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Auditing: Systematic Process of F/S Audit Audit Planning Audit Evidence Audit Documentation

The document discusses the auditing process. It begins by outlining the key steps: audit planning, gathering evidence, and preparing a report. It then provides more details on the audit planning phase, including accepting the engagement, evaluating management integrity, understanding the client's industry and operations, and assessing audit risks. The goal of audit planning is to develop an overall strategy and detailed approach to perform the audit efficiently.

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Mae Astoveza
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56 views28 pages

Auditing: Systematic Process of F/S Audit Audit Planning Audit Evidence Audit Documentation

The document discusses the auditing process. It begins by outlining the key steps: audit planning, gathering evidence, and preparing a report. It then provides more details on the audit planning phase, including accepting the engagement, evaluating management integrity, understanding the client's industry and operations, and assessing audit risks. The goal of audit planning is to develop an overall strategy and detailed approach to perform the audit efficiently.

Uploaded by

Mae Astoveza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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AUDITING

1. SYSTEMATIC PROCESS OF F/S AUDIT


2. AUDIT PLANNING
3. AUDIT EVIDENCE
4. AUDIT DOCUMENTATION
SYSTEMATIC PROCESS OF FS
AUDIT

1. Pre-engagement and
Audit Planning (PSA 300)
2. Gathering and evaluating
evidence (PSA 500)
3. Preparing and issuing
report (PSA _00)
SYSTEMATIC PROCESS OF FS
AUDIT

PHASE 1
 Pre-engagement and Audit
Planning
Preliminary arrangements
 Engagement Letter
Accepting the Engagement
 Competition among firms
 Change in auditors
 Mergers
 Expanded services
 Dissatisfaction
 Audit fee
 Also engagement continuance
 Does the auditor have the obligation to
perform an audit when requested?
Evaluating the Integrity of Management

 Trust in management
 Management lacking in integrity?
 Evaluation of Management Integrity
a. Make inquiries of third parties
• Who to ask?
 Prior auditor
 Successor auditor should take initiative
 Client’s permission
 Code of conduct
SYSTEMATIC PROCESS OF F/S AUDIT
 Pre-engagement and Audit Planning
Audit Planning - developing a
general strategy & a detailed
approach for the expected
nature, timing & extent of the
audit.
The auditor plans to perform the audit in an efficient & timely manner.
Summary of the Purposes
of Audit Planning

A major purpose is to gain :


(1) an understanding of the client’s business
and industry.
(2) an overall audit strategy
Key Parts of Planning
Accept client and perform
initial planning

New client Obtain an


acceptance and understanding
continuance with client

Identify client’s Staff the


reasons for audit engagement
Key Parts of Planning
Understand the client’s
business and industry

Understand client’s
Understand client’s
management, operations,
industry and external
strategies, and
environment
performance system

Understand client’s
accounting and Understand client’s
reporting systems internal control
Industry and External Environment

What are some reasons for obtaining an


understanding of the client’s industry
and external environment?

1. Risks associated with specific industries


2. Inherent risks common to all clients in
certain industries
3. Unique accounting requirements
Business Operations
and Processes

Factors the auditor should understand:

– Major sources of revenue


– Key customers and suppliers
– Sources of financing
– Information about related parties
– Ability to obtain financing
Management and Governance
Management establishes the strategies and
processes followed by the client’s business.

Governance includes the client’s organizational


structure, as well as the activities of the board
of directors and the audit committee.

Corporate charter and bylaws

Code of ethics Meeting minutes


Planning an Audit and Designing an
Audit Approach

Assessment of Acceptable audit risks


Materiality and inherent risk

Understand internal
Develop overall audit
control and assess
plan and audit program.
control risk.
MATERIALITY
 Presented fairly in accordance with GAAP
implies?
 From an accounting perspective?
 materiality involves the determination of
what information should be reported
 From an auditing perspective?
 A matter of judgment
 It requires the auditor to consider
 Circumstances of the company
 The users of the F/S
 The auditor makes a preliminary judgment
about materiality levels in planning the audit
 May ultimately differ from materiality levels
used in evaluating audit findings
 Materiality involves both qualitative and
quantitative considerations
 In assessing the quantitative amount it is
necessary to relate the nature and peso
amount to the F/S
 In planning, the auditor is usually concerned
with just the quantitative
 Qualitative?
Calculating Materiality
 Any quantitative assessment of materiality must give
full consideration to the surrounding circumstances as
they exist at that time
 Ratios and percentages
 Guidelines:
1. 5% to 10% of net income before taxes
2. 1% to 2% of total assets
3. 1% of equity
4. ½ % of gross revenue
5. A variable percentage of gross revenue
Qualitative Factors
Should answer the following questions
1. Nature of the item?
2. Unusual or extraordinary?
3. Contingency?
4. Based on existing facts?
5. Relevant to F/S taken as a whole?
6. Relevant to the total of the accounts of which it forms a part?
7. Relevant to other related items?
On the basis of the initial information gathered
by the auditor, he then assesses the

AUDIT RISK

Control risk Inherent risk

Detection Risk
Risk Terms
Acceptable audit risk

A measure of how willing the auditor is to accept


that the FS may be materially stated after the audit
is completed and an unqualified opinion has been issued

Zero risk 100% Risk


= =
Certainty Uncertainty
Inherent Risk

 Some accounts may be susceptible to loss


through fraud or theft
 Complex calculations for leases or pensions
are more likely to contain errors
 Inherent risk also extends to factors that affect
the financial statements as a whole
Control Risk

 A function of the effectiveness of the client’s


system of internal control
 Effective controls over an account
 Control risk can never be zero
Detection Risk

 A function of the effectiveness of the auditor’s


verification of account balances
 What influences detection risk?
 In estimating detection risk, the auditor should
also consider the likelihood that errors will be
made in judgment
 Inverse relation between the inherent risk and
control risk for an account and the detection
risk for that account
 DR a 1/IR
 DR a 1/CR
 Inherent risk and control risk relate to the
circumstances of the client, but detection risk is
controlled by the auditor
The Audit Risk Model
 The three components can expressed in
quantitative terms
 They can also be expressed in non-
quantitative terms
 AR = IR x CR x DR
Inherent Risk Control Risk Detection Risk Audit risk
HIGH .70 .6 x .8 x.7 = .34
•Small Samples
•Few substantive
tests
•Extensive reliance
on IC
HIGH .80
•System poorly designed
•System poorly executed
•Not tested (CR = 1.00) LOW .30 .6 x .8 x .3 = .14
•Large samples
•Many substantive
tests
HIGH .60 •No reliance on IC
•Assets susceptible to theft
•New client HIGH .70 .6 x .2 x .7 = .08
•Integrity doubtful •As above
•Non profitable and
needs financing LOW .20
•System well designed and
well executed
•Audit tests show system LOW .30 .6 x .2 x .3 = .04
effective •As above
Inherent Risk Control Risk Detection Risk Audit risk
HIGH .70 .4 x .8 x.7 = .22
•Small Samples
•Few substantive
tests
•Extensive reliance
on IC
HIGH .80
•System poorly designed
•System poorly executed
•Not tested (CR= 1.00) LOW .30 .4 x .8 x .3 = .10
•Large samples
•Many substantive
tests
LOW .40 •No reliance on IC
•Assets not susceptible to
theft HIGH .70 .4 x .2 x .7 = .06
•Old client •As above
•Integrity believed high
•Profitable and easily LOW .20
financed •System well designed and
well executed
•Audit tests show system LOW .30 .4 x .2 x .3 = .02
effective •As above

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