i.The terms of the engagement, which are documented in the engagement letter, should include the objective of the engagement, the management’sresponsibilities, the auditor’s responsibilities, and the limitation of the engagement. ii.Three topics: 1.the engagement letter: may include: arrangements involving the use of specialists or internal auditors: any limitation of the liabilities of the audit or client; additional services to be provided relating to regulatory requirements;2.Using the work of the internal auditors:3.The role of the audit committee.4.The role of the audit committee: is a subcommittee of the board of directors that is responsible for the financial reporting and disclosure process.5.Planning the audita.In the audit plan, the auditor documents a description of the nature, timing, and extent of the planned audit procedures to be used in order to comply with auditing standards.b.Steps should be included:i.Assess business risks: inappropriate audit report when materially misstated.ii.Establish materiality: in all material respectsiii.Consider multi-locations:iv.Assess the need for specialistsv.Consider violations of laws and regulationsvi.Identify related partiesvii.Consider additional value-added servicesviii.Document the overall audit strategy, audit plan, and prepare audit programs.c.Supervision of the audit6.Types of Audit Tests: there are three general types of audit tests:a.Risk assessment procedures: environment and internal control.
i.Inquiries of management and othersii.Preliminary analytical proceduresiii.Observation and inspectionb.Tests of control: to test the operating efectiveness of controls in preventing or detecting. The correcting, material misstatements at the relevant assertion level.i.Examples are: inquiries of appropriate management, supervisory, and staf personnelii.Inspection of documents, reports and electronic filesiii.Observation of the application of specific controlsiv.Walkthroughs, which involve tracing a transaction from its origination to its inclusion in the financial statements through a combination of audit procedures, including inquiry, observation and inspectionv.Reperformance of the application of the control by the auditor.c.substantive procedures: to detect material misstatements. There are two categories of substantive procedures:i.tests of details:1.substantive test of transactions: for errors or fraud in individual transactions2.tests of details of account balances and disclosures: focus on the items that are contained in the ending financial statements account balances and disclosures.ii.substantive analytical procedures.d.Dual-Purpose Tests:7.Materiality: to determine overall materiality for the financial statements and to decide on tolerable misstatement for significant account or disclosures.