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CHAPTER I OVERVIEW OF AUDIT PROCESS

AND PRE-ENGAGEMENT ACTIVITIES


Audit - systematic process of objectively obtaining
and evaluating evidence regarding assertions about
economic actions and events to ascertain the
degree of correspondence between these
assertions and established criteria communicating
the results thereof.
AUDIT PROCESS
1. Pre-engagement
Decide whether or not:
To accept client
To continue relationship with existing one
Evaluate:
Auditors qualification
Integrity and credibility of clients FS
Objective: Minimize the likelihood of being
associated to a client whose management
lacks integrity.
2. Audit Planning
I.
Development of overall:
a. Audit Plan
b. Audit Strategy
c. Audit Program
II.
Obtain more detailed knowledge about the
clients business and industry in order to
understand the transactions and events
affecting the financial statements.
III.
Preliminary assessment of RMM
Objective: Assess the different risks associated
with the audit to determine the nature, timing
and extent of further audit procedures
necessary to be performed.
3. Consideration of the internal controls (Test of
Control)
Note: Internal Control directly affects entitys
financial statements
Auditors action: Study and evaluate control
Objective: Establish basis for reliance on internal
controls, in determining the nature, timing, and
extent of audit procedures to be performed.
4. Evidence Gathering (Substantive Testing)
Using the information obtained in audit
planning and consideration of internal controls, the
auditor perform substantive test to determine
whether entitys financial statements are presented
fairly in accordance with financial reporting
standards.

Objective: To conclude whether or not the financial


statements are presented fairly in accordance with
financial reporting standards.
5. Completing the Audit
1. Wrapping up procedures performed
2. Conclusions reached are reviewed
3. Overall opinion is formed
Objective: Assist the auditor in assessing
conclusion reached is consistent with evidence
gathered.
6. Issuance of the Audit Report
Audit Report describes the scope of the
audit and sates the auditors conclusion regarding
the fairness of the financial statements.
Objective: Communicate the conclusion reached by
the auditor to various intended users.
7. Post-audit responsibilities
- auditor performs procedure that will enable
him/her identify areas for improvement in the
current and future engagements.
Objective: Assess and evaluate the quality of
services delivered by the engagement team.

PRE-ENGAGEMENT

Factors to be considered to determine whether to


accept or reject engagement:
1. Competence
2. Independence
3. Ability to serve the client properly
4. Integrity of the prospective clients
management
Things to perform by the auditor:
1. Obtain preliminary knowledge of the clients
business and industry. (Competence)
2. Consider whether there are any threats to
the firms independence and objectivity.
(Independence)
- If so, determine whether
safeguards can be established.
3. Evaluation of the firms (auditors firm) ability
to serve the prospective client.
4. Evaluate auditability.
Auditability A company that is considered
auditable allows auditors to do a more
thorough and accurate assessment of the
companys financial information.

5. Investigation of the integrity of the


management:
a. Inquiry to appropriate parties
b. Communication with the
predecessor auditor
To be discussed with predecessor
auditor:
- Reasons for change in auditors
- Integrity of the management
- Disagreements
Note: Communication made to other
parties must ask permission from the
client and document the items
discussed.
6. Agree on the terms of the engagement
and prepare an engagement letter.
Note: Agreed terms would need to be
recorded in:
o Audit engagement letter; or
o Other suitable form of
contract
Note: It is in the interest of both client and the
auditor that the auditor sends an engagement
letter, preferably before the commencement of the
engagement to help avoid misunderstandings.
The engagement letter documents and confirms:
1. Auditors acceptance of the engagement

2. Objective and scope of the audit


3. Extent of Auditors responsibility to the
client
4. Form of any reports
Contents of Engagement Letter
Contents and forms may vary but would generally
include the following: (RA FORMS)
1. Risk
2. Access to any records
3. Framework used
4. Objective of the audit
5. Reports or communication (Forms)
6. Managements responsibility
7. Scope of the audit
Auditor may also wish to include: (FRAP Reports)
1. Fees
2. Representation letter
3. Acknowledgement of management of
terms of agreement
4. Planning of the audit arrangement
5. Other Reports description
Recurring Audits
Auditor should consider whether:
Circumstances require the terms of the
engagement to be revised
There is a need to remind the client of the
existing terms of the engagement.
Instances where there is a need to send a new
letter:
a. Indication that the client misunderstand the
objective and scope of the audit.
b. Any revised or special terms of the
engagement.
c. A recent change of management, board of
directors or ownership.
d. A significant change in nature or size of the
clients business.
e. A change in legal or regulatory
requirements.
f. A change in financial reporting framework
adopted in the preparation of the financial
statements.
g. A change in other reporting requirements.
CHAPTER II AUDIT PLANNING
INTRODUCTION AND RISK ASSESSMENT
PROCEDURE
Planning an audit

Establishing the overall strategy


Developing the audit plan

Benefits of planning:
Appropriate attention is devoted to
important areas
Potential problems are identified and
resolved on a timely basis
Work are appropriately assigned to
appropriate engagement team members
Assistance in coordinating work done by
other auditors and experts.
Assistance in facilitating direction,
supervision and review.
Nature and extent of planning will vary
according to the: (SECTa)
Size and complexity of the entity
Experience with the entity of key
engagement team members (partner,
manager, and staff-in-charge)
Changes and circumstances that occur
during the engagement
Timing of the Appointment of the
independent auditor
Audit Planning Activities
1. Obtaining and understanding of the client
and its environment.
2. Determine the need for experts
3. Establishing materiality and assessing risks
4. Assessing the possibility of non-compliance
5. Identifying related parties
6. Performing preliminary analytical
procedures
7. Developing of overall audit strategy and
detailed audit plan

8. Preparation of preliminary audit programs.

Overall Audit Strategy


Audit Plan
- more detailed than the overall audit
strategy in that it includes the nature, timing and
extent of audit procedures to be performed by
engagement team members. These procedures
may be documented in an audit program.
Audit Program:
1. Set of instructions to assistants involved in
the audit;
2. Means to control and record the proper
execution of the work
Also contains;
3. The audit objectives for each area.
4. A time budget in which hours are budgeted
for the various audit areas or procedures.

Changes to planning decisions during the


course of the audit
- should be revised as necessary
Planning Documentation
a. The overall audit strategy
b. The audit plan
c. The significant changes made during the
audit engagement to the overall strategy or
audit plan, and the reasons for such
changes.