AUDITING THEORY

General Audit Process,

including the first step:
Accepting the engagement

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The audit process usually covers the following phases:
Pre-engagement Procedures

Audit Planning

Obtaining an understanding of the client and

its environment, including internal control

Assessing the risks of material misstatement

and designing further audit procedures

Performing substantive procedures

Completing the audit

Issuing an auditor’s report

Pre-engagement Procedures

Pre-engagement procedures are performed

to assist the auditor in deciding whether to
accept or reject an audit engagement. In
making such decision, the firm (auditor)
should consider its competence, its
independence, its ability to serve the client
properly, and the integrity of the prospective
client’s management.
What activities shall the auditor
undertake at the beginning of an
audit engagement?
The procedures performed at the beginning of an audit
engagement are called preliminary planning activities. It
may involve:

a. Establishing whether the preconditions for an audit are

present.
b. Confirming that there is a common understanding
between the auditor and management (including those
charged with governance) of the terms of engagement.
c. Performing procedures regarding the acceptance and
continuance of the client relationship and the specific
audit engagements.
d. Evaluating compliance with relevant ethical
requirements, including independence, in accordance
with the Code of Ethics for Professional Accountants.
 DEFINITION

Predecessor auditor refers to the

auditor who was previously the
auditor of an entity and who has
been replaced by an incoming
auditor.

Successor auditor or incoming

auditor, is the auditor who is
considering to accept an engagement
to audit the financial statements or
an auditor who has accepted such an
engagement.
 Why is there a need to communicate
with the predecessor auditor?
Before a new engagement is accepted by a successor auditor,
information must be sought from the predecessor auditor.
Inquiry of the predecessor auditor is a necessary procedure
because the predecessor auditor may be able to provide
information that will assist the successor auditor in deciding
whether to accept the engagement.

The communication should be done, however, only after an

engagement has been offered. It may be made orally or in
written form. It is the successor auditor’s responsibility to
initiate the contact between him and the predecessor auditor.
The successor auditor, however, must first seek permission
from the prospective client to make inquiries of the
predecessor auditor.
 Inquiry to predecessor auditor
The successor auditor should make specific and reasonable
inquiries of the predecessor auditor regarding matters that
will assist him in determining whether to accept the
engagement. Matters subject to inquiry may include:

a. Information that might bear on the integrity of

management.
b. Any disagreements with management as to accounting
policies, auditing procedures, or other similarly
significant matters.
c. The predecessor auditor’s understanding as to the
reasons for the change of auditors.
What are some of the conditions
that may lead to a justifiable
change in the terms of an audit
engagement?
A request may be made by the client entity for the auditor to
change the terms of the audit engagement. The following are
considered justifiable reasons for a client’s request for a
change in the engagement:

a. A change in circumstances that affects the need for the

service.
b. A misunderstanding as to the nature of the service as
originally requested.

If the auditor concludes that there is reasonable justification

to change the engagement, the report issued would be that
appropriate for the revised terms of engagement and not
include reference to the original engagement or mention any
procedures that may have been performed in the original
engagement.
 What are some of the
circumstances that are
considered unreasonable basis
in requesting a change in the
terms of an audit engagement?
A request for a change in engagement would not be
considered reasonable if:

a. It appeared that the change relates to information that is

incorrect, incomplete, or otherwise unsatisfactory.
b. There is a restriction in the scope of the engagement
whether imposed by management or caused by
circumstances. (e.g., an audit engagement where the
auditor is unable to obtain sufficient appropriate audit
evidence regarding material accounts and the client asks
for the engagement to be changed to a lower level
engagement to avoid a qualified opinion or a disclaimer
of opinion).
Completing the Audit
 What is the purpose of performing analytical
procedures at the completion stage of the audit?
PSA 520 states that the auditor should design and perform analytical
procedures near the end of the audit to assist the auditor in
performing an overall conclusion as to whether the financial
statements are consistent with the auditor’s understanding of the
entity.

Analytical procedures performed as an overall review in the

completion of an audit usually involves reading the financial
statements and:

a. Consider unusual or unexpected account balances or

relationships that were not previously identified during the
audit.
b. Consider the adequacy of audit evidence regarding previously
identified unusual or unexpected balances.
c. Assess the conclusions reached and evaluate the overall
financial statement presentation.
 Subsequent events and going concern
Subsequent Events, which requires the auditor to
perform audit procedures to obtain sufficient
appropriate audit evidence that all events occurring
between the date of the financial statements and the
auditor’s report that require adjustment of, or disclosure
in, the financial statements have been identified.

Going Concern states that the auditor shall remain alert

throughout the audit for audit evidence of events or
conditions that may cast doubt on the entity’s ability to
continue as a going concern. Therefore, the auditor will
conclude on going concern matters near the end of the
audit having reviewed all evidence obtained and after
reviewing the final version of the financial statements.
Written representations and communication with those
charged with governance

Towards the end of the audit, the auditor must consider the matters to
be included in management’s written representation, according to ISA
580, Written Representations . This is a matter to be dealt with
towards the conclusion of the audit because it is a requirement of ISA
580 that the date of the written representation shall be as near as
possible to, but not after, the date of the auditor’s report. Written
representations are necessary audit evidence, and therefore the
auditor’s opinion cannot be expressed and the auditor’s report
cannot be dated before the date of the written representations.
Significant subsequent events may come to light very late in the audit,
and therefore the written representations should cover all of the
subsequent events period, right up to the date at which the audit
report is dated.
Written representations and communication with those
charged with governance

Important outputs of the audit are the matters to be

communicated in accordance with ISA 260,
Communication with Those Charged with Governance.
The matters to be communicated include significant
findings from the audit and matters relating to auditor’s
independence. In addition, the auditor must also consider
whether the two-way communication between the auditor
and those charged with governance has been adequate for
an effective audit, and have taken appropriate action if not.
Issuing the report

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Audit report

An audit report is a medium through which an

independent auditor expresses his opinion or disclaims
an opinion. It is a letter communicating what was
audited, the responsibilities of the client’s management
and the auditor, what an audit entails, and the auditor’s
opinion. It must be made in writing, and may be issued
in hard copy format, or using an electronic medium.
Audit report

The following report variations may be used:

a. A clean opinion, if the financial statements are a fair

representation of an entity's financial position, being free of
material misstatements. This is also known as an unqualified
opinion.
b. A qualified opinion, if there were any scope limitations that
were imposed upon the auditor's work.
c. An adverse opinion, if the financial statements were materially
misstated.
d. A disclaimer of opinion, which can be triggered by several
situations. For example, the auditor may not be independent, or
there is a going concern issue with the auditee.
Audit report

The typical audit report contains six paragraphs, which

cover the following topics:

1. The auditor’s opinion.

2. Basis for opinion.
3. Key Audit Matters.
4. Responsibilities of Management and those charged
with governance
5. Auditor’s responsibilities for the audit of the financial
statements
6. Report on other Legal and regulatory Requirements
 Post-audit
responsibilities
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Post-audit responsibilities

Post audit responsibilities include the consideration of

the following:

1. Subsequent events occurring between the date and

the issuance of the auditor’s report.
2. The discovery of existing facts.
3. The discovery of omitted procedures.
Thank you

Tamie C. Encarnacion