The Stages of the Audit

Process
Lecture 3

0
Outline
• Overview of Audit Process
• Stages in the Audit Process
• Auditors’ Operational Manual

1
The Stages of the Audit Process (Cont’d)

2
The Stages of the Audit Process
Stages of the Audit Process
1. Engagement Acceptance and Continuance

2. Preliminary Audit Planning (and Controls &

Record work done)
• Establish engagement scope and terms
• Determine Audit Strategy
• Determine Job Administration
3
The Stages of the Audit Process (Cont’d)
3. Understand the entity (including documenting and
confirming the accounting systems and internal control)
• Understand the internal environment –
accounting system, policies, procedures and
practices
• Understand the external environment – laws,
regulations and industrial factors
• Understand and evaluate internal control

4
The Stages of the Audit Process (Cont’d)
4. Assess risks
• Faced by the entity in general
• of material misstatement

5. Design Further Audit Procedures

• Select audit procedures to respond to risk of
material misstatement & other risks

5
The Stages of the Audit Process (Cont’d)
Perform Audit Procedures
• Test of Controls
• Where risk assessment includes expectation that controls
operate effectively, tests controls to confirm expectation
• If Satisfactory, carry out restricted substantive tests
• If Unsatisfactory, report to management & carry out full
substantive tests
• Substantive Testing
• Where risk assessment does not include expectation that
controls operate effectively, report to management and
Carry out Full substantive tests

6
The Stages of the Audit Process (Cont’d)
Conclude the Audit
• Carry out Audit Review of Work Done
• Carry out overall review of financial statements

Communicate and Report

• Issue Audit Report
• Issue Management & other reports

7
Auditors’ Operational Manual

• In the Auditors’ Operational Standard, the following

five essential phases are highlighted:-

• The auditor should adequately plan, control and

record his work

• The auditor should ascertain the enterprises

system of recording and processing
transactions and assess its adequacy as a basis
for the preparation of financial statements.
8
Auditors’ Operational Manual

• The auditor should obtain relevant and reliable audit

evidence sufficient to enable him to draw reasonable
conclusions from there

• If the auditor wishes to place reliance on any internal

controls, he should ascertain and evaluate those
controls and perform compliance tests on their
operation.

9
Auditors’ Operational Manual

• The auditor should carry out such a review of the

financial statements as is sufficient, in conjunction
with the conclusions drawn from the other audit
evidence obtained to give them a reasonable basis
for his opinion on the financial statements.

10
Audit Committee
Lecture 3

11
Outline
▪ Overview
▪ The Need for an Audit Committee
▪ Membership
▪ Objectives
▪ Role and Responsibilities
▪ Advantages
▪ Disadvantages or Drawbacks
▪ Cadbury Report
12
Overview of Audit Committee
• An audit committee is a committee of the board of directors
• Audit committees can have an important corporate governance
role when they are independent of client's management and
can assist the Board of Directors in satisfying itself that the
external auditors are independent in carrying out their audit
role.
• There should be regular communication between the firm and
the audit committee of listed entities regarding relationship and
other matters that might, in the firm's opinion, reasonably be
thought to bear on independence.
13
Overview of Audit Committee
• Firms should establish policies and procedure relating to
independent communication with audit committees.
• In the case of audit of listed entities, the firm should
communicate orally or in writing at least annually, all
relationships and other matters between the firm, the network
firms and the audit client that in the firm's professional
judgment may reasonably be thought to bear on independence.
• An audit committee can help a company maintain objectivity
with regard to financial reporting and the audit of financial
statements.
14
The Need for an Audit Committee
• This is a requirement under IFAC regulations.
• The listing rules of the Ghana Stock Exchange require that all listed
companies should have audit committees.
• In recent times, many big companies have adopted the idea of audit
committees. The intent of this new development is to create space
between the external auditors and the directors of the Client
Company.
• The need to appoint audit committees has become all the more
necessary following the Cadbury Committee Report in 1992.

