Audit process
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The audit process involves 6 phases: 1) Preliminary planning 2) Pre-survey 3) Survey 4) Data collection and analysis 5) Reporting 6) Postaudit evaluation The objective of an audit is to enable the auditor to express an opinion on whether the financial statements are prepared in accordance with the applicable financial reporting framework. The scope of an audit determines the audit procedures necessary to achieve the audit's objective.
Audit process
- 1. Audit process What is the process of audit? An audit that focuses on processes and not a specific person or product. A process audit examines the effectiveness of company procedures. Definition An examination of a company's activities or products to determine if a company is doing what it says it is doing. SIX PHASES OF THE AUDIT PROCESS Phase 1 - Preliminary Planning Phase 2 - Pre-Survey
- 2. Phase 3 - Survey .
- 3. Phase 4 - Data Collection and Analysis
- 4. Phase 5 - Reporting
- 5. Phase 6 - Postaudit Evaluation
- 6. SCOPE: Scope of audit means the audit procedures deemed necessary to achieve the objective of an audit. Scope of Audit 1. Legal Requirements The auditor can determine the scope of an audit of financial statements in accordance with the requirements of legislation, regulations or relevant professional bodies. The state can frame rules for determining the scope of audit work. In the same way professional bodies can make rules to conduct the audit. The auditor can follow all the applicable on the audit work while checking the accounts of a business concern. 2. Entity Aspects The audit should be organized to cover all aspects of the entity as far as they are relevant to the financial statement being audited. A business entity has many areas of working. A small entity may have few functions while a large concern has many functions. The auditor has duty to go through all the functions of a business. The audit report should cover all function so that the reader may known about all the working of a concern. 3 ۔Reliable Information The auditor should obtain reasonable assurance as to whether the information contained in the underlying accounting record and other source data is reliable and sufficient as the basis for preparation of the financial statements. The auditor can use various techniques to test the validity of data. All auditors while doing the auditor work usually apply the compliance test and substance test. The auditor can show such information in the report.
- 7. 4. Proper Communication The auditor should decide whether the relevant information is properly communicated in the financial statements. Accounting is an information system so facts and figures must be so presented that reader can get information about the business entity. The auditor can mention this fact in his report. The principles of accounting can be applied to decide about the disclosure of financial information in the statements. 5. Evaluation The auditor assesses the reliability and sufficiency of the information contained in the underlying accounting records and other source date by making a study and evaluation of accounting system and internal controls to determine the nature, the nature, extent and timing of other auditing procedures. 6. Test The auditing assesses the reliability and sufficiency of the information contained in the underlying accounting record and other source data by carrying out other tests, enquiries and other verification procedures of accounting transaction and account balance as he considers appropriate in the particular circumstances. There are compliance test and substantive test in order to examine the date. The vouching, verification and valuation technique are also used. 7. Comparison The auditor determines whether the relevant information is properly communicated by comparing the financial statement with the underlying accounting records and other source data to see whether they properly summarized the transaction and events recorded therein. The auditor can compare the accounting record with financial statement in order to check that same has been processed for preparing the final accounts of a business concern. 8. Judgements The auditor determines whether the relevant information is properly communicated by consideration the judgement that management has made in preparing the financial statements, accordingly, the auditor assesses the selection and consistent application of accounting policies, the manner in which the information has been classified and the adequacy of disclosure. The auditor must have the quality of judgement when accounting books to not provide true data. 9. Work Judgement permeates the auditor’s work. for example, in determining the extent of audit procedures and in assessing the reasonable of the judgments and estimates made by management in preparing financial statements. The accounting data is based on personal judgment of accountant and managers in preparing final accounts. Such judgment also affect the working of an auditor. He is also bound to make guess work on the basis of available data. 10. Evidence The audit evidence available to auditor is persuasive rather than conclusive in nature. Due to judgment and persuasive evidence absolute certainty in auditing is really attainable. That is why the auditor can express an opinion as true and fair instead of exact and cent percent correct. The personal judgments affect the value of many items. The value of such items becomes an opinion so cent percent accuracy is not there. 11. Mis-Statement The auditor carries out procedures designed to obtain reasonable assurance that financial statement are properly stated in all material respects. Because of test nature and other inherent limitations of an audit, together with inherent
