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Stages of The Audit Process: Learning Objectives
Stages of The Audit Process: Learning Objectives
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cro29695_ch05.indd 134 1/27/2012 9:08:04 PM
McGraw-Hill 2012
Planning an Audit A 135
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cro29695_ch05.indd 135 1/27/2012 9:08:06 PM
McGraw-Hill 2012
CHAPTER 5: Stages of the Audit Process A 136
a client with branches throughout the country, travel and lodging arrangements also need to be made. See
Exhibit 51 for an example of planning documentation.
Assess the Need for Experts
A major consideration in planning the audit is the need for experts. Auditing standards (ISA 620) define an
auditors expert as an individual or organization possessing expertise in a field other than accounting or
auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropri-
ate audit evidence. An auditors expert may be either an internal (partner or staff of the auditors firm) expert
or an external (not employed by the auditors firm) expert. This would include experts in finance, tax, valua-
tion, pension, and information technology (IT). Such experts may assist the auditor with measuring fair val-
ues, valuing financial instruments, determination of physical quantities, amounts derived from specialized
techniques, or interpretations of regulations or agreements. The use of an IT expert is a significant aspect of
most audit engagements. When deciding whether an IT expert is to be used, a primary concern is the extent
to which IT is used in processing accounting information. The presence of complex information technology
may require the use of an IT expert.
The auditor is still ultimately responsible for work performed by the expert. In relying on the expert, the
auditor should evaluate competence and objectivity of the expert, audit the inputs used by the expert (e.g.
census data for actuary) and tie out the output (e.g. estimate should be found in the financial statements or
disclosures), and review the expert work for reasonableness, including the reasonableness of assumptions.
LO 4 Gathering Audit Evidence
After the auditor has planned the audit the auditor needs to gather sufficient appropriate audit evidence on
which to base his/her audit opinion. The auditor gathers evidence by performing audit procedures. These
audit procedures consists of test of controls and substantive procedures.
Test of Controls
Test of controls are performed either to test the system, because the auditor wants to place reliance on the
controls (combined approach), or when substantive procedures on its own cannot produce sufficient appro-
priate audit evidence (e.g. performing an inventory count provides evidence on the existence of inventory).
The auditor will only test key controls: key controls are controls which contribute to the reliance the auditor
can place on figures in the financial statements. The auditor is, therefore, not interested in testing controls
which only contribute to efficient operations or providing good service to customers.
When testing controls, the auditor can perform manual tests and/or use computer-assisted audit tech-
niques (CAATs). These CAATs are referred to as system CAATs. Should the auditor decide to rely on the
computer environment when testing internal controls, the auditor should test both general and application
controls. Detailed discussions on test of controls can be found in Chapters 12 to 18.
Substantive Procedures
The auditor needs to perform substantive procedures to obtain sufficient and appropriate audit evidence to
express an audit opinion. The assertions, either per transaction, balance or disclosure, together with the risks
identified during the planning phase guide the auditor in developing substantive procedures.
When performing substantive procedures, the auditor can perform either manual tests and/or use com-
puter-assisted audit techniques (CAATs). These CAATs are referred to as data CAATs. Data CAATs can be used
to select samples, stratify information, analyse data, extract reports to identify items that require further
investigation and to recalculate totals and calculations. Detailed discussions on substantive procedures can
be found in Chapters 12 to 18.
LO 5 Completing the Audit
Once the auditor has completed gathering evidence relating to the financial statement assertions the audit
enters the completion phase, See figure 54 for detail on this. First the sufficiency and appropriateness of the
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Reporting r 137
Figure 54 Steps of the Completion Phase
Sufficient and
appropriate
evidence
yes
No
Overall
evaluation of
financial
statements
Subsequent
events
Quality
control and
administration
Concluding and
formulating
audit
opinion
Consider
going
concern
Final
materiality
evidence gathered is evaluated. The preliminary assessments of the risk of material misstatement (as identi-
fied during the planning phase) are used to evaluate the sufficiency and appropriateness of the evidence col-
lected (see Fig. 54). The auditor shall obtain sufficient appropriate evidence in order to reach and justify a
conclusion on the fairness of the financial statements. Should the auditor determine that sufficient appropri-
ate evidence was not obtained, additional substantive procedures need to be performed. Once the auditor is
content with the sufficiency and appropriateness of the evidence, the completion phase can continue.
The next stage of this phase is to determine the final materiality figure and to evaluate all
misstatements identified. The auditor can either accept the planning materiality figure as the final
materiality figure or lower it. However, the auditor should never increase the planning materiality figure
during the completion phase. The auditor then aggregates the total identified misstatements and deter-
mines if it causes the financial statements to be materially misstated (compare to the final materiality
figure).
The list of identified misstatements is discussed with the client, and the client is given the opportunity to
correct some or all of the identified misstatements should they wish to do so. If the uncorrected misstate-
ments are judged to be material, the auditor issues an opinion that explains that the financial statements are
materially misstated. If the uncorrected misstatements do not cause the financial statements to be materially
misstated, the auditor may issue a report with an unqualified opinion. During the completion phase the
auditor also carries out an overall evaluation of the financial statements. This uses analytical procedures as
well as the knowledge of the entity obtained throughout the previous phases of the audit. The auditor also
needs to assess the appropriateness of preparing the financial statements on a going-concern basis as well as
identifying possible subsequent events which have not been correctly disclosed in the financial statements.
