Untalan, Shaira Coleen DC.

December 4 2020
BSA-3A

PRE-TEST
Lesson 4: The Audit Process - Accepting an Engagement

1. What are the steps involve in the audit process?

a. Accepting and Engagement - a process to make a decision of whether to accept or reject an
audit engagement. This would required evaluation of the auditor’s qualification as well as
auditability of the prospective client. The procedures performed at this stage of the audit are
referred to in PSA 300 as “preliminary planning activities”.
b. Audit Planning - where the auditor obtains more detailed knowledge about the client’s
business and industry in order to understand the transactions and events affecting the financial
statements. This is where a “preliminary assessment of risk and materiality” should also be
made.
c. Consideration of Internal Control - this involves obtaining understanding of the entity’s
control system and assessing the level of control risk. Internal control directly affects the
reliability of the financial statements, therefore the stronger the internal control, the more
assurance it provides.
d. Performing Substantive Test - this is to determine whether the entity’s financial statements
are presented fairly in accordance with the financial reporting standards. The extent of this test
is highly dependent on the results of the auditor’s consideration of internal control.
e. Completing the Audit - this includes review of subsequent events and contingencies,
assessing the going concern assumption, performing overall analytical review procedures, and
obtaining written representations from management.
f. Issuing a Report - with the basis of evidence gathered and evaluated, the auditor forms a
conclusion and is communicated to interested users through an audit report.
2. What are the assertions provided by the management regarding balances presented in the
balance sheet?
Account balance assertions. The following four items are classified as assertions related to the
ending balances in accounts, and so relate primarily to the balance sheet:
• Completeness - The assertion is that all reported asset, liability, and equity balances have
been fully reported.
• Existence - The assertion is that all account balances exist for assets, liabilities, and equity.
• Rights and obligations - The assertion is that the entity has the rights to the assets it owns and
is obligated under its reported liabilities.
• Valuation - The assertion is that all asset, liability, and equity balances have been recorded at
their proper valuations.
3. What is the major responsiblity of the independent auditor in the financial statements
assertions?
First and foremost, the auditor use assertions for classes of transactions, account balances, and
presentation and disclosures in sufficient detail to come up for a basis for the assessment of risk
of material misstatements and the design and performance of further audit procedures. They
also uses assertions in assessing risks by considering the different types of potential
misstatements that may occur, and thereby designing audit procedures that are responsive to
the assessed risks.
5. What are the different audit procedures available for the independent auditor to reach a
decision and/or conclusion?
a. Observation consists of looking at a process or procedure being performed by others, e.g.,
the auditor's observation of inventory counting by the company's personnel or the
performance of control activities. Observation can provide audit evidence about the
performance of a process or procedure, but the evidence is limited to the point in time at which
the observation takes place and also is limited by the fact that the act of being observed may
affect how the process or procedure is performed.
b. Inquiry consists of seeking information from knowledgeable persons in financial or
nonfinancial roles within the company or outside the company. Inquiry may be performed
throughout the audit in addition to other audit procedures. Inquiries may range from formal
written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part
of the inquiry process.
c. A confirmation response represents a particular form of audit evidence obtained by the
auditor from a third party in accordance with PCAOB standards.
d. Analytical procedures consist of evaluations of financial information made by a study of
plausible relationships among both financial and nonfinancial data. Analytical procedures also
encompass the investigation of significant differences from expected amounts.
e. Inspection involves examining of records, documents, or tangible assets. An example of
inspection used as a test of controls is inspection of records for evidence of authorization.
f. Confirmation consists of the response to an inquiry to corroborate information contained in
the accounting records. External confirmation procedures frequently are relevant when
addressing assertions associated with certain account balances and their elements.