THE AUDIT

PROCESS
Accepting an Engagement
Financial statement assertions

Responsible for the

fair presentation of
financial statements
that reflect the nature
and operations of the
entity
MANAGEMEN Implicitly or explicitly
T makes assertions
regarding the
recognition,
measurement,
presentation and
disclosure of the various
elements of FS and
 Assertions about classes of transactions and events for the
period under audit
OCCURRENCE TRANSACTIONS AND EVENTS that
been recorded have occurred and
pertain to the entity
COMPLETENESS All TRANSACTIONS AND EVENTS
that should have been recorded
have been recorded
ACCURACY Amounts and other date relating to
recorded TRANSACTIONS AND
EVENTS have been recorded
appropriately
CUT-OFF TRANSACTIONS AND EVENTS have
been recorded in the correct
accounting period
CLASSIFICATION TRANSACTIONS AND EVENTS have
Financial statement assertions Categories
been recorded in the proper
accounts
 Assertions about account balances at the period end
EXISTENCE Assets, liabilities, and equity
interests exist
RIGHTS AND OBLIGATIONS The entity holds or controls the
rights to assets, and liabilities are
the obligations of the entity
COMPLETENESS All assets, liabilities, and equity
interests that should have been
recorded have recorded

VALUATION Assets, liabilities, and equity

interests are included in the FS at
appropriate amounts and any
resulting valuation or allocation
adjustments are appropriately
recorded.
 Assertions about presentation and disclosures
OCCURRENCE AND RIGHTS Disclosed events, transactions, and
other matters have occurred and
AND OBLIGATION pertain to the entity
COMPLETENESS All DISCLOSURES that should have
been recorded have been included
in the FS have been included
CLASSIFICATION and Financial information is
appropriately presented and
UNDERSTANDABILITY described, and disclosures are
clearly expressed
ACCURACY and VALUATION Financial and other information are
disclosed fairly and at appropriate
amounts
Audit procedures  Assessment
of risk of
Should use material
assertions for misstatement
classes, balances,  Design and
disclosures to form performance
of further
a basis for: audit
procedures
AUDITOR The procedures
selected should
enable the
auditor to gather
sufficient
appropriate
evidence about a
particular
assertion
 AUDIT PROCEDURES
Involves examining of records,
INSPECTION documents, or tangible assets
Consists of looking at a process or
OBSERVATION procedure or procedure being
performed by others
Consists of seeking information from
INQUIRY knowledgeable persons inside or
outside the entity
Consists of the response to an inquiry
CONFIRMATION to corroborate information contained in
the accounting records
Consists of checking the arithmetical
COMPUTATION accuracy of source documents and
accounting records or performing
independent calculations
Consists of the analysis of significant
ANALYTICAL ratios and trend including the resulting
PROCEDURES investigation of fluctuations and
relationships that are inconsistent with
other relevant information or deviate
Evidence
Refers to the
information obtained
by the auditor in
arriving at the
conclusions on which
the audit opinion is
Audit based
evidence Comprise source
documents and
accounting records
underlying the
financial statements
and corroborating
information
Overview of the audit process

Accepting an
engagement
Audit planning
Considering internal
control
Performing substantive
tests
Completing the audit

Issuing a report
Accepting an engagement  First step is to make
decision of whether to
accept or reject an audit
engagement

 Preliminary understanding
PSA 300 “PRELIMINARY PLANNING of the client business and
ACTIVITIES” background are usually
Performing procedures regarding the performed at this stage
continuance of the client relationship and
the specific audit engagement
Evaluating compliance with ethical
requirements including independence

Establishing an understanding of the

terms of the engagements
Audit planning
Obtains more detailed knowledge
about the client's business and
industry in order to understand the
transactions and events affecting
the financial statements
To identify potential problems that
might be encountered during the
AUDIT audit

OR Preliminary assessment of risk

and materiality should also be
made to be able to develop an
overall audit strategy

A detailed approach for the

expected conduct and scope of
the examination.
Considering the internal control

• Should give adequate consideration

Consideration of internal control
AUDITO to the entity's internal control
involves:
because the condition ofauditor
If the the wants to
R Assessing
entity's the level
internal
of control risk-
assess control risk at
control
less
directly
than high level,
affects the reliabilitysufficient
of the appropriate
FS
The stronger the the risk
internal that the
control, evidence
the more must be
assurance it
Obtaining client's internal obtained to prove that
provides about the reliability
understanding control may of accounting
not the data and
internal control is
offinancial statements.
the entity's prevent or detect functioning effectively
and that it can be
control systems material relied upon. This
misstatements in evidence can be
the financial obtained by performing
statements TESTS OF
CONTROLS.
Performing substantive test

Extent of test •isTohighly dependent

determine whetheronthe
theentity's
results of
AUDITO
auditors consideration of internal
financial statements are control
presented
INTERNAL CONTROL IS
INTERNAL CONTROL
REFFECTIVE IS
fairly in accordance with financial
reporting standards. WEAK

