OVERVIEW OF AUDIT PROCESS

AND PRELIMINARY ACTIVITIES

CHAPTER OBJECTIVES
AUDIT
 AUDIT PROCESS: A GENERAL APPROACH

Entity prepares and The auditor

The auditor performs The auditor gathers
presents financial expresses an audit
audit procedures audit evidence
statements opinion
ENTITY PREPARES AND PRESENTS FINANCIAL STATEMENTS
An audit in accordance with PSAs is conducted on the premise that

management and, where appropriate, those charged with governance

have responsibilities that are fundamental to the conduct of the audit.

The FS subect to the conduct of the audit are those of the entity, prepared

and presented by the entity's management with oversight from those

charged with governance.

The audit of FS does not relieve the management or those charged with

governance of those responsibilities.

CLASSIFICATION OF FS ASSERTIONS

RIGHTS AND OBLIGATION - that the entity has the right over the reported assets
and a valid obligation to settle the reported liabilities.
VALUATION AND ALLOCATION - that assets and liabilities are properly valued and
that revenues and expenses are properly measured.
PRESENTATION AND DISCLOSURE - that assets and liabilities are properly classified
and that disclosures in the notes to the financial statements are adequate.
EXISTENCE OR OCCURRENCE - that assets and liabilities exist as of the financial
statement date and that revenues and expenses occurred during the reporting
period.
COMPLETENESS - all items that should be reported in the financial statements are
included.
 ENTITY PREPARES AND PRESENTS FINANCIAL STATEMENTS

CATEGORY ASSERTIONS

Completeness - all transactions and events

that should have been recorded have been
recorded
Occurrence - transactions and events that
have been recorded have occurred and
pertain to the entity
Classes of Transactions and events for the
Cutoff - transactions are recorded in the
period under audit (TOCCAC) correct accounting period
Accuracy - amounts and other data relating to
recorded transactions have been recorded
appropriately
Classification - transactions and events are
recorded in the proper amounts.
ENTITY PREPARES AND PRESENTS FINANCIAL STATEMENTS

CATEGORY ASSERTIONS

Completeness - all assets, liabilities, and

equity interests that should have been
recorded have been recorded
Existence - assets, liabilities, and equity
interests exist.
Rights and Obligations - the entity holds or
Account balances at the period end
controls the rights and assets, and the
(ACERV) liabilities are the obligations of the entity
Valuation and Allocation - assets, liabilities,
and equity interests are included in the
financial statements or appropriate amounts,
and any resulting valuation or allocation are
appropriately recorded.
ENTITY PREPARES AND PRESENTS FINANCIAL STATEMENTS

CATEGORY ASSERTIONS

Completeness - all disclosures that should

have been included in the financial
statements have been included.
Occurrence and rights and obligations -
disclosed events, transactions, and other
matters have occurred and pertain to the
entity.
Presentation and disclosure (POCAC)
Accuracy and valuation - financial and other
information are disclosed fairly and at
appropriate amounts.
Classification and understandability - financial
information is appropriately presented and
described, and disclosures are clearly
expressed.
NEW SET OF CATEGORIES FOR ASSERTIONS UNDER PSA 315

CATEGORY ASSERTIONS

Presentation - transactions and events are

appropriately aggregated or disaggregated
and clearly described, and related disclosures
are relevant and understandable in the
context of the requirements of the applicable
financial reporting framework.
Classes of Transactions and events and Occurrence - transactions and events that
have been recorded or disclosed have
related disbursements (POCCAC) occurred, and such transactions and events
pertain to the entity.
Completeness - all transactions and events
that should have been recorded have been
recorded and all related disclosures that
should have been included in the financial
statement have been included.
NEW SET OF CATEGORIES FOR ASSERTIONS UNDER PSA 315

CATEGORY ASSERTIONS

Cut-off - transactions and events are

recorded in the correct accounting period.
Accuracy - amounts and other data relating to
recorded transactions and events have been
Classes of Transactions and events and
recorded appropriately, and related
related disbursements (POCCAC)
disclosures have been appropriately
measured and described.
Classification - transactions and events have
beem recorded in the proper accounts
 NEW SET OF CATEGORIES FOR ASSERTIONS UNDER PSA 315

CATEGORY ASSERTIONS

Completeness - all assets, liabilities, and

equity interests that should have been
recorded have been recorded, and all related
disclosures that should have been included in
the FS have been included
Presentation - assets, liabilities, and equity
Account balances and related disclosures
interests are appropriately aggregated or
(CPA CER) disaggregated and clearly described, and
related disclosures are relevant and
understandable in the context of the
requirements of the applicable financial
reporting framework.
 NEW SET OF CATEGORIES FOR ASSERTIONS UNDER PSA 315

