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Audit Process i.

Client relationship vs specific audit
engagements
Financial Statement Assertions ii. Evaluation of compliance with
ethical requirements
 Occurrence  Existence (independence)
 Completeness  Rights and iii. Understanding the term of the
 Accuracy Obligation engagement
 Cutoff  Completeness 2. Audit Planning— obtains more detailed knowledge
 Classification  Valuation and about the client’s business and industry. Risk and
Allocation 2 materiality
1 3. Internal Control— adequate consideration to the
 Occurrence and
control obtaining understanding, assessing the
rights & obligation
level of control risk, test control
 Completeness 4. Substantive Tests— to determine whether the
 Classification & entity’s financial statements are presented fairly
understandability 5. Completing Audit— must have sufficient
 Accuracy & appropriate evidence in order to reach a conclusion
valuation 3 on the fairness of FS
6. Report— auditors forms a conclusion about the
financial statements.
1. Transactions and events
2. Account balances at the period Accepting the Engagement
3. Presentation and disclosure  Competence— primary consideration if the
auditor has the necessary skills and competence
Audit procedures— one basic criterion: The to handle such engagement “degree of
procedures selected should enable the auditor to competence”
gather sufficient appropriate evidence about a  Independence— credibility of auditor
particular assertion. Sequence of different activities  Ability to serve— closely related to
involved in an audit. competence, it’s the ability to serve the client
After the assertion it can conclude: properly. PSA 220 appropriate capabilities,
1. Assessment of risk competence and time to perform the audit
2. Design and performance of further audit engagement
procedures  Integrity— to conduct a background
Some audit procedures: investigation of the prospective client in order
1. Inspection— examining to minimize the likelihood of association with
2. Observation— looking clients whose management lacks integrity.
3. Inquiry— seeking info i. Making inquiries of appropriate parties
4. Confirmation—response to an inquiry in the business community
5. Computation—arithmetical accurate ii. Communicating with the predecessor
6. Analytical Procedures— analysis of significant auditor— useful whether the
ratios engagement will be accepted;
Audit Evidence— basically audit procedures are used to permission to contact with the
result to an audit evidence. It refers to the information predecessor if not given permission it
obtained by the auditor in arriving at the conclusions on will raise serious questions as to accept
which the audit opinion is base. this; if obtained: ask for reason,
disagreement and the integrity of the
1. Accepting an Engagement— first step, whether to prospective client.
accept or not an audit engagement; needs an The COE requires the predecessor auditor to
evaluation of auditors qualification as well as respond fully to the incoming auditor’s inquiry
auditability of the prospective client’s FS: and advise the incoming auditor if there are any
 Business and background investigation professional reasons why the engagement
 PSA 300 “preliminary planning activities” should not be accepted
Retention of the Existing Client
Client should be evaluated once a year or upon
occurrence of major events such as changes in
management, directors, ownership, and nature of
business.

Engagement Letter
After accepting the audit engagement, an engagement
letter should be prepared. Written contract between
the auditor and the client. Contains:
 Objectives
 Managements responsibility
 Scope
 Forms or any reports
 Limitation of the audit
 Allow to have unrestricted access
Others:
 Billing arrangements
 Expectation of receiving management
representation letter
 Arrangements concerning involvement of
others
 Confirmation request for the engagement
IMPORTANCE! Avoid misunderstanding with respect to
the engagement; and document and confirm the
auditor’s acceptance of the appointment