- 8. limitations of any system of internal control, there is an unavoidable risk that even some material misstatement may remain undiscovered. The statements show true and fair view instead of exact view of operations. 12. Errors The auditor may get an indication that some fraud or error may have occurred which could result in material misstatement would curse the auditor to extend his procedures to confirm or dispel his suspicion. It is the duty of auditor to check cent percent items in order to discover the error in accounting books and other records when he smells any doubt. He should clear the doubt or confirm it while going through the record. 13. Opinion Constraints on the scope of the audit of financial statement that impair the auditor’s ability to express an unqualified opinion on such financial statements should be seen out in his report and a qualified opinion or disclaimer of opinion should be expressed as a appropriate. OBJECTIVE: The objective of an audit of financial statements is to 'enable the auditor to express an opinion' whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
- 12. What Is an Audit Program? An audit program is a set of polices and procedures that dictate how an evaluation of a business is done. This generally involves specific instructions as to what, and how much, evidence must be collected and evaluated, as well as who will collect and analyze the data and when this should be done. These types of programs are used to check up on things like a business' performance, finances, economy, and efficiency, and are generally tailored to a specific business or purpose. Purpose Audit programs are important because they standardize the data collection and evaluation process. By setting out a specific list of steps to be followed and data to be collected, the program ensures that auditors collect all the information they need in an efficient manner while under appropriate supervision. Keeping the process standardized also means that all the data collected can be used to make useful comparisons between businesses, departments, and previous years' inspections, since the same set of data is collected each time. Additionally, having a program like this in place makes sure that any problems are discovered promptly and reported to the correct person. Types There are many different types of audits, which can be categorized according to frequency or purpose. The program for each one is slightly different, and is usually tailored to fit the purpose of the inspection. For example, an audit program for an annual business-wide audit would be a lot
- 13. broader and more in-depth than one for a project evaluation. Likewise, the program for a business process review, which is focused specifically on the efficiency of administrative departments in an organization, would be different from an integrated internal control framework review, which is focused on business risks. Organizations sometimes use audit program templates, but many also create their own programs based on the findings from previous inspections. Common Elements Most audit programs include instructions for risk assessment, the frequency of inspections, evaluation planning, a reporting structure, and security measures. Risk assessment is used to identify and analyze potential dangers for specific areas of the business, like failure to comply with laws or regulations, threats to a business' reputation, or financial fraud. This is usually done on a consistent basis to keep pace with changes to internal control and work processes. The level of risk found in an assessment is also used in choosing the frequency of the audit cycle, which is how often evaluations are done. Other factors that affect the frequency of reviews include the time people in a business have to perform them, as well as the number of staff a business can spare or hire to do them. Audit programs also commonly include a reporting structure. This includes information about who a reviewer reports to if he or she finds a problem, how the report is to be made, and how long reports are kept on file. This ensures that problems don't get swept under the rug or lost in filing. Security measures are another important part of a program, since much of the data collected during evaluations is sensitive. Computer software used in this process is usually limited to auditing departments, and is almost always password protected. Businesses also review their audit software regularly to determine its reliability and overall efficiency, and change to another one if needed. Another essential component of an audit program is planning. Although strategies are generally devised with respect to individual organizations, a well-rounded plan generally covers scheduling, staff needs, reporting, and the overall goals of the audit. Many organizations find that this planning is most efficient when the results of risk assessment are combined with the resources needed to determine the timing and frequency of inspections. Planning is generally the final step that takes place before the audit actually occurs. AUDIT EVIDENCE AND WORKING PAPERS