THE AUDIT PROCESS
An Overview
MAJOR PHASES IN AN AUDIT
Client acceptance and retention
Establish terms of the engagement
Plan the audit
Consider internal control
MAJOR PHASES IN AN AUDIT
Conduct substantive tests
Complete the audit
Issue audit report
CLIENT ACCEPTANCE AND
RETENTION
 The audit firm must have existing policies and
procedures on client acceptance and retention
 The purpose is to minimize association with client
who lacks integrity
 Investigation on prospective client prior to
acceptance must be documented in a memo or
completion of client acceptance questionnaire or
checklist.
1. Obtain and review available financial
information
 annual reports
 interim financial statements
 income tax returns
2. Inquire of third parties about any
information concerning the integrity
of the prospective client and its
management
 Bankers
 Lawyers
 Credit agency
 Members of the business community
EVALUATING A
PROSPECTIVE
CLIENT
List of
procedures
3. Communicate with predecessor auditors about whether there
were any disagreements about:
•
•
•
Accounting principles
Audit procedures
Other similar related matters
 Successor auditor should request permission of the prospective client before
contacting the predecessor auditors
 Inquiry should include questions related to
 integrity of management,
 disagreements over accounting and auditing issues
 Communications with audit committees or group regarding fraud, illegal
acts, and internal control related matters
 The predecessor’s understanding of the reason for the change in auditors
 Predecessor auditors should respond fully unless an unusual circumstances
exists (lawsuit)
 If predecessor auditors’ response is limited, the successor auditor must be
informed that the response is limited.
 If prospective client refuses to permit the predecessor auditors to respond, the
successor auditor should have reservations about acceptance.
4. Consider whether prospective client has any
circumstances that will require special attention or that
may represent unusual business or audit risks:
• Litigation
• Going-concern problems
5. Determine if the firm is independent of the client and if
able to provide the desired service
6. Determine if the firm has the necessary technical skills
and knowledge of the industry to complete the
engagement
7. Determine if acceptance of the client would violate any
applicable regulatory agency requirements or the Code of
Professional Conduct.
ESTABLISH TERMS OF THE
ENGAGEMENT
1. What services to be performed
2. Engagement letter should document the terms
agreed to:

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Responsibilities of the management’
Responsibilities of the auditors
Assistance to be provided by the client personnel and
internal auditors
Expected audit fees.
1. Owner-manager ( in small
privately held companies)
2. Large private companies”
 Auditor is appointed by vote
of the stockholders after
recommendation by the
board or audit committee.
 Audit committee is
composed of the members of
the board of directors who do
not hold positions in the
company.
THE AUDIT
COMMITTEE
RESPONSIBILITIES OF AUDIT
COMMITTEES
1. Financial reporting and disclosure process
2. Encourage fair reporting from the perspective of:



Stockholders
Creditors
Employees
3. Provide for the independence of the external and internal
auditors
4. Meets with the external auditor to discuss about




responsibilities
significant accounting policies
Scope of the auditor’s work
Conduct of special investigations
1. Formalizes the arrangement
reached between the auditor and
the client.
2. Serves as a contract
3. Outlines the responsibilities of the
parties
4. Includes arrangements involving
the use of specialists or internal
auditors
5. Includes any limitations of the
liability of the auditor or client like:

Misrepresentations to the auditor by the
management
6. Additional services to be provided
relating to regulatory requirements
7. Arrangements regarding other
services (assurance, tax, consulting)
THE
ENGAGEMENT
LETTER
1. Gather information about their
activities
2. Assess the competence and
objectivity of the internal auditors
and the effect of their work to the
audit
3. Consider the effect of the internal
auditors’ work on the audit process



Understanding of the internal control’
Risk assessment
Substantive procedures
THE
INTERNAL
AUDITORS
CONSIDERING EFFECTS OF THE INTERNAL
AUDITORS’ WORK ON THE AUDIT
1. Consider the extent of the effect of the internal
auditors’ work
2. Coordinate audit work with internal auditors
3. Evaluate and test the effectiveness of the internal
auditors’ work.
FACTORS IN ASSESSING THE
COMPETENCE OF INTERNAL AUDITORS
1.
2.
3.
4.
5.
6.
Educational level and professional experience
Professional certification and continuing education’
Audit policies, procedures and checklists
Practices regarding their assignments
Supervision and review of their audit activities
The quality of their working paper documentation,
reports and communications
7. Evaluation of their performance.
FACTORS IN ASSESSING THE OBJECTIVIT Y
OF INTERNAL AUDITORS
1. Organizational status of the internal auditor for the
internal audit function

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Coverage
Access to board of directors
Access to audit committee
2. Policies to maintain internal auditors’ objectivity
about the areas audited
ENGAGEMENT
PLANNING