FACULTY OF BUSINESS MANAGEMENT SCIENCES AND ECONOMICS

DEPARTMENT OF FINANCE AND ACCOUNTING

STUDY NOTES (October, 2020)

Auditing 1
AC210

1. Introduction to Auditing
2. An Overview of the Audit Process
3. Important Elements of the Audit Process
4. Accounting Cycles

Topic 1 of 4

This paper contains 20 printed pages

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Contents
1. Historical Background .................................................................................................................... 3
2. Definition and objectives ................................................................................................................ 4
3. Types of auditors............................................................................................................................. 4
4. Characteristics and Scope of an Audit ............................................................................................ 5
a. On the basis of organizational structure ...................................................................................... 7
b. On the basis of the conduct of audit ............................................................................................ 7
c. On the basis of objective audit .................................................................................................... 9
d. On the basis of degree of independence.................................................................................... 10
5. Inherent Limitations of an Audit ................................................................................................... 11
a. The nature of financial reporting .............................................................................................. 11
b. The nature of audit procedures.................................................................................................. 11
c. Audit evidence is usually persuasive rather than conclusive. ................................................... 11
d. The use of testing ...................................................................................................................... 11
e. The inherent limitations of accounting and internal control systems........................................ 11
f. Timeliness of financial reporting and the balance between benefit and cost ............................ 12
6. Auditing Theory ............................................................................................................................ 12
7. Auditing Standards and Regulatory Framework ........................................................................... 14
8. Stages of the Audit Process ........................................................................................................... 19
a. Preliminary engagement activities ............................................................................................ 20
b. Planning .................................................................................................................................... 20
c. Obtaining audit evidence (the auditor’s response to assessed risk) .......................................... 20
d. Evaluation, conclusion and reporting........................................................................................ 20

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1. Historical Background
The term auditor was derived from the Latin “audire”, to hear. Tracing back to
earliest civilisations the auditor was the master who listened to his steward
orally recite from memory, the disposal and possession of the master’s wealth
over a specific period of time. The term auditor hence acquired a secondary
meaning, ie, tone who satisfies himself as to the truth of the accounting of
another.

With the development of writing, people started keeping written records of

different types of transactions. This process was called bookkeeping.

Evidence of intricate auditing was found in ancient Egypt and Babylonia, and in
the early Greek and Roman civilisation. The philosophy of Greek and Roman
accounting and auditing formed the source for a statute passed in England in
1285, under the reign of Edward 1. The statute stated that auditors must be
appointed to check the accounts of the Masters and if they were found to be in
arrears upon the account, they were to be arrested, based on the auditor’s
testimony, and jailed.

An increase in trade in Europe resulted in a number of bookkeeping problems

and complexities. During the Industrial Revolution several joint stock
companies were created. It was expected of the various businesses to account
clearly and honestly to its shareholders (owners). Accountants were appointed
to act as agents for the shareholders. This resulted in the profession of
accounting and auditing as it exists today. The term chartered accountant, was
used for the first time after the first British society of accountants, incorporated
by Royal Charter, was formed in Edinburgh in 1854.

International Federation of Accountants, IFAC, an international organisation for

Accountancy Profession, was founded on 7 October, 1977 with the aim of
creating a stronger, more integrated accountancy profession. The vision,
mission and values of IFAC improved over the years. Currently, its vision is
that the global accountancy profession be recognised as a value leader in the
development of strong and sustainable organisations, financial markets and
economics.

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2. Definition and objectives
Auditing : Webster’s seventh collegiate dictionary defines an audit as a formal
or official examination and verification of an account book, a methodical
examination and review and the final report of an examination of books of
account by auditors, (Webster’s, 1976). Recently scholars have generally
defined auditing as an independent examination of financial information of any
entity, whether profit oriented or not, and irrespective of its size, or legal form,
when such an examination is conducted with a view to expressing an opinion
thereon. It therefore can be described as a detailed examination of books of
accounts of an organisation for a given period by an independent and qualified
person who, with the help of vouchers, documents and information given,
whether the financial statements exhibits a true and fair state of affairs of the
business or not.
Audit: An examination of records of an entity to establish their reliability and
the reliability of statements drawn from them.
Auditor: A person who is qualified and authorised to examine and verify
accounts of an entity.

