UNIT II AUDIT PROCESS

The audit process is the series of steps followed by an auditor in order to conduct an audit
engagement with a client. The exact steps followed will depend on the nature of the audit
engagement, but typically follow the general steps noted below.

Step 1. Request General Information from the Client

The audit team begins by requesting a variety of information from the client, in order to gain a
reasonable overview of its operations. This can include meetings with key client personnel in
order to learn more about targeted areas.

Step 2. Understand the Operating Environment of the Client

The audit team examines the client’s system of internal controls, to assess the various risk levels
of the client’s functional areas. This information is needed to design the tests to be used later in
the audit process.

Step 3. Prepare an Audit Plan

Based on the information gleaned in the preceding steps, the audit team creates an audit plan that
describes the various tests that will be conducted. This plan incorporates the team’s decisions
about the extent to which the client’s system of controls can be relied upon.

Step 4. Conduct Fieldwork

The audit team uses the audit plan as the basis for its fieldwork. The results found during each
phase of the fieldwork may modify the type and extent of tests conducted through the remainder
of the fieldwork. The team documents its work in a set of working papers.

Step 5. Review the Audit Results

The audit manager discusses any findings from the fieldwork with the client. This may result in
additional tests, as well as the creation of a management letter that describes any issues found.

Step 6. Draft an Audit Report

The audit team drafts an audit report, which is reviewed by audit managers along with the
supporting workpapers. This review may result in additional fieldwork being conducted, possibly
resulting in another iteration of the audit report.

Step 7. Communicate the Audit Results to the Client in a Closing Meeting

The audit team creates the final draft of the audit report and discusses it with the client’s audit
committee.
The stages of the auditing process:

The finer details of an audit process may vary by company and auditor. But, the general stages of
the auditing process are as follows:

Planning: An audit should be planned so that all the people involved are prepared. The company
will speak to, negotiate with and engage an auditor. The company and the auditor will have to
agree on the level of engagement, process, and objectives of the auditing process. It can perform
an internal audit in preparation for the external audit. Having all accounts in order and the
paperwork accessible makes an auditor's job easier. An auditor also has to plan the audit to give
the company an approximate timeline for the audit process. A planned audit also informs the
stakeholders of when to expect to see the organization's audited financial statements.

Requesting financial documents: The auditor draws up a list of the required documents for
scrutiny. This is a preliminary list, and the audit scope is not limited to these documents alone.
The auditor may ask for the previous audited reports, bank statements, ledgers, receipts, board
meeting minutes, organizational charts, etc. The auditor would plan the details of the audit
process based on these documents. The audit plan is then drafted.

Open meeting: An auditor may sometimes call for an open meeting with the senior management
and key administrative staff. During this meeting, the audit plan and scope may be discussed.
Problem areas, if any, may be identified. The auditor and the management can determine an
accurate time frame for the audit. If the auditor plans to interview any of the staff, he/she would
inform and discuss it with the management.

On-site work: The auditor would examine data samples in the business records. These could be
entries for any random date. The transaction records are examined for anomalies. The auditor
may be satisfied with the results or decide to examine the records in more detail. If there are
doubts, the auditors would question the people involved to answer satisfactorily. Transactions are
verified, and the procedures followed by the company are examined for accuracy and adherence
to accounting principles. The auditor will verify the presence of internal controls in the company
and check how well these controls are working.

Draft report: The auditor will create a draft report based on the inspection and findings. If the
auditor has found proof of fraud, financial mismanagement, corrected reports, wrong process or
accounting policies, etc., they will be mentioned in this report. If the auditor has any suggestions
or corrections on improving or correcting processes and procedures, they will be listed in the
report. It is at the discretion of the management to implement these suggestions.

Additional requirements: If the auditor needs further information, a request for more materials
and information can be made. If the additional requirements satisfy the auditor, changes to the
draft report can be made. Once this step is completed, the auditor’s report cannot be changed or
corrected.
Publishing report: In this step, the final auditor’s report is published to state the auditor's
opinion. It is usually reviewed by the auditors, the management, and the people involved in the
accounting process before publishing. The final report is published and presented to the investors
and management. The investors are usually given a consolidated report rather than the detailed
report.

What is an Audit Engagement?

An audit engagement is an agreement between a client and an independent third-party auditor to

perform an audit of some element of the client’s business, such as accounting records, financial
statements, internal controls, regulatory compliance, information systems, operational processes,
etc. More information on what auditors do and the different types of audit engagements can be
found in a previous post.

The purpose of engaging a third-party auditor is to obtain an unbiased and independent opinion
on the organization’s ability to achieve the specified audit criteria. Your auditor should be a
subject matter expert who provides value in delivering conclusions on the effectiveness of
business processes and controls, while alerting the company of any risks identified.

When a company has to go through the audit process, an auditor may use the
term "audit engagement." This can mean different things, so it is important that
the auditor clarify what he means when he uses the term. Regardless of which
definition the auditor follows, however, the auditor always follows specific
procedures and guidelines for handling the engagement.

What are Audit Working Papers?

Audit working papers are used to document the information gathered during an audit. They
provide evidence that sufficient information was obtained by an auditor to support his or her
opinion regarding the underlying financial statements. Working papers also provide evidence
that an audit was properly planned and supervised. They should contain sufficient information
for an auditor who did not work on an audit to discern the reasons for the opinion given
regarding a client's financial statements. The forms of documentation that may be contained
within the working papers include the following:

 Checklists of standard investigation items that were completed, and by whom

 Copies of correspondence

 Documentation of the assertions investigated and supporting evidence found

 Extracts from the corporate minutes of the client

  Flowcharts of a client's key transaction processes

 Narrative discussions of issues found

 Organization charts

 Questionnaires for which the client provided answers

Audit working papers are prepared by the audit staff and audit seniors, and are reviewed by audit
senior managers and partners. If a reviewer finds that any issues have not yet been addressed, then
these issues are delegated to the on-site audit team for action. Reviewers sign and date each page
examined. Once an audit has been concluded, the audit working papers are considered legal
evidence, and so are appropriately indexed and filed. At a minimum, the working papers will likely
be reviewed the next year by the assigned audit senior or manager, who will want to understand any
issues found in the prior year, and also to determine if there are any ways to budget the audit staff's
time more effectively.

Definition:

Audit documentation refers to the records or documentation of procedures that auditors performed,
the audit evidence that they obtained and the conclusion that makes by them based on the evidence
obtained. Audit documentation is sometimes called audit working paper or working paper.

Internal control documents that auditor prepare in Ms words, Ms excel or other application is the
example of audit documentation. Another best example that describes audit documentation would be
the working paper that auditor prepares to document and test depreciation expenses.

The following is the key information that should have in the audit documentation:

 The nature of information or data that being prepare or documents

 Timing including the audit period that covers, and the date prepare

 Name of the auditor who prepares audit working papers

 The extent of the audit procedures performed to comply with the ISAs and applicable legal
and regulatory requirements.

 The evidence that auditor obtains, the procedures that they use for testing and the result of
testing should properly and clearly document in the audit working papers. This is to ensure
that the reviewer could easily perform the quality review and to prove that the relevant
standards are implementing.

 During an audit, the auditor might found the significant mater related to financial
statements, their ethics, as well as their process. The auditor should clearly document these
things.

 Some testing or sampling require auditor use their professional judgment and its importance
to documents those judgments.