CATEGORY ASSERTIONS

Accuracy, valuation, and allocation - assets,

liabs, and equity interest have been included
in the FS at appropriate amounts and any
Account balances and related disclosures
resulting valuation or allocation adjustments
(CPA CER)
have been appropriately recorded, and
related disclosures have been apprpriatelty
measured and described.
 NEW SET OF CATEGORIES FOR ASSERTIONS UNDER PSA 315

CATEGORY ASSERTIONS

Classification - assets, liabilities, and equity

interests have been recorded in the proper
accounts.

Account balances and related disclosures Existence - assets, liabilities, and equity
(CPA CER) interests exist.
Rights and obligations - the entity holds or
controls the rights to assets, and liabilities are
the obligations of the entity.
 Preparation and presentation of FS in accordance with the applicable
financial reporting framework
Provide the auditor with:
- all information, such as records, documentation and other matters that
are relevant to the preparation and presentation of FS,
- any additional information that the auditor may request from
management, and, where appropriate, those charged with governance.
- unrestricted access to those within the entity from whom the auditor
determines it necessary to obtain audit evidence.
THE AUDITOR PERFORMS THE AUDIT PROCEDURE
THE AUDITOR PERFORMS THE AUDIT PROCEDURE
MAJOR AUDIT PROCEDURES

The audit procedures are performed to obtain an

RISK ASSESSMENT understanding of the entity and its environment, including the
PROCEDURES entity’s internal control, to identify and assess the risks of
(RAP) material misstatements, whether due to fraud or error, at the
financial statement level.

An audit procedure designed to evaluate the operating

TEST OF effectiveness of controls in preventing, detecting, and
CONTROLS correcting material misstatements at the assertion level.
MAJOR AUDIT PROCEDURES

An audit procedure designed to detect material misstatements

SUBSTANTIVE
at the assertion level. Substantive procedures comprise:
PROCEDURE
Test of details (of classes of transactions, account balances,

and disclosures), and

Substantive analytical procedure

SPECIFIC AUDIT PROCEDURES

1. INQUIRY - consists of seeking information from knowledgeable persons, both

financial and non-financial, throughout the entity or outside the entity.

2. INSPECTION - refers to the examination of physical documents, records, or assets to

assess their accuracy, completeness, and compliance with relevant regulations and

accounting standards.

3. OBSERVATION - consists of looking at a process or procedure being performed by

others.

4. ANALYTICAL PROCEDURE - consists of evaluations of financial information made by a

study of plausible relationships among both financial and non-financial data.

SPECIFIC AUDIT PROCEDURES

5. REPERFORMANCE - involves the auditor’s independent execution of procedures or

controls that were originally performed as part of the entity’s internal control.

6. RECALCULATION – consists of checking the mathematical accuracy of

documents or records.

7. CONFIRMATION - a specific type of inquiry. It is the process of obtaining a

representation of information or an existing condition directly from a third party.

THE AUDITOR GATHERS AUDIT EVIDENCE

Through the procedures performed, the auditor obtains sufficient

appropriate audit evidence to be able to draw reasonable conclusions on
which to base the audit opinion.

THE AUDITOR EXPRESSES AN OPINION

Opinion to be expressed by the auditor may include either of the following:
a. Unmodified Opinion
modified Opinion
Qualified and Adverse
Qualified and Disclaimer
a. Investigative phase – includes the performance of audit procedures

and the gathering of audit evidence.

b. Reporting phase – includes the expression of opinion, preparation of

the report, and communication of the results to the different users of the

audited financial statements.

AUDIT PROCESS: A MORE DETAILED APPROACH

PHASE DESCRIPTION

This phase will require a decision from the

auditor on whether or not to accept a new
client or continue a relationship with an
existing one.
require evaluation not only of the auditor’s
PRELIMINARY ENGAGEMENT ACTIVITIES
qualification, but also the integrity and
auditability of the client’s FS.
Primary objective: to minimize the likelihood of
being associated with client whose management
lacks integrity.
AUDIT PROCESS: A MORE DETAILED APPROACH

PHASE DESCRIPTION

involves the development of an overall audit

strategy, audit plan, and audit program.

