ba 120.1 - auditing process b

7/29/2019 BA 120.1 - Auditing Process B

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AUDITING PROCESS (B)

BA 120.1Mr. Virgilio Lapuz III, CPA, CIA


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Outline

General Approach to Auditing FS

The Audit Process

Accepting an Engagement

Audit Planning

Materiality

Risk

Consideration of Internal Controls


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General Approach

FinancialStatementAssertions

AuditProcedures

AuditEvidence

AuditOpinion


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AssertionsAssertions

Procedures

Evidence

Opinion

Assertions about classes of

transactions and events for the

period under audit Assertions about account balances at

the end of the period

Assertions about presentation and

disclosure


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Assertions on EventsAssertions

Procedures

Evidence

Opinion

Occurrence

Completeness

Accuracy Cutoff

Classification


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Assertions on BalancesAssertions

Procedures

Evidence

Opinion

Existence

Rights and Obligations

Completeness Valuation and Allocation


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Assertions on DisclosureAssertions

Procedures

Evidence

Opinion

Occurrence and rights and

obligations

Completeness Classification and Understandability

Accuracy and Valuation


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Audit ProceduresAssertions

Procedures

Evidence

Opinion

Inspection

Observation

Inquiry Confirmation

Computation

Analytical Procedures


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Audit EvidenceAssertions

Procedures

Evidence

Opinion

To be discussed after Exam


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Audit OpinionAssertions

Procedures

Evidence

Opinion

Unqualified

Qualified

Adverse Disclaimer of an Opinion


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Audit Process

AcceptinganEngagement

Audit Planning

ConsideringInternal Controls

PerformingSubstantive Tests

Completing an

Audit


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Accepting anEngagement

Audit Planning



Completing anAudit

Making a decision whether to accept or reject an

engagement

Requires evaluation of auditors qualification,auditability of the clients FS, independence issues,

etc.

Usually involves preliminary understanding of the

business, background investigation, etc


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Audit Planning


Audit Planning



Completing anAudit

More detailed knowledge about the clients business

and industry in order to

understand the transactions and events affectingthe financial statements, and

Identify potential problems that might be

encountered during the audit

Preliminary assessment of risk and materiality

Develop overall audit strategy and detailed

approach/scope


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Considering Internal Control


Audit Planning



Completing anAudit

Stronger internal controls, more assurance it

provides about the reliability of accounting data

and financial statements Involves

Obtaining understanding of Control Systems

Assessing the level of Control Risk Performing Test of Controls (less than high level)


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Substantive Tests


Audit Planning



Completing anAudit

Gathering evidence to test the assertions

Dependent on the results of the consideration of

internal controls (inverse)


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Completing an Audit


Audit Planning



Completing anAudit

Auditor must have sufficient, appropriate evidence

in order to reach a conclusion on the fairness of the

financial evidence Review of subsequent events

Assessing going concern assumption

Overall analytical review Written representations


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Outline


The Audit Process


Audit Planning

Materiality

Risk



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Competence

Independence

Ability to serve the client properly

Integrity of Management


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Integrity of Management

PSA 220 states that auditors should conduct a

background investigation of the prospective client to

minimize the likelihood of association with clients

whose management lack integrity Making inquiries of appropriate parties in the

business community

Communicating with the predecessor auditor


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Communicating with the predecessor

auditor

Matter of courtesy to the predecessor auditor

Allows incoming auditor to obtain informationabout the client that will be useful in determining

whether the engagement will be accepted Is there a need to ask potential clients permission?

Incoming auditor should inquire into matters thatmay affect the decision to accept the engagement


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What to inquire?

Predecessor auditors understanding as to the

reasons for the change of auditors

Any disagreement between the predecessor

auditor and the client Any facts that may have bearing on the integrity

of the prospective clients management

Can the predecessor auditor withhold info?


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Retention of Existing Clients

Evaluation is not a one-time exercise

At least once a year or upon occurence of major

events

Changes in Management, Directors, Owners

Change in nature of business

Other changes that may affect the scope of

engagements


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Engagement Letter

Written contract between the auditor and the client

Important to avoid misunderstandings with respect

to the engagement, and to document and confirm

the auditors acceptance of the appointment.


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Content of Engagement Letter

Objective of the audit (express an opinion)

Managements responsibility (FS)

Scope

Forms or any reports expected to be issued

Unavoidable risk

Responsibility of client to have unrestricted access


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Optional Content

Billing arrangements

Expectations of receiving management

representation letter

Arrangements concerning the involvement of others

Request to confirm the terms of the engagement


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Recurring audits

Do you need to send it every year?

When do you send a new letter?

Indication that the client misunderstands the objective

and scope of the audit Revised or special terms of the engagement

Recent change of senior management, BOD, ownership

Significant change in nature of the business Legal requirements and other pronouncements


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Audit of Components

Who appoints the auditor of the component?

Is there a separate report?

Legal requirements

Extent of any work performed by other auditors

Degree of ownership by the parent

Degree of independence of the components

management


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10 minute break then quiz


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Outline


The Audit Process


Audit Planning

Materiality

Risk



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Audit Planning

Developing a

General Audit Strategy

Detailed Approach for the expected conduct of the audit

Main objective

determine the scope of the auditprocedures to be performed

Plan the audit so that it can be performed in aneffective and efficient manner

Extent varies depending on size of entity, complexity ofaudit, auditors experience with the entity, knowledgeof the business, etc.


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Why is adequate planning important?

Helps ensure that appropriate attention is devoted

to important areas of the audit.

Helps identify potential problems

Allows the work to be completed expeditiously

Assists in the proper assignment and coordination of

work

Helps ensure the audit is conducted effectively andefficiently


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Sufficient Understanding (315)

Industry, regulatory, other external factors includingfinancial reporting framework

Nature of the entity, including entitys selection and

application of accounting policies Objectives and strategies and the related business

risks that may result in a material misstatement ofthe financial statements

Measurement and review of the entitysperformance

Internal Controls


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Sources of Information

Review of prior years working papers

Tour of clients facilities

Discussion with people within and outside the entity

Reading books, periodicals, and other publicationsrelated to the clients industry

Reading corporate documents and financial reports

Who in the audit firm? When?


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Use of the information obtained?

Assessing risks and identifying potential problems

Planning and performing the audit effectively and

efficiently

Evaluating audit evidence as well as thereasonableness of clients representations and

estimates

Providing better services to the client


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New Engagements (510)

Obtain sufficient, appropriate audit evidence that:

Opening balance do not contain misstatements thatmaterially affect the current years financial statements

Prior periods ending balance was correctly brought

forward, or when appropriate, have been restated

Appropriate accounting policies are consistentlyapplied, or changes have been properly accounted forand adequately disclosed.


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Overall Audit Strategy

Best strategy is that which will result in the most

efficient auditthat is, an effective audit

performed at the least possible cost.

How much evidence to accumulate?

What procedures should be done?

How and when should these be done?


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Materiality

Largest amount of misstatement that the auditor

could tolerate in the financial statements

Smallest aggregate amount that could misstate the

financial statements


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Using Materiality Levels

Determine overall materialityfinancial statement

level

Determine the tolerable misstatement at the account

level Compare the aggregate amount of uncorrected

misstatements with the overall materiality


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Audit Risk Model

DetectionRisk

ControlRisk

InherentRisk

AuditRisk

ba 120.1 - auditing process b

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