Stages of an Audit
Like any other undertaking, there are different steps and stages of an audit that need to be undertaken in order for it to be completed. These stages should transpire to do a proper audit. Each audit stage is important to end up with the proper answers and judgment.
Typically, there are four stages of an audit. These stages are:
- Planning and designing an audit approach.
This audit stage starts with the acceptance of a client and the performance of initial planning for the audit. The auditors should understand the client’s business and the industry it belongs to. It is important for the auditor to understand the relevant industry that the client belongs to and the regulatory and external factors that may affect it including the applicable financial reporting framework. The auditor should also understand the nature of the entity, its selection, and application of accounting policies. Auditors should also understand its objectives, strategies and the related business risks that may result in a misstatement of financial statements. Auditors should also understand the review and measurement of the entity’s financial performance and internal control relevant to the audit.
The auditor should then proceed to assess the business risk of the client. He should also set what is materiality and assess acceptable audit risks and inherent risks. He should also understand what internal control is and evaluate control risk and finally, develop an overall audit plan and audit program.
- Performing test of controls and substantive testing of transactions.
If an auditor intends to reduce the determined control risk, he should perform a test of control. This audit stage should be done to assess the operating effectiveness of internal controls (like account reconciliations, authorisation of transactions, segregation of duties) including IT general controls. If the internal controls are assessed as effective, this will reduce the amount of work that the auditor has to do.
Essential test of transactions helps evaluate the recording of transactions of the client. This is done through verification of the monetary amounts of transactions, a procedure or process that is otherwise known as a substantive test of transactions. Auditors providing audit services may resort to using computer software when comparing unit selling prices on identical invoices with approved prices on electronic files to test the objective of accuracy for sales transactions. This audit stage will try to satisfy the accuracy of transaction-related audit objective for sales. Test of controls and substantive test of transactions are done at the same time for the sake of efficiency.
The auditor should also assess the likelihood of misstatement in financial statements.
If the auditor accepts the control risk (CR) that has been set on the first stage and does not want to reduce the CR, the auditor may not perform a test of control. If so, the auditor should perform a substantive test of transactions. This test helps determine the amount of work to be performed like a test of details or substantive testing.
- Performing analytical procedures and testing of details of balances.
In cases where there are strong internal controls, auditors depend more on Substantive Analysis. This is the process of comparing sets of financial data or information with non-financial data or information, to tell if the numbers are sensible and that any unexpected movements can still be explained.
In cases where there are weak internal controls, auditors rely on Substantive Test of Detail of Balance. This is done by selecting sample items from major account balances, and search for hard evidence for the items (which include invoices and bank statements).
Some audits involve a fast close or hard close where substantive procedures can be made before the year ends. If the year-end is on the 31st of December, hard close may give auditors with figures on the 30th of November. Auditors would audit income and expense movement between January 1 and November 30. After the year end, it is only necessary to audit December’s income and expense movements and the December 31 balance sheet.
- Completing the audit and issuing an audit report
Once the auditor has completed all the procedures for each audit objective, for each financial statement account and relevant disclosures, the information obtained should be combined to reach an overall conclusion if the financial statements are fairly presented or not. This very subjective process heavily relies on the auditor’s professional judgment. Once this audit stage is completed, the CPA should issue an audit report that should accompany the published financial statements of the client.
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