These procedures would involve examination of the

the auditor
documents and evidence supporting will have
the amounts and to
disclosures
the scope ofin the
thefinancial
auditor's compensate for this
statements.
substantive tests can be weakness by performing
reduced more extensive
substantive procedures
Completing the audit
These procedures
• Has completed testing the account
AUDITO include
balances, the auditor performs additional
audit procedures to complete the audit and
R become
review satisfied that
of subsequent the evidence
events and gathered
is consistent with the auditor's report.
contingencies,

assessing the going concern

assumption

performing overall analytical

review procedures

obtaining written representations

from the client's management.
Issuing the report

On the basis of audit evidence gathered and

evaluated, the auditor forms a conclusion about
the financial statements.

This conclusion (in the form of an opinion) is

communicated to various interested users
through an AUDIT REPORT
An important element of a firm's quality control policies
and procedures is a system for deciding whether to
accept or reject an audit engagement. In making this
decision, the firm should consider

COMPETENCE INDEPENDENCE
Accepting
an
Engageme
ABILITY TO SERVE
nt INTEGRITY OF
THE CLIENT MANAGEMENT
PROPERLY
 Independen
Competence
According to the ce
Before accepting an
Code of Ethics
audit engagement, the
Professional auditor should consider
accountants should whether there are any
not portray threats to the audit
themselves as team's independence
having expertise and objectivity and, if
which they do not so, whether adequate
possess.
Competence is safeguards can bee
acquired through a established.
combination of
education, training
and experience.
The auditor should obtain a preliminary knowledge of the
client's business and industry to determine whether the
auditor has the degree of Competence required by the
engagement or whether such competence can be
obtained before the completion of the audit.
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 audit work should be assigned to

personnel who have the appropriate capabilities,
competence and time to perform the audit engagement in
accordance with professional standards

In addition, there should be sufficient direction,

supervision and review of work at all levels in order to
provide reasonable assurance that the firm's standard of
quality is
 Integrity of PSA 220 requires the firm to conduct a
management background investigation of the
prospective client in order to minimize the
likelihood of association with clients
whose management lacks integrity.
MAKING INQUIRIES OF
COMMUNICATING
Questions WITH THE
includes:
APPROPRIATE PARTIES IN THE
PREDECESSOR AUDITOR
BUSINESS COMMUNITY
Reasons for the change of
• To
The Code of Ethics requires theobtain information about the
•
auditors.
client thatto
will be useful in
predecessor auditor to respond fully the
• determining
Disagreement whether the the
between
incoming auditor's inquiry
• Prospective client's banker; and advise
engagement the
incoming predecessorwill be accepted.
auditor and
legal counsel, or auditor if there arethe
any
client.
professional
underwriter to obtainreasons why the
• engagement
Once permission of the client is
should not be • Facts that might have a
information about theaccepted. obtained, the incoming auditor
bearing
should on the
inquire integrity
into matters of
that
reputation of the client
the prospective
may client's
affect the decision to
management.
accept the engagement.
Retention of existing clients

The auditor's evaluation of clients is not a one-time

consideration.
Clients should be evaluated at least once a year or
upon occurrence of major events such as:

 Changes in management, directors, ownership,

nature of client's business, or other changes that
may affect the scope of the examination.

In general, conditions which would have caused an

accounting firm to reject a prospective client may also
result or lead to a decision of terminating an audit
engagement.
Engagement Letter

After THE AUDITOR

accepting MAY ALSO
the audit engagement, an INCLUDE THEshould
engagement letter FOLLOWING
beprepared.
This serves as the written
ITEMS IN THEcontract between the auditor
ENGAGEMENT and the client.
LETTER:

Billing arrangements
 The objective of the audit of financial statements which is to
express an opinion on the FS
Expectations
 The management'sof receiving
responsibilitymanagement
for the fair presentation of the
representation letter
financial statements
 The scope of the audit.
 The forms or any concerning
Arrangements reports or other the involvement
communication that theofauditor
others (experts,
expects to issue. other auditors, internal
auditors andbecause
 The fact that otherofclient personnel)
the limitations of the audit, there is an
unavoidable risk that material misstatements may remain
Request for the client to confirm the terms of
undiscovered
the engagement
 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.
Importance of the engagement
letter

It is in the interest of both the auditor and the

client that the auditor sends engagement letter
in order to:

Avoid misunderstandings with respect to the

engagement.

Document and confirm the auditor's

acceptance of the appointment
Recurring audits
The auditor does not normally send new
engagement letter every year. However, the
following factors may cause the auditor to send
a new engagement 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 the nature or size

of the client's business

Legal requirements and other

government agencies' pronouncements
 Audits of
Components
When the auditor of a parent entity is also the
auditor of its subsidiary, branch or division
(component), the auditor should consider the
following factors in making a decision of whether to
send a separate letter to the component
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 auditor.

Degree of ownership by parent

Degree of independence of the

component's management.