OVERVIEW THE
AUDIT PROCESS
Overview of the Audit Process
Obtain and understanding of the
business and Industry
Identify relevant financial
statement assertions
Make decisions about materiality
Make decisions about audit risk
components
Obtain evidence through audit
procedures
Procedures to obtain
understanding of internal
control
Test of
control
Substantive tests: analytical
procedures, detais ofl
transactions, details of balances
Determine how evidence will be used
Communicati
on to F/S
users through
audit opinion
Other required
communicatio
ns to the audit
committee
Communication
of findings
associated with
other valueadded services
Knowledge of the Business and Industry
Developing expectations of F/S
Industry impact on information systems
Evaluation of reasonableness of
accounting estimates
GAAP for specific industries
Foundation for other value-added
services
Management’s Assertions
Management’s Assertions
Representation of economic events and
transactions made by management
Categories of Management’s Assertions
* Existence or Occurrence
* Completeness
* Rights and Obligations
* Valuation or Allocation
* Presentation and Disclosure
– Explicit: existence & valuation
– Implicit: completeness, right-obligation,
disclosure
Management’s Assertions
Existence or Occurrence
deal with whether assets or liabilities of the
entity exist at a given date and whether
recorded transactions have occurred during
a given period
Completeness
deal with whether all transactions and
accounts that should be presented in the
financial statements are indeed included
Management’s Assertions
Right and Obligations
deal with whether assets are the right
of the entity and liabilities are the
obligations of the entity at a given date
Valuation or Allocation
deal with whether assets, liability,
revenue and expense components
have been included in the F/S at
appropriate amounts
Management’s Assertions
Presentation and Disclosure
deal with whether particular
components of the financial
statements are properly classified,
described, and disclosed
Materiality
FASB Concepts Statements No. 2
defines materiality as “the magnitude
of an omission or misstatement of
accounting information that, in light of
surrounding circumstances, makes it
probable that the judgment of a
reasonable person relying on the
information would have been changed
or influence by the omission or
misstatement”
Materiality
Materiality influence the audit process
– In planning the engagement, auditor should
judge the scope of the audit
– Guides the collection of sufficient, competent
evidential matter
– Guides auditor when evaluating audit findings
Audit Risk
SAS 47 (AU 312.02) defines audit risk:
the risk that the auditor may unknowingly
fail to appropriately modify his or her
opinion on financial statements that
contain a material misstatement
Audit Risk Components
Client's
internal
controls
Misstatements
prevemted or
detected and
corrected by
internal control
Susceptibility of
individual assertions to
material misstatement
Assess Control Risk
Material misstatement
not prevented or
detected and corrected
by client's internal
control
Design Audit to
Achieve Detection Risk
Auditor's
procedure
s for
verifying
assertions
Misstatement
detected by audit
procedures
Assess Inherent Risk
=
Material
misstatements
remaining
undetected in
individual
assertions
Audit Risk
F/S with
reasonable
assurance that
they are free of
material
statement
Audit Risk Components
Inherent Risk (IR)
the susceptibility of an assertion to a material misstatement,
assuming that there are no related internal controls
Control Risk (CR)
that a material misstatement that could occur in an assertion
will not by prevented or detected on a timely basis by entity’s
internal controls
Detection Risk (DR)
that auditor will not detect a material misstatement that exist
in an assertion
Audit Risk Model
AR = IR x CR x DR
Evidence
Sufficient competent evidential matter is to be
obtained through inspection, observations,
inquiries, and confirmation to afford a reasonable
basis for an opinion regarding the financial
statements under audit (3rd General Standard)
SAS 31 (AU 326.20) Evidential Matter
states that “the amount and kinds of evidential
matter required to support an informed opinion are
a matter for auditor to determine in exercise
professional judgment after a careful study of the
circumstance in the particular case”
Sufficiency of Evidential Matter
Materiality and Risk
more evidence is needed for accounts that are
material to the F/S
Economic Factors
evidence must be obtained within a reasonable
time and at a reasonable cost
Size and Characteristics of the Population
the larger the population, the larger the quantity
of evidence required
Competency of Evidential Matter
The competency (reliability) of both underlying
accounting data and corroborating information
Relevance
evidence must be pertinent to the auditor’s objective
Source
independent outside entity, internal control structure, direct
access
Timelines
relates to the date to which the evidence is applicable
Objectivity
objective in nature is more reliable
Classification of Audit Procedures
Procedures to Obtain an Understanding
procedures to obtain an understanding of the client, its
business and industry, and factors that may affect the
inherent risk of misstatement in an assertion
Tests of Control
to provide evidence about the effectiveness of the design and
operation of internal control structure policies and procedures
Substantive Tests
to provide evidence as to the fairness of management’s
financial assertions
- Analytical procedures
- Tests of details of transactions
- Tests of details of balances
Consideration of Value-Added Services
Benchmarking company performance
and performance measurement
Business planning
Risk assessment
Business evaluation
Information system design and
reliability
Communication of Findings
The communication on the financial
statements through auditor’s report
Other required communications with
management
– Internal controls
– Significant accounting policies
– Management judgments and accounting
estimates
Communication of other findings
– Other value-added services