PLANNING AN AUDIT OF FINANCIAL

Primary objective: to assess the different risk
STATEMENT
associated with the audit to determine the
nature, timing and extent of further audit
procedures necessary to be performed.
AUDIT PROCESS: A MORE DETAILED APPROACH

PHASE DESCRIPTION

Primary objective: to establish a basic reliance

STUDY AND EVALUATION OF INTERNAL on internal controls, in determining the nature,
CONTROL timing, and extent of audit procedures to be
performed.

substantive procedures could either be

analytical procedures or tests of details
EVIDENCE GATHERING (SUBSTANTIVE Primary objective: to ascertain the degree of
TESTING) correspondence between the FS prepared by the
management and the financial reporting
framework.
AUDIT PROCESS: A MORE DETAILED APPROACH

PHASE DESCRIPTION

Wrapping-up procedures are performed;

COMPLETING THE AUDIT conclusions reached are reviewed, and an

overall opinion is formed during this phase.

the auditor prepares and issues an audit

report that describes the scope of the audit
ISSUANCE OF THE REPORT
and states the auditor’s conclusion regarding
the fairness of the FS.
AUDIT PROCESS: A MORE DETAILED APPROACH

PHASE DESCRIPTION

after completion of the engagement, the

auditor performs procedures that will enable

him/her to identify areas for improvement in

POST-AUDIT RESPONSIBILITIES the current and future engagements.

Primary objective: to assess and evaluate the

quality of services delivered by the engagement

team.
 PRELIMINARY ENGAGEMENT ACTIVITIES

In deciding whether to accept or reject an engagement, the auditor’s

firm should consider the following:

1. Its competence

2. Its independence

3. Its ability to serve the client properly, and

4. Auditability of the prospective client

5. Integrity of the prospective client’s management

PRELIMINARY ENGAGEMENT ACTIVITIES

auditor can only accept engagements whose requirements

COMPETENCE
are within the auditor’s capacity and capability.

acquired through a combination of education, training,

and experience.

To determine whether the auditor has the degree of

competence required by the engagement, the auditor

obtains a preliminary knowledge of the client’s business and

industry.
 PRELIMINARY ENGAGEMENT ACTIVITIES

INDEPENDENCE
before accepting a specific audit engagement, the auditor

considers whether there are any threats to the firm’s

independence and objectivity, and if so, whether

adequate safeguards can be established.

Essential to the credibility of the auditor’s report.

 PRELIMINARY ENGAGEMENT ACTIVITIES

INDEPENDENCE
Independence of mind - the state of mind that permits the

expression of a conclusion without being affected by

influences that compromise professional judgement,

allowing an individual to act with integrity, and exercise

objectivity and professional skepticism.

 PRELIMINARY ENGAGEMENT ACTIVITIES

Independence in appearance - avoidance of facts and

INDEPENDENCE
circumstances that are so significant that a reasonable and

informed third party, having knowledge of all relevant

information, including safeguards applied, would

reasonably conclude a firm, or a member of the assurance

team’s integrity, objectivity, or professional skepticism had

been compromised.
 PRELIMINARY ENGAGEMENT ACTIVITIES

ABILITY TO SERVE An engagement should not be accepted if there are no

THE CLIENT
PROPERLY enough qualified personnel to perform the audit.

PSA 220 requires that audit work be assigned to personnel

who have the appropriate capabilities, competence, and

time to perform the audit engagement in accordance with

the professional standards.

 PRELIMINARY ENGAGEMENT ACTIVITIES

AUDITABILITY OF
THE CLIENT Accounting records, documents and other information that
(ADEQUACY OF
ACCOUNTING support the client’s FS should be made available to the
RECORDS)
auditor.

Absence of these raises significant doubt about the client’s

auditability.
 PRELIMINARY ENGAGEMENT ACTIVITIES

PSA 220 requires the firm to conduct a background

INTEGRITY OF
MANAGEMENT investigation of the prospective client in order to minimize the
likelihood of association with clients whose management lacks
integrity. This task involved:
Making inquiries of appropriate parties in the business
community (banker, legal counsel) to obtain information
about the reputation of the client.
Communicating with the predecessor auditor, subject to the
client’s permission
 PRELIMINARY ENGAGEMENT ACTIVITIES
Matters to be discussed with the predecessor auditor include
INTEGRITY OF the following: (RID)
MANAGEMENT
Reasons for the change of auditors
Information that might bear on the integrity of the
management, and
Disagreements between the previous auditor and
management as to accounting principles, auditing
procedures.
The predecessor auditor should respond fully to the successor auditor’s
inquiry and advise the successor auditor if there are any professional
reasons why the engagement should not be accepted.
 PRELIMINARY ENGAGEMENT ACTIVITIES

After considering the factors, the auditor shall decide whether to accept or

decline the proposed audit engagement. If the auditor decides to accept

the engagement, the auditor and the client shall agree on the terms of the

engagement.
ACCEPTANCE OF AN

ENGAGEMENT
ACCEPTANCE OF AN ENGAGEMENT

The objective of the auditor is to accept or continue an audit engagement

only when the basis upon which it is to be performed has been agreed upon,

through:

a. establishing whether the preconditions for an audit are present; and

b. confirming that there is a common understanding between the auditor

and management and, where appropriate, those charged with governance

of the terms of the audit engagement.

the use by management of an acceptable financial reporting framework

in the preparation of the financial statements; and

the agreement of management and, where appropriate, those charged

with governance to the premise on which an audit is conducted.

