OVERVIEW THE AUDIT PROCESS

taufikurRahman@2002

Overview of the Audit ProcessObtain and understanding of the

business and Industry

Identify relevant financialstatement assertions

Obtain evidence through auditprocedures

Make decisions about audit riskcomponents

Make decisions about materiality

Procedures to obtainunderstanding of internal

control

Test ofcontrol

Substantive tests: analyticalprocedures, detais ofl

transactions, details of balances

Determine how evidence will be used

Communication to F/S

users throughaudit opinion

Other requiredcommunications to the audit

committee

Communicationof findings

associated withother value-

added services

Knowledge of the Business and Industry

Developing expectations of F/SIndustry impact on information systemsEvaluation of reasonableness of

accounting estimatesGAAP for specific industriesFoundation for other value-added

services

Management’s Assertions

Management’s AssertionsRepresentation of economic events and

transactions made by managementCategories of Management’s Assertions

* Existence or Occurrence* Completeness* Rights and Obligations* Valuation or Allocation* Presentation and Disclosure– Explicit: existence & valuation– Implicit: completeness, right-obligation,

disclosure

Management’s Assertions

Existence or Occurrence

deal with whether assets or liabilities of the entity exist at a given date and whether recorded transactions have occurred during a given period

Completeness

deal with whether all transactions and accounts that should be presented in the financial statements are indeed included

Management’s Assertions

Right and Obligationsdeal with whether assets are the right of the entity and liabilities are the obligations of the entity at a given date

Valuation or Allocationdeal with whether assets, liability, revenue and expense components have been included in the F/S at appropriate amounts

Management’s Assertions

Presentation and Disclosure

deal with whether particular components of the financial statements are properly classified, described, and disclosed

Materiality

FASB Concepts Statements No. 2defines materiality as “the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influence by the omission or misstatement”

Materiality

Materiality influence the audit process– In planning the engagement, auditor should

judge the scope of the audit– Guides the collection of sufficient, competent

evidential matter – Guides auditor when evaluating audit findings

Audit Risk

SAS 47 (AU 312.02) defines audit risk:

the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that contain a material misstatement

Audit Risk Components

Susceptibility ofindividual assertions tomaterial misstatement

Client'sinternalcontrols

Material misstatementnot prevented or

detected and correctedby client's internal

control

Auditor'sprocedure

s forverifying

assertions

F/S withreasonable

assurance thatthey are free of

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Assess Inherent Risk Assess Control RiskDesign Audit to

Achieve Detection RiskAudit Risk=

Materialmisstatements

remainingundetected in

individualassertions

Audit Risk Components

Inherent Risk (IR)the susceptibility of an assertion to a material misstatement, assuming that there are no related internal controls

Control Risk (CR)that a material misstatement that could occur in an assertion will not by prevented or detected on a timely basis by entity’s internal controls

Detection Risk (DR)that auditor will not detect a material misstatement that exist in an assertion

Audit Risk ModelAR = IR x CR x DR

Evidence

Sufficient competent evidential matter is to be obtained through inspection, observations, inquiries, and confirmation to afford a reasonable basis for an opinion regarding the financial statements under audit (3rd General Standard)

SAS 31 (AU 326.20) Evidential Matter

states that “the amount and kinds of evidential matter required to support an informed opinion are a matter for auditor to determine in exercise professional judgment after a careful study of the circumstance in the particular case”

Sufficiency of Evidential Matter

Materiality and Risk

more evidence is needed for accounts that are material to the F/S

Economic Factors

evidence must be obtained within a reasonable time and at a reasonable cost

Size and Characteristics of the Population

the larger the population, the larger the quantity of evidence required

Competency of Evidential Matter

The competency (reliability) of both underlying accounting data and corroborating information

Relevance

evidence must be pertinent to the auditor’s objective

Source

independent outside entity, internal control structure, direct access

Timelines

relates to the date to which the evidence is applicable

Objectivity

objective in nature is more reliable

Classification of Audit Procedures

Procedures to Obtain an Understandingprocedures to obtain an understanding of the client, its business and industry, and factors that may affect the inherent risk of misstatement in an assertion

Tests of Controlto provide evidence about the effectiveness of the design and operation of internal control structure policies and procedures

Substantive Teststo provide evidence as to the fairness of management’s financial assertions

- Analytical procedures

- Tests of details of transactions

- Tests of details of balances

Consideration of Value-Added Services

Benchmarking company performance and performance measurement

Business planningRisk assessmentBusiness evaluationInformation system design and

reliability

Communication of Findings

The communication on the financial statements through auditor’s report

Other required communications with management– Internal controls– Significant accounting policies– Management judgments and accounting

estimates

Communication of other findings– Other value-added services