Explanation of the Audit Process
Essay by Angel Euqinod • July 9, 2015 • Term Paper • 486 Words (2 Pages) • 1,277 Views
Explanation of the Audit Process
The first step in the audit process is planning. Proper planning of an audit will more than likely allow the auditor to gather more sufficient and appropriate evidence in arriving at the ultimate product, which is to express an opinion.
In the planning phase the auditor will perform certain procedures depending on whether the prospective client is being audited for the first time or they are desirous of changing auditors. It is very important to note that the auditors must assess the company to ensure that they do not engage a client that may potentially harm their reputation as that of Arthur Anderson. If after satisfying themselves of the reputation and after having made contact with the predecessor auditor, provided permission is granted from the prospective client, the auditors will now proceed to performing due diligence check. At this point the auditor will ensure that they possess the necessary skills and expertise and a full understanding of the industry in which the business operates. The auditors will also have to ensure that the predecessor auditor’s removal was properly done according to the law/standards and also to make additional inquiries of the predecessor regarding any possible disagreements they may have had with the management. The culmination of all this is an engagement letter, which is drafted by the prospective auditor and forwarded to the client.
The next stage requires that the auditor understands and documents his/her understandings of the client’s Internal Control and assess the control risks of the company. To aid the auditor in understanding the control, the auditor may make inquiries of the client’s management and observation of the processes. The auditor is required at this stage to document the understanding so as to help in identifying the types of possible misstatements that could occur. At this stage the auditor will access the control risks depending on the outcome of the understanding.
The magnitude of test of controls or substantive test (test of details/balances, analytical procedures) is dependent on the assessed level of risks. If control risks are initially assessed to be high, that means the controls are bad, then the auditor will not focus on testing the controls but to test the balances as a bad control will more than likely result in material misstatement in the financial statements?
If the Controls are assessed to be low, which means they are good, then the auditor will focus more on testing the controls to prove that they are good, and less testing of balances as a good internal control will more than likely prevent any material misstatement to the financial statements.
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