Objective of an audit of financial statements

 To enable the auditor to express an opinion as to whether or not the financial
statements fairly present, in all material respects the financial position of the
entity at a specific date, and the results of its operations and cash flow
information for the period ended on that date, in accordance with an
identified financial reporting framework and statutory requirements.
 The auditor’s opinion enhances the credibility of the financial statements but
does not guarantee the future viability of the entity.
 It also does not guarantee the efficiency and effectiveness with which
management has conducted the affairs of the entity.

3. Types of auditors
 Registered (external) auditors –auditors who express an independent opinion
on whether the annual financial statements of a company, fairly present the
financial position and results of the company’s operations.
 Internal auditors –auditors who perform independent assignments on behalf
of the board of directors of the company.
 Government auditors –government auditors perform a role similar to that of
the internal auditor –but within government departments.

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 Forensic auditors –forensic auditors concentrate on investigating and
gathering evidence where there has been alleged financial mismanagement,
theft or fraud.
 Special purpose auditors –these are auditors who specialise in a particular
field such as environmental auditors, who audit compliance with
environmental regulations, and vat auditors who work for the ZIMRA and
who audit vendors’ VAT returns.

The need for auditors

The split between ownership and management
 The need for modern day auditors, both external and internal, arose out of
the natural development of owner-managed businesses into entities which
were owned by people who did not manage the business.
 The appointment of an independent person to evaluate the reports of the
managers and to provide an opinion on their truth or fair presentation.
Confidence in financial information
 In order to maintain the confidence of those who invest in business, whether
they are members of the general public or investment companies, assurance
is required that the financial information produced by business organisations
is reliable and credible.
 It is the auditor of the financial information who provides this assurance
(credibility).
Accountability
 Directors must be held accountable for the way in which they run their
businesses, the government must be held accountable for the way it spends
taxpayers’ money, and companies whose activities affect the environment
must be held accountable for the way in which they adhere to environmental
regulation and legislation.
 This has created a need for the wider auditing profession to provide an
independent service which assesses and evaluates whether directors,
governments etc are meeting their responsibilities.

4. Characteristics and Scope of an Audit

 Audit is a crucial review of the system of accounting and internal control
 It is an organised and scientific examination of the books of accounts of a
business

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  Audit is undertaken by an independent person or body of persons who are
duly qualified for the job
 Audit is a verification of the results shown by the financial statements of
an organisation.
 Audit is done with the help of vouchers, documents, information and
explanation received from the preparers of the financial statements.

Differences between accounting and auditing (not exhaustive)

Basis Accountancy Auditing (external)
Period Accounting work is done Auditing work is
continuously throughout the generally undertaken at
year the end of the financial
year
Nature of work Accounting work is Auditing is concerned
constructive in approach with examination of past
transactions
The recording of Accountancy is concerned Auditing is concerned
business with current recording of with examination of past
transaction business transactions transactions
Status The accountants are the Auditors are the
employees of the concern outsiders. The qualified
chartered accountants
Qualification Accountants need not be Auditors should be
chartered accountants chartered accountants
Knowledge Accountants may or may not Auditors must have the
have the knowledge of audit knowledge of audit
techniques and procedures techniques and
procedures

 Audits may be categorized or classified on different bases (not exhaustive)

• On the basis of organizational structure
• On the basis of the conduct of audit
• On the basis of objective audit
• On the basis of degree of independence

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a. On the basis of organizational structure
 Statutory audit
 These are largely carried out or performed by independent auditors as
compliance by an entity with legal requirements of a particular
country or jurisdiction of operation.
 E.g. in Zimbabwe, all companies registered under the Companies and
Other Business Entities Act, (2019) are required to prepare annual
financial statements in accordance with an identified financial
reporting framework (IFRS) and such financial statements must be
audited by a registered auditor.
 Voluntary/private/non statutory audit
 These are carried out at the request of the company or stakeholders or
shareholders.
 An auditor may also be engaged to provide an audit, or a review
report, on special purpose financial statements.
 Government audit
 Audit of accounts of government departments and offices ,
government companies and statutory corporations.
b. On the basis of the conduct of audit
 Continuous audit
 This is an audit where the books of accounts are verified throughout ether
at regular or irregular intervals and the financial statements of the
business are examined at the end of the year.
 Continuous audit becomes imperative in the following types of business
 When internal check system is not satisfactory.
 In big concerns where the volume of transactions are numerous.
 In concerns where monthly accounts are required to be presented to
the management.
 Where it is desired that the audited final accounts should be ready
immediately after the close of the accounting period.

