AUDITING PROCESS (B)

BA 120.1 Mr. Virgilio Lapuz III, CPA, CIA

Outline

General Approach to Auditing FS The Audit Process Accepting an Engagement Audit Planning
Materiality Risk

Consideration of Internal Controls

General Approach
Financial Statement Assertions

Audit Opinion

Audit Procedures

Audit Evidence

Assertions
Opinion

Assertions

Procedures

Assertions about classes of transactions and events for the period under audit Assertions about account balances at the end of the period Assertions about presentation and disclosure

Evidence

Assertions on Events
Opinion

Assertions

Procedures

Occurrence Completeness Accuracy Cutoff Classification

Evidence

Assertions on Balances
Opinion

Assertions

Procedures

Existence Rights and Obligations Completeness Valuation and Allocation

Evidence

Assertions on Disclosure
Opinion

Assertions

Procedures

Occurrence and rights and obligations Completeness Classification and Understandability Accuracy and Valuation

Evidence

Audit Procedures
Opinion

Assertions

Procedures

Inspection Observation Inquiry Confirmation Computation Analytical Procedures

Evidence

Audit Evidence
Opinion

Assertions

Procedures

To be discussed after Exam

Evidence

Audit Opinion
Opinion

Assertions

Procedures

Unqualified Qualified Adverse Disclaimer of an Opinion

Evidence

Audit Process

Performing Substantive Tests Considering Internal Controls Audit Planning

Completing an Audit

Accepting an Engagement

Accepting an Engagement

Making a decision whether to accept or reject an engagement Requires evaluation of auditors qualification, auditability of the clients FS, independence issues, etc. Usually involves preliminary understanding of the business, background investigation, etc
Considering Internal Controls Audit Planning

Performing Substantive Tests

Completing an Audit

Accepting an Engagement

Audit Planning

More detailed knowledge about the clients business and industry in order to understand the transactions and events affecting the financial statements, and Identify potential problems that might be encountered during the audit Preliminary assessment of risk and materiality Develop overall audit strategy and detailed approach/scope
Performing Substantive Tests Considering Internal Controls Audit Planning Accepting an Engagement

Completing an Audit

Considering Internal Control

Stronger internal controls, more assurance it provides about the reliability of accounting data and financial statements Involves Obtaining understanding of Control Systems Assessing the level of Control Risk Performing Test of Controls (less than high level)
Performing Substantive Tests Considering Internal Controls Audit Planning Accepting an Engagement

Completing an Audit

Substantive Tests

Gathering evidence to test the assertions Dependent on the results of the consideration of internal controls (inverse)

Performing Substantive Tests Considering Internal Controls Audit Planning

Completing an Audit

Accepting an Engagement

Completing an Audit

Auditor must have sufficient, appropriate evidence in order to reach a conclusion on the fairness of the financial evidence Review of subsequent events Assessing going concern assumption Overall analytical review Written representations
Performing Substantive Tests Considering Internal Controls Audit Planning Accepting an Engagement

Completing an Audit

Outline

General Approach to Auditing FS The Audit Process Accepting an Engagement Audit Planning
Materiality Risk

Consideration of Internal Controls

Accepting an Engagement

Competence Independence Ability to serve the client properly Integrity of Management

Integrity of Management
PSA 220 states that auditors should conduct a background investigation of the prospective client to minimize the likelihood of association with clients whose management lack integrity Making inquiries of appropriate parties in the business community Communicating with the predecessor auditor

Communicating with the predecessor auditor

Matter of courtesy to the predecessor auditor Allows incoming auditor to obtain information about the client that will be useful in determining whether the engagement will be accepted Is there a need to ask potential clients permission? Incoming auditor should inquire into matters that may affect the decision to accept the engagement

What to inquire?

Predecessor auditors understanding as to the reasons for the change of auditors Any disagreement between the predecessor auditor and the client Any facts that may have bearing on the integrity of the prospective clients management Can the predecessor auditor withhold info?

Retention of Existing Clients

Evaluation is not a one-time exercise At least once a year or upon occurence of major events

Changes in Management, Directors, Owners Change in nature of business Other changes that may affect the scope of engagements

Engagement Letter

Written contract between the auditor and the client Important to avoid misunderstandings with respect to the engagement, and to document and confirm the auditors acceptance of the appointment.

Content of Engagement Letter

Objective of the audit (express an opinion) Managements responsibility (FS) Scope Forms or any reports expected to be issued Unavoidable risk Responsibility of client to have unrestricted access

Optional Content

Billing arrangements Expectations of receiving management representation letter Arrangements concerning the involvement of others Request to confirm the terms of the engagement

Recurring audits

Do you need to send it every year? When do you send a new letter?
Indication

that the client misunderstands the objective and scope of the audit Revised or special terms of the engagement Recent change of senior management, BOD, ownership Significant change in nature of the business Legal requirements and other pronouncements

Audit of Components

Who appoints the auditor of the component? Is there a separate report? Legal requirements Extent of any work performed by other auditors Degree of ownership by the parent Degree of independence of the components management

10 minute break then quiz

Outline

General Approach to Auditing FS The Audit Process Accepting an Engagement Audit Planning
Materiality Risk

Consideration of Internal Controls

Audit Planning

Developing a
General Audit Strategy Detailed Approach for the expected conduct of the audit

Main objective determine the scope of the audit procedures to be performed Plan the audit so that it can be performed in an effective and efficient manner Extent varies depending on size of entity, complexity of audit, auditors experience with the entity, knowledge of the business, etc.

Why is adequate planning important?

Helps ensure that appropriate attention is devoted to important areas of the audit. Helps identify potential problems Allows the work to be completed expeditiously Assists in the proper assignment and coordination of work Helps ensure the audit is conducted effectively and efficiently

Sufficient Understanding (315)

Industry, regulatory, other external factors including financial reporting framework Nature of the entity, including entitys selection and application of accounting policies Objectives and strategies and the related business risks that may result in a material misstatement of the financial statements Measurement and review of the entitys performance Internal Controls

Sources of Information

Review of prior years working papers Tour of clients facilities Discussion with people within and outside the entity Reading books, periodicals, and other publications related to the clients industry Reading corporate documents and financial reports Who in the audit firm? When?

Use of the information obtained?

Assessing risks and identifying potential problems Planning and performing the audit effectively and efficiently Evaluating audit evidence as well as the reasonableness of clients representations and estimates Providing better services to the client

New Engagements (510)

Obtain sufficient, appropriate audit evidence that:

Opening

balance do not contain misstatements that materially affect the current years financial statements Prior periods ending balance was correctly brought forward, or when appropriate, have been restated Appropriate accounting policies are consistently applied, or changes have been properly accounted for and adequately disclosed.

Overall Audit Strategy

Best strategy is that which will result in the most efficient audit that is, an effective audit performed at the least possible cost.

How much evidence to accumulate? What procedures should be done? How and when should these be done?

Materiality

Largest amount of misstatement that the auditor could tolerate in the financial statements Smallest aggregate amount that could misstate the financial statements

Using Materiality Levels

Determine overall materiality financial statement level Determine the tolerable misstatement at the account level Compare the aggregate amount of uncorrected misstatements with the overall materiality

Audit Risk Model

Audit Risk

Inherent Risk

Control Risk

Detection Risk