chap4-audit

Chapter 4 - AUDIT PROCESS – ACCEPTING AN ENGAGEMENT
GENERAL APPROACH TO AUDITING FINANCIAL STATEMENTS
Financial Statement Assertions:
1. Existence or occurrence
- The Assets and Liabilities exist as of the financial statement date and revenues and expenses
occurred during the period.
- Most effective way to check existence is through physical examination.
2. Rights and obligations

- That the entity has rights over the reported assets and that it has a valid obligation to settle
the reported liabilities.
- Examine ownership documents
3. Completeness
- All items that should be reported in the FS are included.
- To satisfy this assertion, the auditor should start with the source documents to determine
whether the same has been recorded.
4. Validation and allocation

- The Assets and Liabilities are properly valued and revenues and expenses are properly
measured.
- An effective way to check is by recalculating the valuation assertion of the management.
5. Presentation and Disclosure.

- All assets and liabilities are properly classified and that disclosures in the notes to the FS are
adequate.
- To test this assertion, auditors are required to apply the relevant accounting standards.
CATEGORIES AFFECTED BY
FINANCIAL STATEMENT ASSERTIONS
1. Assertions about classes of transactions

• Occurrence
• Completeness
• Accuracy
• Cutoff
• Classification
2. Assertions about account balances

• Existence
• Rights and obligations
• Completeness
• Valuation and allocation
3. Assertions about presentation and disclosure

• Occurrence and rights & obligations
• Completeness
• Classification and understandability
• Accuracy and valuation
AUDIT PROCEDURES
- Auditors normally develop specific audit objectives for each of the relevant assertions.
- Audit objectives serve as a guide to auditors in assessing the risks of material misstatement
and in designing the appropriate audit procedures to be performed.
- Audit procedures are procedures performed by auditors to achieve its audit objectives.
SAMPLE AUDIT PROCEDURES
1. Inspection - Involves examining records, documents or tangible assets
2. Observation - Consist of looking at a process or procedure being performed by others
3. Inquiry - Consists of seeking information from knowledgeable persons inside or outside the
entity
4. Confirmation - Consist of the response to an inquiry to corroborate information contained in

the accounting records
5. Computation - Consists of checking the arithmetical accuracy of source documents and

accounting records or performing independent calculations.
6. Analytical Procedures - Consists of the analysis of significant ratios and trends including
the resulting investigation of fluctuations and relationships that are inconsistent with other
relevant information or deviate from predicted amounts.
AUDIT EVIDENCE
- Refers to the information obtained by the auditor in arriving at the conclusions on which the
audit opinion is based.
- Comprise of source documents and accounting records underlying the financial statements
and accounting records underlying the financial statements and corroborating information
from other sources.
AUDIT OPINION
- The result of the procedures performed and the audit evidence obtained and carefully
evaluated in relation to the fair presentation of the financial statements.
AUDIT PROCESS
1. ACCEPTING AN ENGAGEMENT
- Decision whether to accept or reject an engagement.
- Requires evaluation of the auditor’s competence as well as the audibility of the prospective
client’s FS
2. AUDIT PLANNING
- Auditor obtains a detailed knowledge of the client’s business and industry.
- Knowledge of business and industry enables the auditor to understand the transactions and
events affecting the FS.
- Understanding of the client combined with the assessment of risk and materiality shall enable
the auditor to develop an overall audit plan.
3. CONSIDERING THE INTERNAL CONTROL

- Involves obtaining an understanding of the entity’s internal control systems and assessing the
level of control risk.
4. PERFORMING SUBSTANTIVE TESTS

- Are performed to obtain reasonable assurance that the AFS are presented fairly in accordance
with the AFRF.
- Substantive tests are audit procedures designed to detect material misstatements in the FS.
- Nature, timing, and extent are highly dependent on the results of the auditor’s consideration
of IC. (Relationship is inverse)
5. COMPLETING THE AUDIT

- To complete the audit, the auditor must have sufficient appropriate evidence in order reach a
conclusion on the fairness of the FS.
- Among others, the procedures performed at this stage include:

• Assessing the appropriateness of the use of the going concern assumption.
• Performing analytical review procedures.
• Obtaining written representations from the client’s management.
6. ISSUING A REPORT
- Formulation of conclusion in the form of an Opinion which is communicated to various
interested users through an audit report.
CONSIDERATION IN ACCEPTING AN ENGAGEMENT
1. The Auditor’s competence

2. The Auditor’s independence
3. The auditor’s ability to serve the client properly
4. The integrity of the prospective client’s management; and
5. The adequacy of the accounting records.
RETENTION OF EXISTING CLIENTS

- Clients should be evaluated at least once a year or upon occurrence of major events.
- Conditions which would have caused the auditor to reject a prospective client may also result
or lead to a decision of terminating an audit engagement.
ENGAGEMENT LETTER
1. Objective of the audit of the FS (to express an opinion)

2. Management’s responsibility on the FS
3. Scope of the audit
4. Forms or any reports or other communication that the auditor expects to issue;
5. The fact that because of the limitations of the audit, there is an unavoidable risk that material
misstatements may remain undiscovered; and
6. The responsibility of the client to allow the auditor to have unrestricted access.
7. Billing arrangements
8. Expectations of receiving management representation letter;
9. Arrangements concerning involvement of others; and
10. Request for the client to confirm the terms of the engagement.
IMPORTANCE OF ENGAGEMENT LETTER
- Avoid misunderstanding with respect to the engagement; and
- Document and confirm the auditor’s acceptance of the appointment.
RECURRING AUDITS
- No need to send a new EL every year unless it is necessary.
- If a new EL is not required, auditors must remind the client of the terms and conditions
previously agreed upon
AUDIT OF COMPONENTS
- One entity – One EL.
- Unless, the EL will include the scope of audit to the Parent and its components (subsidiaries)

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Chapter 4 - AUDIT PROCESS – ACCEPTING AN ENGAGEMENT

GENERAL APPROACH TO AUDITING FINANCIAL STATEMENTS

Financial Statement Assertions:

- Most effective way to check existence is through physical examination.

2. Rights and obligations

- Examine ownership documents

4. Validation and allocation

- An effective way to check is by recalculating the valuation assertion of the management.

5. Presentation and Disclosure.

1. Assertions about classes of transactions

2. Assertions about account balances

3. Assertions about presentation and disclosure

2. Observation - Consist of looking at a process or procedure being performed by others

4. Confirmation - Consist of the response to an inquiry to corroborate information contained in

5. Computation - Consists of checking the arithmetical accuracy of source documents and

3. CONSIDERING THE INTERNAL CONTROL

4. PERFORMING SUBSTANTIVE TESTS

5. COMPLETING THE AUDIT

- Among others, the procedures performed at this stage include:

1. The Auditor’s competence

RETENTION OF EXISTING CLIENTS

1. Objective of the audit of the FS (to express an opinion)

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