Advantages of continuous audit

 Detection of errors and frauds. Auditor gets sufficient time to check all the
books of accounts in detail, in the case of continuous audit. This facilitates
auditor to detect errors and frauds easily and quickly.

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 Moral check. Frequent visits of the auditor to the client’s business imposes a
moral check on the accounting staff to keep the books of accounts upt to date
and accurate.
 Early presentation of accounts. As accounts are checked throughout the
year, it becomes possible for the accountant to present the audited financial
statements to the owners of the business immediately after the close of the
accounting period.
 Valuable suggestions. In the case of continuous audit, the auditor gets an
opportunity to familiarize himself with all the aspects of the clients business,
this will help the auditor to give valuable suggestions for the improvement of
operational efficiency of the business.
 Preparation of interim accounts. If the directors of a company decide to
declare an interim dividend, continuous audit will help them in preparing
interim accounts without much delay.
 Work efficiency. As auditor has constant touch with the clients’ business and
business an sufficient time, he can plan his work properly and carry out his
work more efficiently.

Disadvantages of continuous audit

 Very expensive. It is very expensive as more audit fees is required to be paid
to the auditor for his continuous visits.
 Time consuming. It involves much time; the time spent on audit will be a
sheer waste, if the size of the business is small.
 Alteration of figures. In the case of continuous audit, figures may be altered
bu the dishonest accountant after the auditor has checked the books of
accounts for a particular period.
 Loosing link in the audit work. If proper notes of the work done on previous
visits are not correctly made, the auditor may lose link in on the work and
will fail to clear up the outstanding queries.
 Monotony. As audit is carried out throughout the year, in case of continuous
audit there is the danger of the audit work becoming monotonous.
 Inconvenience. Frequent and unexpected visits of the auditor to the client’s
business may cause inconvenience to the client’s staff.

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Interim audit
 This is a kind of audit, which is done between the two annual audits. It is
suitable for those companies which want to declare interim dividend.
Advantages
 The final audit can be completed quickly, if there has been an interim audit
 Errors and fraud can be detected easily and quickly.
 It imposes moral check on the staff of the client.
Disadvantages
 Figures may be altered in the accounts, which have already been audited.
 Even in case of interim audit, auditor is required to take extensive notes of
the figures audited. This would increase the work of the auditor.
 It is comparatively expensive as it involves additional financial burden to the
organization.
Final audit
 This is where the auditor takes up his work of checking the books of
accounts at the end of the accounting period, when the transactions for the
whole year are completely recorded and financial statements have been
prepared.
 Final audit is adopted by almost all listed entities.
Partial audit
 This is where the work of the auditor is condensed.
 For example, auditor may be asked to check only the cash book to detect
misappropriation of cash.
Occasional audit
 This is an independent and critical examination of the various records
maintained by the company by the cost auditor to ascertain whether cost of
the product manufactured by the company have been correctly in accordance
with the correct costing principles.

c. On the basis of objective audit

Management audit
 The auditor examines the policies and the actions of the management to
ensure that there is proper and maximum utilisation of available resources.
Special audit
 When the affairs of the company are not being managed according to the
sound business principles, the central government is empowered to appoint a
special auditor to audit the company’s working and its state of affairs.
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Operational audit
 It involves intelligent examination of the various operation of the different
functional areas of a business and observing the weakness, lapses,
inefficiencies in operation and suggesting ways for strengthening the system.
Performance audit
 It is carried out with the objective of ascertaining that contracts entered into
with third parties are in the best interest of the concern and there is a system
which ensures the safety of the assets of the concern.

d. On the basis of degree of independence

External audit
 External auditors are independent firms that inspect the accounts of entity
and render an opinion on whether its statements conform with IFRS and
present fairly the financial position of the company and the results of
operations.
 The external auditor’s primary obligation is to the users of financial
statements outside the organization.
Internal audit
 Internal auditors consider the examination, monitoring and analysis of
activities related to a company’s operations, including its business structure,
employee behaviour and information systems.
Differences between internal and external audits
Internal audit External audit
Conduct of audit Conducted by staff of the Conducted by an independent and
organization or may be qualified chartered accountant.
outsourced.
Period Carried out continuously Carried generally once in a year.
throughout the year.
Scope Determined by management. Determined by the statute.
Objective To ascertain whether internal To obtain reasonable assurance
controls are adequate and whether financial statements exhibit
effective. a true and fair state of affairs of the
organization.
Responsibility Responsible to management Responsible to shareholders
Add more
differences…

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Which type of auditor does this module deal with?
 This module primarily deals with registered auditors, the external audit of
financial statements and the assurance (opinion) given for this common
engagement.
 However, registered auditors frequently carry out independent reviews of
financial statements.
 The major difference between an audit engagement and a review
engagement is the nature and extent of the work done and consequently the
level of assurance which is given by the registered auditor.