15
Membership of the Audit Committee
A group of independent, non-executive directors
• Should consist of at least three members with written terms
of reference which deal clearly with its authority and duties.
• At least one member should have recent and relevant
financial experience
• Committee members should be independent of operational
management

16
Objectives of the Audit Committee
• The broad objectives of an audit committee are threefold:
• to increase public confidence in the credibility and
objectivity of published financial information;
• to assist directors in meeting their responsibilities in
respect of financial reporting;
• to strengthen the independent position of a company’s
external auditor

17
Role and Responsibility
• Monitor the integrity of the company’s financial statements
• Review the company’s internal control and risk management
systems
• Monitor and review the effectiveness of the company’s
internal audit function

18
Monitor the integrity of the company’s
financial statements
• Make recommendations in relation to appointment, reappointment
and removal of external auditor
• Approve remuneration and terms of engagement of the external
auditor
• Review and monitor external auditor's independence and objectivity
and the effectiveness of the audit process
• Develop and implement policy on the engagement of the external
auditor to supply non-audit services

19
Monitor the integrity of the company’s
financial statements
• Reviewing and dealing with external auditor's criticism of
management and ensuring that recommendations of
internal and external auditors have been implemented.
• Review of the company's existing accounting policies and
recommending changes in response to new reporting
standards.
• Review of annual financial statements presented to
shareholders.

20
Review the company’s internal control and risk
management systems
• Reviewing the company's procedures and system to manage
business risk and environmental problems.
• Review of major findings on internal investigations and on
management's, response to those investigations.
• Ensuring compliance with codes of practice on corporate
governance set out stock exchanges or other similar
institutions
• Providing a reporting channel for ‘whistle blowing’.

21
Review the company’s internal control and risk
management systems
• Review of the internal audit function to ensure that it is
adequately resourced, has appropriate standing within the
company and performing effectively and efficiently

22
Advantages
• Improve the quality of financial reporting, by reviewing the
financial statements on behalf of the Board
• Create a climate of discipline and control which will reduce
the opportunity for fraud
• Enable the non-executive directors to contribute an
independent judgement and play a positive role
• Help the finance director, by providing a forum in which he
can raise issues of concern, and which he can use to get
things done which might otherwise be difficult

23
Advantages
• Strengthen the position of the external auditor, by providing a
channel of communication and forum for issues of concern
• Provide a framework within which the external auditor can assert
his independence in the event of a dispute with management
(Avoidance of conflicts)
• Strengthen the position of the internal audit function, by providing
a greater degree of independence from management
• Increase public confidence in the credibility and objectivity of
financial statements

24
Advantages
• Monitoring of the independence of the external auditors,
and discussion of significant issues with the external auditors
• Better quality of management accounting, as the audit
committee is better placed to criticize internal functions.
• Stronger control environment, as the internal audit function
will report to the audit committee increasing their
independence and adding weight to their recommendations.

25
Advantages
• Should lead to better communication between the directors, external
auditors and management
• The skills, knowledge and experience (and independence) of the audit
committee members can be an invaluable resource for a business
• It may be easier and cheaper to arrange for finance, as the presence
of an audit committee can give a perception of good corporate
governance.
• It would be less burdensome to meet listing requirements if an audit
committee (which is usually a listing requirement) is already
established.
26
Drawbacks or Disadvantages
Opponents of audit committees argue that:
• The executive directors may not understand the purpose of
an audit committee and may perceive that it detracts from
their authority. (fear that their purpose is to police executive
management)
• There may be difficulty selecting sufficient non-executive
directors with the necessary competence (skills &
experience) in auditing matters and with sufficient time for
the committee to be really effective.
27
Drawbacks or Disadvantages
• Non-executive directors may be over-burdened with details.
• Ambitious members of the committee may turn it to a rival
board
• The establishment of such a formalized reporting procedure
may dissuade the auditors from raising matters of
judgement and limit them to reporting only on matters of
fact.
• Costs may be increased. Non-executive directors are
normally remunerated, and their fees can be quite expensive
28