Audit process notes - 2010

Audit process notes - 2010 - Notes on Phases of the Audit...

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Notes on Phases of the Audit Process J. Jones These notes are intended to elaborate on the Summary of Phases of the Audit Phase 1 – Pre-planning Before accepting or deciding to continue with an audit engagement, the auditor: Investigates the integrity of the client (senior management and Board of Directors). (This was part of your group assignment Assesses the auditors’ independence (look at relationships, other engagements, etc.) – See Session 12 for discussion on independence. Assesses the auditors’ competence (does the auditor have the industry knowledge, will the auditor need a specialist, does the auditor have enough staff to service the audit). When the auditor addresses competence issues, it part of managing detection risk. This is relevant for both new and continuing engagements (sometimes the client will grow so much or change so much that the auditor no longer has the ability to conduct a proper audit). These steps are important for preliminary assessment of audit risk (client integrity as well as financial strength of client). Obtain engagement letter. At the start of each audit, the auditor issues an engagement letter. This ensures no misunderstanding between the client and the auditor. Phase 2 – Client Risk Profile Understanding the Client Business Risk It is essential that the auditor obtain a thorough understanding of the client entity, its business, its operations, its industry, and key personnel. This understanding: Makes the auditor aware of any particular events, transactions or accounting practices which may have a significant impact on financial statements Enables the auditor to identify and assess circumstances which may increase the likelihood of misstatement Provides a background against which evidence gathered during the course of the audit can be evaluated and see if it “makes sense” and “looks right” Procedures include: Visiting the client company, touring the premises and meeting key personnel (i.e. The CFO, marketing managers, production managers, human resources managers) Discuss with key personnel, in relation with past year, the company’s financial performance, problems and successes, any significant changes in activities, accounting, or personnel Reviewing company’s documents and records (e.g. loan documents, Board minutes, significant customer agreements) Reviewing industry and business data Reviewing previous year’s working papers and past experience with client Discussion among engagement team members Gaining an understanding of the external and internal environment also involves 1
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Notes on Phases of the Audit Process J. Jones assessing the financial position through overall analytical review procedures. The results of the analysis are evaluated against the auditors’ expectations - based on auditors’ knowledge of the business, the client’s “usual” position in its industry and any known
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Audit process notes - 2010 - Notes on Phases of the Audit...

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