The Audit Process
Introduction
This guide outlines the key stages and activities involved in the audit process, as detailed in
Dynamic Auditing 14th Edition, Chapter 5 (pages 5-15 to 5-17). Understanding these stages is
crucial for comprehending how an audit is conducted from inception to conclusion.
Learning Outcomes
Upon successful completion of this study unit, you should be able to:
Name the different stages of the audit process.
Briefly describe the activities that need to be performed during each stage of the audit
process.
Apply the concepts of the audit process in a case study.
Stages of the Audit Process
The audit process can be broadly categorized into four main stages:
Stage 1: Engagement Activities
This initial stage focuses on establishing the auditor-client relationship and ensuring the audit is
viable and properly defined.
Step 1: Perform a Client Investigation for New and Existing Clients
For new clients, this involves a thorough investigation to assess their integrity, financial
stability, and the risks associated with accepting them as a client.
For existing clients, this involves reviewing significant changes in their business,
management, or financial position since the last audit.
Step 2: Determine the Skills and Competence Requirements
Assess whether the audit firm possesses the necessary expertise, technical knowledge,
and resources to conduct the audit effectively, considering the client's industry and
complexity.
Step 3: Establish the Terms of the Engagement
Clearly define the scope, objectives, responsibilities of both the auditor and the client, and
the form of the report in an engagement letter. This document serves as a contract
between the auditor and the client.
Stage 2: Planning of the Audit
This is a critical phase where the auditor develops a strategy and detailed plan to conduct the
audit efficiently and effectively. It involves planning at both the overall financial statement level
and the assertion level for individual accounts.
Planning at the Overall Financial Statement Level and Establishing the Overall Audit Strategy
Understanding the Entity and its Environment: Gain a comprehensive understanding of
the client's business, industry, regulatory environment, and internal operations.
Obtain an Understanding of the Entity's Internal Control: Assess the design and
implementation of the client's internal control system, including its information system.
This helps identify potential weaknesses and risks.
Identify and Assess the Risk of Material Misstatement (ROMM) at the Overall Financial
Statement Level: Determine the likelihood of material misstatements existing due to fraud
or error that could affect the financial statements as a whole.
Set Materiality: Determine the materiality level, which is the magnitude of an omission or
misstatement that could influence the economic decisions of users of the financial
statements.
Identify Significant Accounts to Audit in Detail at the Assertion Level: Based on the
understanding of the entity and initial risk assessments, identify specific accounts,
classes of transactions, and disclosures that require detailed audit attention.
Overall Audit Strategy Formulation
Formulate an Overall Audit Approach: Develop a high-level strategy outlining the nature,
timing, and extent of audit procedures for the financial statements as a whole.
Specific Risk Responses: Define how the audit will respond to identified specific risks.
This includes considering the application of professional skepticism, incorporating
unpredictability in audit procedures, deciding on the use of experts, and assigning
appropriately senior staff to key areas.
Organizational, Administrative, and Coordination Issues: Plan the logistics of the audit,
including the timing of audit visits, setting time and cost budgets, allocating staff, and
establishing internal review and control mechanisms.
Detailed Planning at the Assertion Level for Individual Classes of Transactions, Account
Balances, and Disclosures (Audit Plan)
For Individual SIGNIFICANT Accounts:
Perform Risk Assessment Procedures: Conduct procedures to assess the risk of
material misstatement at the assertion level for specific accounts. This involves
identifying significant risks and controls of audit significance (key controls) that may
be in place to mitigate these risks.
Establish a Detailed Audit Approach: Define the specific nature, timing, and extent of
planned audit procedures, including tests of controls and substantive procedures,
tailored to the assessed risk for each significant account.
Response to Specific Risks for the Account: Determine the required level of
professional skepticism and unpredictability for the audit of the specific account.
Allocation of Resources and Coordination: Assign audit staff based on their
experience, determine the level of supervision and review required, decide on the use
of experts or computer-assisted audit techniques (CAATs), and refine time and cost
budgets for the specific account.
Perform Audit Procedures: Execute the planned tests of controls and/or substantive
tests in response to the assessed risk.
For NON-SIGNIFICANT Accounts:
Verify through Substantive Analytical Review Procedures: For accounts deemed not
significant, the audit approach typically involves using substantive analytical review
procedures to obtain sufficient appropriate audit evidence.
Stage 3: Obtaining Audit Evidence
This stage involves executing the audit plan by performing the designed audit procedures to
gather sufficient appropriate audit evidence.
Obtaining Audit Evidence through Performance of Audit Procedures:
Tests of Controls: These procedures are performed to evaluate the operating
effectiveness of internal controls in preventing, or detecting and correcting, material
misstatements at the assertion level.
Substantive Procedures:
These procedures are performed to detect material misstatements at the assertion level.
They include:
Tests of Details: Examining specific transactions, account balances, or disclosures.
Substantive Analytical Procedures: Evaluating financial information by studying
plausible relationships among both financial and non-financial data.
Stage 4: Evaluating, Concluding, and Reporting
The final stage involves reviewing the gathered evidence, forming an opinion on the financial
statements, and communicating this opinion to the users.
Overall Review of the Financial Information and Evaluation of the Audit Evidence: Review the
financial statements for overall fairness and consistency. Evaluate whether the audit evidence
obtained is sufficient and appropriate to support the audit opinion.
Conclude and Formulate an Audit Opinion: Based on the evaluation of evidence, the auditor
concludes whether the financial statements are presented fairly, in all material respects, in
accordance with the applicable financial reporting framework. This conclusion leads to the
formulation of the audit opinion.
Reporting: Communicate the auditor's opinion on the financial statements to the
stakeholders through the auditor's report. This report includes the auditor's findings, any
qualifications to the opinion, and other relevant information as required by auditing
standards.