ACCTNG 9.1 - Overview of Audit Process & Pre-engagement Activities
Completing the Wrapping-up procedures are performed; conclusions
Audit – systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and communicating
the results thereof.
AUDIT PROCESS
PHASE DESCRIPTION
1. Pre-engagement Auditor determine whether or not to accept a new client or
continue relationship with an existing one.
Primary objective: To minimize the likelihood of being
associated to a client whose management lacks integrity.
2. Audit Planning It involves the development of an overall audit strategy, audit
plan and audit program. The auditor usually obtained more
detailed knowledge about the client’s business and industry
in order to understand the transactions and events affecting
the FS.
Primary objective: To assess the different risks associated
with the audit to determine the nature, timing and extent of
further audit procedures necessary to be performed.
3. Consideration of Primary objective: To establish for reliance on internal
Internal controls, in determining the nature, timing and extent of audit
Controls procedures to be performed.
4. Evidence- Substantive test is performed to determine whether entity’s
gathering financial statements are presented fairly in accordance with
(Substantive financial reporting standards.
Testing)
Primary objective: To ascertain the degree of
correspondence between the FS prepared by client’s
management and the financial reporting framework.
5.
Audit reached are reviewed; and an overall opinion is formed
during this phase.
Primary objective: To assist the auditor in assessing
conclusion reached is consistent with evidence gathered.
6. Issuance of Primary objective: To communicate the conclusions reached
Audit Report by the auditor to various interested users.
7. Post-audit The auditor performs procedures that will enable him/her
responsibilities identify areas for improvement in the current and future
engagements.
Primary objective: To assess and evaluate the quality of
services delivered by the engagement team.
PRE-ENGAGEMENT
Acceptance of an Engagement
Things to consider when accepting an engagement:
1. Competence
2. Independence
3. Ability to serve the client properly
4. Integrity of the prospective client’s management
Process in accepting an engagement:
1. Obtain a preliminary knowledge of the client’s business and industry to
determine whether the auditor has the degree of competence required by the
engagement.
2. Consider whether there are any threats to the firm’s independence and
objectivity, and if so, whether adequate safeguards can be established.
3. Evaluation of the firm’s ability to serve the prospective client.
4. Evaluate auditability.
ACCTNG 9 – AUDITING AND ASSURANCE: CONCEPTS & APPLICATION 1
 5. Investigation of the integrity of the client’s management through inquiry to Other components of Engagement Letter
appropriate parties or communication with the predecessor auditor.
a. Basis in which fees are computed and any billing arrangements
b. Expectation of receiving representation letter
Matters to be discussed with the predecessor auditor:
c. Acknowledgement of management of terms of agreement
a. The predecessor’s understanding as to the Reason for change in auditors;
d. Arrangements regarding the planning of audit
b. Information that might bear on the Integrity of the management; and
e. Description of any other letters or reports
c. Disagreements between the predecessor auditor and management as to
accounting principles, auditing procedures, etc. When relevant, the following points should also be made:
6. Agree on the terms of the engagement and prepare an engagement letter.
 Arrangements concerning the involvement of other auditors and experts in
Agreeing on the Terms of Audit Engagements some aspects of the audit.
 Arrangements concerning the involvement of internal auditors and other staff.
 It should be recorded in an Audit Engagement Letter or other suitable form of
contract.  Arrangements to be made with the predecessor auditor, if any, in the case of
initial.
 It is in the interest of both client and the auditor that the auditor sends an
engagement letter, preferably before the commencement of the engagement to  Any restriction of the auditor’s liability when such possibility exists.
help avoid misunderstandings with respect to the engagement.  A reference to any further agreements between the auditor and the client.
 Audit Engagement confirms: Audit Components (Subsidiary, Branch, or Division)
o Auditor’s acceptance of the engagement
o Objective and scope of the audit Factors that influence the decision whether to send a separate engagement letter to
o Extent of auditor’s responsibilities to the client the component:
o Form of any reports  Who appoints the component auditor;
 Legal requirements in relation to audit appointments;
Content of Engagement Letter  Degree of ownership by parent;
 Whether a separate auditor’s report is to be issued on the component; and
a. The presence of audit risk
 Degree of independence of the component’s management from the parent
b. Unrestricted access to whatever records entity.
c. The financial reporting framework used
d. Objective of the audit Recurring Audits
e. The form of any reports or other communications  Auditor may decide to not send a new engagement letter each period.
f. Management’s responsibility
g. The scope of the audit Factors that the auditor should send a new engagement letter

 Any indication that the client misunderstands the objective and scope of the
audit.

ACCTNG 9 – AUDITING AND ASSURANCE: CONCEPTS & APPLICATION 1

  Any revised or special terms of the engagement. 4. If the change relates to information that is incorrect, No
 A recent change of management, board of directors or ownership. incomplete or otherwise unsatisfactory.
 A significant change in nature or size of the client’s business. 5. The auditor is unable to obtain sufficient appropriate No
 A change in legal or regulatory requirements. audit evidence regarding assertions.
 A change in financial reporting framework adopted in the preparation of the
FS.
 A change in other reporting requirements.

Acceptance of a Change in Engagement

Is there a reasonable justification?

YES NO
a. Stop performing the old a. Continue the original audit
engagement. engagement.
b. Stop referring to the old b. When prohibited to continue,
engagement, except withdraw from the audit engagement.
when the new
engagement involves Note: Every time withdrawal is made; the
agreed-upon procedures. auditor should consider the necessity of
c. Start performing the new communicating the reasons to appropriate
engagement. level of management.

Circumstances that could lead to Change in Engagement

Circumstances Justifiable
1. Change in circumstances affecting the need for the Yes
service.
2. A misunderstanding as to the nature of an audit or Yes
related services originally requested.
3. A restriction on the scope of the engagement, No
whether imposed by the management or caused by
circumstances.

ACCTNG 9 – AUDITING AND ASSURANCE: CONCEPTS & APPLICATION 1