To establish whether the preconditions for an audit are present, the auditor

shall:

a. Determine whether the financial reporting framework to be applied in the

preparation of the financial statements is acceptable; and

b. Obtain the agreement of management that it acknowledges and

understands its responsibility.

If management or those charged with governance impose a limitation on

the scope of the auditor’s work in terms of a proposed audit engagement

such that the auditor believes the limitation will result in the auditor

disclaiming an opinion on the financial statements, the auditor shall not

accept such limited engagement as an audit engagement, unless required

by law or regulation to do so.

The auditor shall agree on the terms of engagement with the client,

represented by management or those charged with governance, as

appropriate. The agreed terms shall be recorded in an audit engagement

letter or other suitable form of written agreement.

a written agreement that confirms the auditor's acceptance of the

appointment, the objective and scope of the audit, the responsibilities of the

auditor and management, the applicable financial reporting framework,

and the form and content of expected reports.

It is in the interest of both the entity and the auditor that the auditor sends an

engagement letter, preferably before the commencement of the audit:

To help avoid misunderstandings with respect to the audit; and

Document and confirm the auditor’s acceptance of the appointment.

a. The objective and scope of the audit of the financial statements,

b. The responsibilities of the auditor,

c. The responsibilities of management,

d. Identification of the applicable financial reporting framework for the

preparation of the financial statements, and

e. Reference to the expected form and content of any reports to be issued

by the auditor and a statement that there may be circumstances in which a

report may differ from its expected form and content.

a. The presence of audit risk

b, Unrestricted access to whatever records

c. The financial reporting framework used

d. The objective of the audit

e. The form of any reports or other communication

f. Management’s responsibility

g. Elaboration of the scope of the audit

a. Basis in which fees are computed and any billing arrangements

b. The expectation of receiving a representation letter

c. Acknowledgement of management of terms of agreement

d. Arrangements regarding the planning of the audits

e. Description of any other letters or reports

When the auditor of a parent entity is also the auditor of its subsidiary,
branch, or division (components), the factors that influence the decision
whether to send a separate engagement letter to the component include
the following:
Who appoints the Component auditor
Legal requirements in relation to audit appointments
Degree of ownership by parent
Whether a separate auditor’s report is to be issued on the component;
and
Degree in independence of the component’s management from the
parent entity
An auditor does not normally send a new engagement letter every year.
However, the following factors may cause the auditor to send a new
engagement letter:
an indication that the client misunderstands the objective and scope of
the audit
any revised or special terms of the engagement
a recent change of management, board of directors, or ownership
a significant change in ownership, and the nature or size of the client’s
business.
a change in legal or regulatory requirements
a change in the financial reporting framework adopted in the
preparation of the financial statements
a change in other reporting requirements.
 The auditor shall not agree to a change in the terms of the audit
engagement where there is no reasonable justification for doing so.

Below are examples of circumstances that could lead to a change in

engagement and whether or not they are reasonably justifiable:

Circumstances Reasonably Justifiable?

Change in circumstances affecting the need

for the service

A misunderstanding as to the nature of an

audit or related services originally requested
 Circumstances Reasonably Justifiable?

A restriction on the scope of the engagement,

whether imposed by management or caused
by circumstances

If the change related to information that is

incorrect, incomplete, or otherwise
unsatisfactory

The auditor is unable to obtain sufficient

appropriate audit evidence regarding
assertions
 Auditor and management shall agree on and
record the new terms of the engagement in an
Terms of the audit engagement are changed
engagement letter or other suitable form of
written agreement.

withdraw from the audit engagement where

possible under applicable law or regulation.
Unable to agree to change of the terms of the determine whether there is any obligation,
audit engagement and is not permitted by
either contractual or otherwise, to report the
management to continue the original audit
engagement circumstances to other parties, such as those
charged with governance, owners, or
regulators.
 Thank You!
“It always seems impossible until it’s done.”
- Nelson Mandela