5. Inherent Limitations of an Audit

a. The nature of financial reporting
 Management must apply professional judgement in selecting the relevant
reporting framework, e.g. Non-current and current assets are directly
affected by estimates of depreciation, impairment, inventory obsolescence
and bad debts respectively.
 Therefore, it is impossible to know which debtors will default on payments
etc.
b. The nature of audit procedures
 There is the possibility that management may not provide all the relevant
information in the preparation of the financial statements,
 Fraudulent transactions may go undetected and the auditor may believe that
evidence is valid, complete and accurate when it is not.
c. Audit evidence is usually persuasive rather than conclusive.
 It is impossible for the auditor to witness every transaction.
 Information provided by management may not be true.
d. The use of testing
 Due to financial and time constraints, auditors cannot inspect or examine
every transaction which has taken place in the organisation, therefore
procedures on transaction and balances are sampled.
 By sampling, the auditor only gives a reasoned opinion based on the sample
on which procedures were undertaken.
 Hence he/she cannot guarantee 100% correctness
e. The inherent limitations of accounting and internal control systems
 The auditor is obliged to place reliance on the systems which the client has
put in place to provide financial information;

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 Accounting systems on which the auditor must place reliance, have inherent
limitations, consequently they may not detect errors or fraud, hence the
information on which the auditor forms an opinion, may not be valid,
accurate and complete.
f. Timeliness of financial reporting and the balance between benefit and cost
 The audit report must be provided within a reasonable time after the
financial year-end
 The audit costs must not exceed the benefit derived from the audit

6. Auditing Theory
Mautz and Sharaf (1961, p. 43-62) The Philosophy of auditing- conceived the
following eight postulates of financial auditing:
“No necessary conflict of interest exists between the auditor and management /
employees of the enterprise under audit (both the client and the auditor have the
same objective with regard to fair presentation)”.
 The auditor and the client’s management share a common desire to ensure
that the financial statements prepared by management, do achieve fair
presentation.
 Management will not manipulate the financial statements to mislead
financial affairs of the enterprise.
 In the light of the alarming increase in fraud in recent years e.g. Enron
scandal, Pamalat, WorldCom scandals etc, it has become increasingly
important for the auditor to evaluate management integrity, hence the
adoption of professional scepticism.
 ISA 200 defines professional scepticism as “an attitude that includes a
questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of audit
evidence.

Auditor must act exclusively as an auditor in order to offer an independent and

objective opinion on the fair presentation of financial information
 The auditor's opinion can only be relied upon if he is independent.
 This requires an assessment of other interests that the auditor may have
which relate to an audit client.
 The relevance and applicability of this postulate is however becoming
questionable as audit firms now provide clients with other advisory services,
e.g. tax advisory.

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 In response to the demands of this postulate, the Companies and Other
business Entities Act, (COBE)(2019) requires that public companies must
appoint an audit committee which must approve any non-audit work which
the auditor of the company is engaged to perform (see section 191 of COBE
Act 24:31).

Professional status of the independent auditor imposes commensurate

professional obligations –
 Professional status implies that the auditor has qualities, knowledge and
capabilities which set him apart from the general public, but that this status
brings with it, responsibility.
 To enjoy this status, a professional has to live up to certain expectations and
accept certain responsibilities.
 The concepts of due care, service before personal interest, efficiency and
competence flow from these expectations and have to be accepted as
responsibilities by professional accountants.

Financial data is verifiable

 This postulate proposes that it is possible to verify the client’s financial data.
 If this were not the case, it would be impossible to perform an audit.
 An auditor cannot meet the audit objective of forming an opinion on fair
presentation of the financial information, unless he has gained the necessary
level of assurance through verification of the financial information.
 This postulate is increasingly under threat, with the increase in paperless
transactions. However new ways of gathering sufficient appropriate evidence
to verify client data are being developed through the use of latest audit
technologies, e.g. Big Data.

