Continue the When prohibited to

old engagement, continue, withdraw
the old original audit from the audit
except when the new
engagement engagement involves engagement engagement
agreed-upon
procedures

Start performing
the new
engagement.
 ASSIGNMENT:

• Read and comprehend the following

topics:
• Planning an Audit of Financial
Statements
• Study and Evaluation of Internal
Controls
• Audit of Intangible Assets, Prepaid
Expenses, and Deferred Charges
Thanks!
Does anyone have any questions?

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