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Audit process

•Phase 1: Audit Plan

Chapter 6: •Phase 2: Audit Implementation
Audit process •Phase 3: Audit Completion

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Phase I: Plan an audit

Accept client and perform initial planning

Understand the client’s business and industry

Phase II:
Assess client’s business risk
Perform an
Perform preliminary analytical procedures
audit
Set materiality and assess acceptable
audit risk and inherent risk Performing the audit test

Understand internal control and assess control risk

Gather information to assess fraud risks

Develop overall audit strategy and audit program

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Tests of control Substantive tests

• An auditor performs tests of control to obtain evidence
• Performed on specific transactions and balances to
about whether the internal control system are effective.
see whether the dollar amount of an account balance
• The tests are designed to provide evidence to support an is materially misstated.
assessment of control risk at a level below high
• These tests reduce detection risk.
(indicating reliance on the keys controls).

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Types of substantive tests

Requirement of audit implementation
• Analytical procedures: involve the study and comparison of relationships
between accounting data and related information.
• Absolutely comply with the audit program established
• Tests of details: obtaining evidence on the items (or details) included in
an account balance or class of transactions: • Perform the audit test to collect audit evidence used
by auditors in drawing a conclusion and issue audit
• Substantive tests of transactions (used to determine whether all six
opinion.
transaction related audit objectives have been satisfied for each class
of transactions). • Document all audit evidence in working paper
• Tests of details of balances (focus on the ending general ledger
balances for both balance sheet and income statement accounts)
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Phase III: Complete the audit and issue an audit report

Issue an Audit Report
Perform additional tests for
presentation and disclosure
The audit report is the only thing that most users
Accumulate final evidence see in the audit process and the consequences of
issuing an inappropriate report can be severe.
Evaluate results

Issue audit report

Communicate with audit

committee and management
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Types of Audit Report Conditions for standard unmodified opinion

audit report
1. Includes all financial statements
2. Sufficient appropriate evidence accumulated
3. Financial statements are presented fairly in
accordance with GAAP or other framework

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Types of Audit Report Modifications to the opinion in the

audit report
Three conditions requiring a modification to the audit
opinion:
1. The scope of the audit has been restricted (scope
limitation).
2. The financial statements have not been prepared in
accordance with generally accepted accounting
principles (GAAP departure).
3. The auditor is not independent.

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Modifications to the opinion in the

audit report (cont.)
Three types of reports may be appropriate:
• Qualified opinion—Can be used for a scope limitation or departure from
GAAP, but only when the auditor concludes that the overall financial
statements are material misstatements but not pervasive.
• Adverse opinion—Used when financial statements are so materially
misstated or misleading that they do not present fairly the financial position
of the entity. This is uncommon and is rarely used (so material misstatement
and pervasive)
• Disclaimer of opinion—Used when the auditor cannot form an opinion on the
financial statement due to a severe scope limitation, lack of knowledge on
the part of the auditor, or lack of independence.

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Types of Audit Report

True or False question
1. Control risk is not necessary to be assessed by auditor in audit plan.
2. Understanding internal control is performed by auditor in the audit
implementation.
3. Issuing the report is the important step in the audit implementation.
4. An audit report with unqualified opinion will be issued when the
auditor believes that the overall financial statements are fairly stated
but that either the scope of the audit was limited or the financial data
indicated a failure to follow GAAP
5. The auditor will issue an audit report with adverse opinion when the
auditor believes the financial statements are so materially misstated
or misleading as a whole that they do not present fairly the entity’s
financial position or the results of its operations and cash flows in
conformity with GAAP.
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True or False question

6. Test of detail is a type of test of control
7. The auditor will perform the test of control if the control risk is
assessed at the highest level.
8. An entity changed from the straight – line method to the
declining –balance method of depreciation for all newly acquired
assets. The change has no material effect on the current year’s
financial statement but is reasonably certain to have a substantial
effect in later years. If the change is disclosed in the notes to the
financial statements, the auditor should issue a report with an
adverse opinion.

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