Internal controls reduce the probability of errors and irregularities –

 Internal controls are policies and procedures which a business puts in place
to ensure that its recorded transactions are valid, accurate and complete, that
its assets are secured and that it complies with the law.
 The postulate advocates the better the internal controls, the more chance
there is that the financial information produced will be valid, accurate and
complete.
 If a company has poor internal control, the financial information produced
by the accounting system is most unlikely to be verifiable.

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Application of IRFS results in fair presentation
 This postulate proposes that the application of generally accepted accounting
practice e.g. (IFRS) results in fair presentation.
 The auditor’s opinion should be based on measures which are generally
accepted, rather than mere personal preferences.

That which held true in the past will hold true in the future (in the absence of
contrary evidence)
 The auditor has to draw on past experience when assessing judgements about
the future.
 Factual historical evidence is far more powerful than speculation.
 However, this should not be taken to mean that things don’t change; e.g. the
integrity of the directors may decline forcing the auditor to rethink the extent
to which he can rely on the representations of management in the gathering
of audit evidence.
 Trading conditions can change in a host of different ways and new business
risks may arise; the auditor must recognise this in planning and performing
the audit.

Financial statements submitted to the auditor for verification are free of

collusive and other unusual irregularities –
 Collusion implies that there has been a calculated attempt to misstate the
financial statements.
 The auditor may assume that management have taken adequate steps to
ensure that the financial statements are free of collusive irregularities
orchestrated by management and employees.

7. Auditing Standards and Regulatory Framework

 Statutory audit governance is primarily provided through legislations and
legal instruments.
 Most companies are required to conduct audits under the Companies Act.
 Small companies are exempted in most cases but a review is required under
the Private Business Corporations Act.
 Secondarily, statutory audits are governed through instruments or
requirements provided from legislation promulgated in the setting up of
regulatory bodies.
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 For example, legislation set out to govern members of the stock exchange
who are listed companies or banks
 Additional framework is provided through auditing standards.
 The accounting profession seeks to ensure that high standards of ethics,
conduct and skill are set for, and maintained by, its members. If these
standards are allowed to slip, public confidence will be undermined.
 Legal and professional requirements have therefore been developed over the
years to ensure that appropriate standards are set and adhered to.
 International Standards on Auditing (ISA) 200 "Overall objectives of the
Independent Auditor and the conduct of an Audit in accordance with
International Standards on Auditing” requires, inter alia, that the auditor:
* Shall comply with relevant ethical requirements, including those
pertaining to independence, relating to financial statement audit
engagements (contained in the relevant Codes of Professional Conduct)
* Shall comply with all International Standards on Auditing.
 A mapping of legal instruments governing professional accountants in
Zimbabwe showed that accountants are mainly governed or impacted by the
* Companies and other business Entities Act Chapter 24:31
* Public Accountants and Auditors Act (27:12);
* Chartered Secretaries (Private) Act (27:03);
* Private Business Corporations Act (24:11);
* Zimbabwe Stock Exchange Act (24:18);
* Chartered Accountants Act (27:02);
* Banking Act: (27:20);
* Insurance Act (24:07),
* Income Tax Act (23:06) and
* Public Finance Management Act (22:19)
 These legal instruments provide guidance on who can perform accounting or
auditing functions.
 The legal instruments also define standards to be used, level of education
and technical competences.
 However, some of the laws such as the
* Chartered Accountants Act (27:02) and
* Chartered Secretaries (Private) Act (27:03) which were superseded
by the PAA Act (27:12) have not yet been repealed in Parliament
and remain in force.

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 This creates confusion in the regulation of the accounting profession in
Zimbabwe

Important regulations and standards are also set out in the following
pronouncements :
 IFAC Code of Ethics for Professional Accountants, 2019
 International Standards on :
* Auditing (ISA)
* Review Engagements (ISRE)
* Assurance Engagements (ISAE)
* Related Services (ISRS)
 International Auditing Practice Statements (IAPS)

International Standard on Auditing (ISAs)

 The auditor should conduct an audit in accordance with International
Standard on Auditing (ISAs). ISAs contain basic principles and essential
procedures together with related guidance.