After performing all these procedures, the auditor needs to make a conclusion and formulate an audit opin-
ion. This phase concludes with performing quality control procedures as required by ISQC1, ISA 220 and the
applicable firms audit methodology (e.g. completing evaluation forms for all team members). Chapter 19
covers each of these issues in detail.
LO 6 Reporting
The final phase in the audit process is to evaluate the results of the audit evidence and choose the appropriate
audit opinion to issue. The auditors report is the main product or output of the audit. Just as the report of a
building surveyor communicates the surveyors findings to a prospective buyer, the audit report communi-
cates the auditors findings to the users of the financial statements.
Figure 55 contains the different possible audit opinions. The double-lined blocks provide the different
scenarios, while the dotted-line blocks indicate the appropriate audit opinion. The detail of how to decide on
an audit opinion and the detail of the audit report are explained in Chapter 20.
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CHAPTER 5: Stages of the Audit Process A 138
Figure 55 Audit Opinions
Audit Opinion
Unmodified
Does not effect
audit opinion
Material not
Pervasive
Material not
Pervasive
Material and
Pervasive
Material and
Pervasive
Effects audit
opinion
No material
misstatement
found
Inability to obtain
sufficient appropriate
audit evidence
Materially
misstated
Unqualified
Emphasis of
matter
Qualified Disclaimer Qualified Adverse
Modified
Assertions Representations by management,
explicit or otherwise, that are embodied in the
financial statements, as used by the auditor to
consider the different types of potential misstate-
ments that may occur.
Audit evidence All the information used by
the auditor in arriving at the conclusions on
which the audit opinion is based, and includes
the information contained in the accounting
records underlying the financial statements and
other information.
Audit risk The risk that the auditor expresses an
inappropriate audit opinion when the financial
statements are materially misstated.
Auditing A systematic process of: (1) objectively
obtaining and evaluating evidence regarding
assertions about economic actions and events to
ascertain the degree of correspondence between
those assertions and established criteria; and (2)
communicating the results to interested users.
Auditors expert An individual or organization
possessing expertise in a field other than account-
ing or auditing.
Fraud Intentional misstatements that can be
classified as fraudulent financial reporting or
misappropriation of assets.
Materiality Misstatements, including omis-
sions, that individually or in the aggregate, could
reasonably be expected to influence the economic
decisions of users taken on the basis of the finan-
cial statements. Judgements about materiality are
made in light of surrounding circumstances, and
are affected by the size or nature of a misstate-
ment, or a combination of both.
Misstatement A difference between the
amount, classification, presentation, or disclo-
sure of a reported financial statement item and
the amount, classification, presentation, or dis-
closure that is required for the item to be in
accordance with the applicable financial report-
ing framework. Misstatements can arise from
error or fraud.
Non-compliance This refers to acts of omission
or commission by the entity, either intentional
or unintentional, which are contrary to the pre-
vailing laws or regulations.
Professional judgement The application of
relevant training, knowledge and experience,
within the context provided by auditing, account-
ing and ethical standards, in making informed
Key Terms
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Internet Assignment m 139
decisions about the courses of action that are
appropriate in the circumstances of the audit
engagement.
Reasonable assurance The concept that an
audit done in accordance with auditing stand-
ards may fail to detect a material misstatement
in a clients financial statements. In an auditing
context this term has been defined to mean a
high, but not absolute level of assurance.
Risk of material misstatement The risk that
the financial statements are materially misstated
prior to audit. This consists of two components:
inherent risk and control risk.
Unqualified opinion The opinion expressed by
the auditor when the auditor concludes that the
financial statements are prepared, in all material
respects, in accordance with the applicable finan-
cial reporting framework.
Review Questions
51 (LO 1) List the different phases of an audit.
52 (LO 26) Describe the steps the auditor should perform during each phase of the audit, as listed per
question 51.
Problem
53 (LO 1,2) John Josephs, an audit manager for Tip, Acanoe, & Tylerto, was asked to speak at a dinner
meeting of the local Small Business Association. The president of the association has suggested that
he talk about the various phases of the audit process. John has asked you, his trusted assistant, to
prepare an outline for his speech. He suggests that you answer the following:
a List and describe the various phases of an audit.
b Describe how audit procedures designed for one purpose might provide evidence for other purposes.
Give an example.
c One of the steps involves understanding an entitys internal control. Why might the members of the
association be particularly interested in the work conducted by auditors in this phase of the audit?
Discussion Case
54 (LO 16) The audit process is depicted as a continuous process.
Required
Discuss how evidence obtained in later stages of the audit process can result in the auditor needing to rethink
procedures already performed earlier in the audit process.
Internet Assignment
55 (LO 16) Use one of the Internet browsers to search for two other explanations (either diagrams or
descriptive) of the audit process and critically evaluate it against the process depicted in this chapter.
When you have read this chapter, log on to the Online Learning Centre for
Auditing and Assurance Services at www.mcgraw-hill.co.uk/textbooks/crous,
where youll find auditing weblinks for each chapter and a glossary in
Afrikaans.
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