Review of

the Audit
Process
Noelito M. Sales, CPA, MBA
Audit Process Flowchart
 The Audit Process
Summary of the Audit Process
1. Appointment This is the first step in the audit process flowchart above
where we, as auditors, are appointed to perform the audit
work on the client’s financial statements.
2. Plan the After being appointed as auditors, we can start the initial
audit planning of the audit. This may include evaluating compliance
and ethical matters as well as forming appropriate audit team
members.
3. Understand This is where we obtain an understanding of the client’s
client business and controls environment. While obtaining an
understanding of the client in this stage of audit process, we
also need to identify any risks that the client’s accounts
expose to.
 The Audit Process
Summary of the Audit Process
4. Risk In this step of audit process flowchart, we assess the risk of
assessment material misstatement that can occur on the client’s financial
statements. This step also includes how we respond to the
assessed risk, e.g. we will perform the test of controls or go
directly to substantive audit procedures by ticking the control
risk as high.
5. Test of This where we perform the test of controls to support our
controls assessment of internal controls. However, we only perform
this type of test if we believe the client’s internal control can
reduce the risk of material misstatement; and we intend to
rely on internal controls to reduce our substantive
procedures. If we assess that the internal controls are
ineffective, we will go directly to substantive procedures.
 The Audit Process
Summary of the Audit Process
6. Substantive This step of audit process flowchart is where we gather audit
audit evidence by testing various audit assertions of the client’s
procedures accounts. Substantive audit procedures include substantive
analytical procedures and tests of details.
7. Overall After we have obtained sufficient appropriate audit evidence,
review of we will perform an overall review of financial statements
financial before we express our opinion. This is to see if the financial
statements statement as a whole looks reasonable and is in conjunction
with the conclusion drawn from other audit evidence
obtained.
 The Audit Process
Summary of the Audit Process
8. Audit report This is the final audit process where we issue the audit report
by giving our opinion on financial statements. Usually, we
give an unqualified or clean opinion as most of the time the
audit adjustment is usually made if there’s any material
misstatement.

However, sometimes other audit opinions such as qualified

opinion, adverse opinion, or disclaimer of opinion may be
given instead.
 Unqualified Opinion

• An audit opinion that independent external auditors give when

they conclude that the client’s financial statements contain no
material misstatement.
• Likewise, when auditors give an unqualified opinion, it means that
they have obtained sufficient appropriate audit evidence to
support their opinion that there is nothing wrong with financial
statements from a material perspective.
• In other words, an unqualified opinion from auditors means that
the company’s financial statements present fairly, or give a true
and fair view, in all material respects and in accordance with
applicable accounting standards.
 Unqualified Opinion

• An audit opinion that independent external auditors give when

they conclude that the client’s financial statements contain no
material misstatement.
• Likewise, when auditors give an unqualified opinion, it means that
they have obtained sufficient appropriate audit evidence to
support their opinion that there is nothing wrong with financial
statements from a material perspective.
• In other words, an unqualified opinion from auditors means that
the company’s financial statements present fairly, or give a true
and fair view, in all material respects and in accordance with
applicable accounting standards.
Unqualified Opinion with emphasis of a
matter paragraph
• The case where auditors conclude that the financial statements
contain no material misstatement but they believe that additional
disclosure is important for the users’ understanding of financial
statements.
• Auditors will give an unqualified opinion with the emphasis of matter
paragraph below the opinion paragraph to disclose the matter that
they believe to be significant in the audit report
• Likewise, the main purpose of the emphasis of matter paragraph is to
draw users’ attention to the matter disclosed.
• Some examples of circumstances: Material uncertainty, Subsequent
events, Major catastrophe, Related party transactions, etc.
Unqualified opinion with going concern

• In an audit, going concern is defined as the company’s ability to

continue its operations for the foreseeable future (i.e. at least 12
months from the reporting date).
• Likewise, auditors have responsibilities to evaluate whether there is
significant doubt about the client’s ability to continue as going
concern and assess whether the client’s use of the going concern
basis of accounting is appropriate.
• Examples of conditions that cause the client’s going concern status
to be questionable may include: Deterioration of financial
performance for a prolonged period of time; Negative cash from
operations; Default on loan payments etc.
Unqualified opinion with going concern

• If auditors conclude that the client’s use of going concern status is

appropriate and there is no significant uncertainty, auditors will issue
a standard audit report with an unqualified opinion.
• On the other hand, if the client’s going concern status is appropriate
(with adequate disclosure in the financial statements) but there is a
material uncertainty that still exists as reporting date, auditors need
to issue an unqualified opinion with a disclosure about such
uncertainty in the audit report.
• In this case, a separate paragraph, which is material uncertainty
related to going concern, is required in the audit report to disclose
such related events and conditions.
Unqualified opinion vs qualified opinion
Unqualified opinion
Financial statements are free from
material misstatement.
Auditors obtained sufficient
appropriate audit evidence on which
to base the opinion.
Auditors usually state in the report as
“In our opinion, the financial
statements present fairly…”
Qualified opinion
Financial statements contain
misstatement that is material but not
pervasive.
Auditors may not be able to obtain
evidence about certain matters
resulting in the qualification of related
transactions or balances.
Auditors usually state in the report as
“In our opinion, except for…, the
financial statements present fairly…”
 Qualified Opinion
• An audit opinion that independent external auditors express when
they found that financial statements contain material
misstatement but such misstatement is not pervasive in nature.
• Additionally, the qualified opinion is also given when auditors
could not obtain sufficient appropriate audit evidence about
certain matters and their effect is material but not pervasive. This
happens when there is a scope limitation in an audit.
• Likewise, auditors usually give a qualified opinion by expressing that
the financial statements are free from material
misstatements, except for specific transactions or balances, or
circumstance.
 Qualified Opinion
• The auditors indicate that while there are material misstatements or
material scope limitations, they are confined to a specific element of
the financial statements which could be isolated; the rest of financial
statements are reliable.
• Auditors use the phrase “except for” to describe the issues that give
rise to the qualification of the opinion in the audit report. Likewise, a
qualified opinion in the audit report usually states that “except for…,
the financial statements present fairly (or give a true and fair
view)….”.
 Adverse Opinion
• An audit opinion that independent external auditors express when there
are misstatements in financial statements and such misstatements are
both material and pervasive.
• In this case, the material misstatements affect various accounts or
balances of financial statements, in which they cannot be isolated; or such
misstatements are so material to the point that the financial statements
as a whole are misleading.
• Hence, auditors usually give an adverse opinion by expressing that the
financial statements do not present fairly (or do not give a true and fair
view) in the audit report.
• In this case, auditors have obtained sufficient appropriate audit
evidence to form the basis for their opinion and all substantive reasons
have been disclosed in the audit report.
 Disclaimer of Opinion
• The statement that independent external auditors issue saying that
they do not express an opinion on the financial statements. The
matter involved in this case is both material and pervasive.
• Unlike adverse opinion, auditors cannot form a basis of opinion either
due to limitation of scope or involvement of significant uncertainties.
• The situation for the disclaimer of opinion is that auditors believe the
matter is too material to even be able to express an opinion on
the financial statements.
• Usually the most serious type of audit opinion, comparing to other
modified opinions such as qualified opinion and adverse opinion
because auditors actually state that they are ‘unable to form an
opinion’.
Thank You!