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Stages of the Audit Process

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Mae Tamim

on 28 June 2014

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Transcript of Stages of the Audit Process

Completing the audit
Once the auditor has completed gathering evidence relating to the financial statements the audit enters the completion stage. First, the sufficiency and appropriateness of the evidence gathered is evaluated. The auditor shall obtain sufficient appropriate evidence in order to reach and justify a conclusion on the fairness of the financial statements.
Should the auditor determine that sufficient appropriate evidence was not obtained, additional substantive procedures need to be performed.
The audit process can be broken down into a number of audit phases. These phases are not exactly sequential, they are actually interrelated in nature. Phases often include procedures designed for one purpose that provide evidence for other purposes, and sometimes procedures accomplish purposes in more than one phase.
Stages of the Audit Process
The final phase in the audit process is to evaluate the results of the audit evidence and choose the appropriate audit opinion to issue. The auditor's report is the main product or output of the audit.
Major phases of the audit
Accepting a new client or confirming the continuance of a new client
Planning the audit
Gathering audit evidence
Completing the audit
Accepting a new client or confirmation of a current client
To accept, or not to accept, that's the question. Professional standards require that audit firms establish policies and procedures for deciding whether to accept new clients or to retain current clients. The purpose of such policies is to minimize the likelihood that an auditor: will be associated with clients of which the auditor is not independent; lacks integrity; or accepts an engagement which they do not have the skill or competence to perform.
If an auditor is not independent of a client it can lead to non-compliance with ethical requirements, as well as bad publicity. If an auditor is associated with a client who lacks integrity or the auditor does not have the skill and competence to perform the audit, the risk increases that material misstatements may exist and not be detected by the auditor. This can lead to a lawsuit being brought against the auditor by users of the financial statements.
For a prospective new client, auditors would ordinarily confer with the predecessor auditor or knowledgeable third parties, and conduct background checks on top management. The knowledge that the auditor during the acceptance/continuance process is not as in-depth as when later gaining an understanding of the entity and its environment, to assess risk and plan the audit. However, the knowledge obtained during the engagement activities should be sufficient to make an informed decision whether or not to accept the client.
To determine if the firm has sufficient skill and competence, the competence of the audit team as a whole is considered and also whether the firm has sufficient staff and resources available to perform the engagement. Before the auditor can make the acceptance/continuance decision, the auditor and the client need to establish and understand the terms of the services to be performed.
Once the decision for acceptance/continuance has been taken, the auditor and the client need to confirm the terms of the engagement by signing an engagement letter. Terms included in the engagement letter include the responsibilities of each party, the assistance to be provided by client personnel and internal auditors, the timing of the engagement, and the expected audit fees.
Planning the audit
Auditing standards require the audit to be properly planned; this is to ensure that the audit is conducted in an effective and efficient manner. Planning involves all the issues the auditor should consider to develop an overall practice strategy and audit plan for conducting the audit. Therefor, the outcome of the auditor's planning process is a written plan that sets forth the overall audit strategy, extent, and timing of the audit work.
Steps to be performed during the planning stage
1. Understanding the entity and its environment
It should include information about each of the following categories:
Industry, regulatory, and other external factors, including the applicable financial reporting framework.
selection and application of accounting policies.
objectives, strategies and related business risks.
measurement and review of financial performance.
2. Obtaining an understanding of internal control
In the course of reaching an understanding of the entity, the auditor should also obtain an understanding of its internal control system. This assists the auditor in identifying potential misstatements and the factors that could increase the risk of material misstatements. The auditor typically assesses the risk of material misstatements by examining both the general environment and the application controls per business processes or accounting cycles (e.g. purchasing process or revenue process).
3. Asses the risk of material misstatements
The assessed level of risk of material misstatements is used to determine the acceptable level of detection risk and to plan the auditing procedures to be performed, which are ultimately developed into the audit strategy and audit plan.
4. Asses the need for experts.
Gathering audit evidence
After the auditor has planned the audit auditor needs to gather sufficient appropriate audit evidence on which to base his/her audit opinion.
" Robust audit is the key to re-establishing trust and market confidence; it contributes to investor protection and reduces the cost of capital for companies."
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