International Standards on Quality Control

ISQC 1, Quality Control for Firms that Perform Audits and Reviews of
Financial Statements and Other Assurance and Related Services
Engagements

200–299 General Principles And Responsibilities

ISA 200, Overall Objectives of the Independent Auditor and the Conduct
of an Audit in Accordance with International Standards on Auditing
ISA 210, Agreeing the Terms of Audit Engagements
ISA 220, Quality Control for an Audit of Financial Statements
ISA 230, Audit Documentation
ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of
Financial Statements
ISA 250, Consideration of Laws and Regulations in an Audit of Financial
Statements
ISA 260 (Revised), Communication with Those Charged with
Governance.
ISA 265, Communicating Deficiencies in Internal Control to Those
Charged with Governance and Management

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300 - 450-Risk Assessment and Responses to Assessed Risks
ISA 300, Planning an Audit of Financial Statements
ISA 315 (Revised), Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment
ISA 320, Materiality in Planning and Performing an Audit
ISA 330, The Auditor’s Responses to Assessed Risks
ISA 402, Audit Considerations Relating to an Entity Using a Service
Organization
ISA 450, Evaluation of Misstatements Identified during the Audit

500–599 Audit Evidence

ISA 500, Audit Evidence
ISA 501, Audit Evidence—Specific Considerations for Selected Items
ISA 505, External Confirmations
ISA 510, Initial Audit Engagements—Opening Balances
ISA 520, Analytical Procedures
ISA 530, Audit Sampling
ISA 540, Auditing Accounting Estimates, Including Fair Value
Accounting Estimates, and Related Disclosures
ISA 550, Related Parties
ISA 560, Subsequent Events
ISA 570 (Revised), Going Concern
ISA 580, Written Representations

600–699 Using The Work Of Others

ISA 600, Special Considerations—Audits of Group Financial Statements
(Including the Work of Component Auditors)
ISA 610 (Revised 2013), Using the Work of Internal Auditors
ISA 620, Using the Work of an Auditor’s Expert

700–799 Audit Conclusions And Reporting

ISA 700 (Revised), Forming an Opinion and Reporting on Financial
Statements
ISA 701, Communicating Key Audit Matters in the Independent
Auditor’s Report

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ISA 705 (Revised), Modifications to the Opinion in the Independent
Auditor’s Report
ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report
ISA 710, Comparative Information—Corresponding Figures and
Comparative Financial Statements
ISA 720, The Auditor’s Responsibilities Relating to Other Information in
Documents Containing Audited Financial Statements

800–899 Specialized Areas

ISA 800 (Revised), Special Considerations—Audits of Financial
Statements Prepared in Accordance with Special Purpose Frameworks
ISA 805 (Revised), Special Considerations—Audits of Single Financial
Statements and Specific Elements, Accounts or Items of a Financial
Statement
ISA 810 (Revised), Engagements to Report on Summary Financial
Statements

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8. Stages of the Audit Process
The following diagram sets out the different stages of the audit process. The
process can be divided into 4 stages.

PRELIMINARY ENGAGEMENT ACTIVITIES

(Stage 1)

PLANNING
(Stage 2)

ESTABLISHING
DEVELOP AN AUDIT
OVERALL AUDIT
PLAN
STRATEGY
(Stage 2b)
(Stage 2a)

OBTAINING AUDIT EVIDENCE

(THE AUDITOR’S RESPONSE
TO ASSESSED RISK)
(Stage 3)

PERFORM PERFORM
TESTS OF SUBSTANTIVE
CONTROL PROCEDURES
(Stage 3a) (Stage 3b)

EVALUATION, CONCLUSION
AND REPORTING
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a. Preliminary engagement activities
 Decide if you want to establish or continue a relationship with the client
 Assess the firm’s competence and availability of resources
 Consider ethical requirements e.g. (independence)
 Formulate terms of the engagement
b. Planning
 Understand the entity and its environment including the internal controls
 Assess the risk of material misstatements in the financial statements
 Determine materiality
 Establish the overall audit strategy
 Develop the audit plan
c. Obtaining audit evidence (the auditor’s response to assessed risk)
 conduct tests of controls and other ISA procedures(substantive) to
respond to
• risks at financial statement lever (overall response)
• risks at assertion level
• significant risks
d. Evaluation, conclusion and reporting
 Evaluate audit evidence
 Report accordingly

END OF TOPIC 1

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