OVERVIEW OF AUDIT

PROCESS

Outline

Definition and overview of auditing

Objectives of financial statement
audit
Types of audit
Types of auditors
Audit process - pre engagement
Principal contents of audit
engagement letter

Definition of Auditing

auditing is a systematic process

an audit involves obtaining and evaluating

evidence about assertions regarding
economic actions and events
assertions - representations by management about
economic actions and events

an audit is conducted objectively (without

bias)

Definition of Auditing
auditors ascertain the degree of
correspondence between assertions and
established criteria
Assertion - fair presentation of financial statements
Criteria - identified financial reporting framework (GAAP)

auditors communicate the audit results to

various interested users

Types of Audit
1.

Financial statement audit - to determine whether

the FS are fairly presented in accordance with an
identified financial reporting framework

2. Compliance audit - to determine whether the

organization has adhered to specific procedures,
rules or regulations
3. Operational audit - a study of a specific unit for
the purpose of measuring its performance

Types of Auditors
1. External (independent) auditors

public accountants, both individuals or firms, who perform audit,

tax, consulting and other types of services for external clients

certified public accountants (CPAs) who are independent of the

organizations or companies whose assertions or representations are
being audited

these independent CPAs offer their audit services on a contractual

basis.

majority of audits performed by external auditors are financial

statement audits

Types of Auditors
2. Internal auditors

perform services for a single organization or company for which

they are employed on a full time basis

typically reporting to the audit committee or the board of directors

who are the primary users of their work

perform both compliance and operational audits and measure the

degree to which various functions of their organization or company
adhere to stated managerial policies, laws or regulations

Types of Auditors
3. Government auditors - full-time employees of the
government tasked to determine compliance with
laws, statutes, policies and procedures
4. Forensic auditors - financial auditing specialists
who focus on unearthing the truth and/or
providing evidence in legal/financial disputes
and/or irregularities (including fraud), as well as
providing preventative advice on the subject

Audit process
1. Pre engagement

2. Audit planning
3. Consideration of internal controls
4. Evidence gathering
5. Completing the audit
6. Issuance of the audit report
7. Post audit responsibilities

Audit process pre engagement

acceptance of engagement :

competence - auditor has the necessary skills and competence

to handle the engagement
independence - consider whether there are threats to
independence and objectivity
ability to serve the client - there should be enough personnel
with appropriate capabilities, competence and time to perform
the audit engagement
integrity of management - auditor should conduct background
investigation of the prospective client to minimize association
with client whose management lacks integrity

Audit process pre engagement

procedures before accepting an engagement

1. Obtain preliminary knowledge of the companys

business and industry
2. Identify any threats to the firms independence and
objectivity
3. Evaluate the firms ability to serve the client
4. Evaluate auditability

Audit process pre engagement

procedures before accepting an engagement

5.

Investigate the integrity of clients management through inquiry

Information from predecessor auditor:

6.

Reasons for change in auditors

Information that might bear on the integrity of the management
Disagreements between the predecessor auditor and
management on accounting principles, auditing procedures,
etc.
Agree on the terms of the engagement and prepare an
engagement letter