AUDIT ING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1

Chapter 1: Overview of the Audit Process and Pre-engagement Activities

Learning Objectives

 Explain how audit planning and performance of analyst procedures affects the audit
process

 Differentiate Test of Controls and Substantive Tests

 Discuss the importance of audit documentation and different methods in

documentation

 Discuss an overview of audit process for accounts and transactions cycle related to
cash, revenue and expenditure and disbursement, and production cycle

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 Chapter 1: Overview of
the Audit Process and
Pre-engagement Activities

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Chapter 1: Overview of the Audit Process and Pre-engagement Activities
Documentation

White-board question:
Based on the video watched, what is audit?
 Importance of Audits, Types of Audits, Regulatory Bodies, and Professional Organizations

Why do we perform an audit? Types of Audits:

Audits help to keep the capital markets safe and secure for the investing ISA (International Standards
public. Investors have confidence that an independent third party has PCAOB Integrated Audit:
on Auditing) and PCAOB
performed an objective audit to verify that the financial and other (Public Company Accounting An integrated audit
information disclosed by management is fairly stated. Oversight Board) Non- combines a financial
integrated Audits: statement audit with an
audit of internal controls.
We perform audits because: An audit of financial statements
 they may be required by laws or regulations; only.
 they are requested by shareholders or governing bodies;
 and/or they are requested by specific parties interested in the financial
statements (i.e., lenders).

Audit of Internal Control

Audit of Financial
over Financial Reporting:
Statements:
An audit on the effectiveness
An audit on the accuracy and
of the company’s internal
fair representation of an
control over financial
entity’s financial statements.
reporting. 

Regulatory Bodies: Professional Organizations:

Regulatory bodies establish rules and regulations to create a standard of audit Professional organizations represent the interest of the professional
quality. Below are some regulatory bodies our audits adhere to: practitioners. They develop standards for practitioners to follow and
provide educational guidance materials to its members.
International Auditing and Assurance Standards
Board (IAASB):
The IAASB is an independent standard-setting body that
serves the public interest by setting high-quality
international standards for auditing, quality control,
review, and other assurance and related services. The International Federation of Accountants
IAASB enhances the quality and uniformity of practice (IFAC):
throughout the world and strengthens public confidence in
the global auditing and assurance profession. The IFAC is a global organization that supports
the development, adoption, and implementation
Public Company Accounting Oversight Board of the International Standards on Auditing (ISA).
(PCAOB):
The PCAOB was created by the Sarbanes-Oxley Act to
oversee the audits of public companies in order to protect
the interest of the investors. All PCAOB rules and
standards are approved by the Securities and Exchange
Commission (SEC).
The Audit Cycle
The Audit Cycle
Overview

Audit Cycle
Pre-planning
(Client Acceptance & Planning Execution Conclusion
Continuance)

Chapter 1: Overview of the Audit Process and Pre-engagement Activities Documentation 7

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The Audit Cycle
Overview

Audit Cycle
Pre-planning
(Client Acceptance & Planning Execution Conclusion
Continuance)

Chapter 1: Overview of the Audit Process and Pre-engagement Activities Documentation 8

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Phase I
Client Acceptance & Continuance

When appointed as an auditor of a company, before we start any work for an audit engagement…

Agree the Terms of the Audit

• Prepare and sign engagement letter
• Reporting Framework
Acceptance and Continuance Decision
• Responsibilities of Management
• Practitioner’s ethical standards on
• Responsibilities of Auditors
independence
Assess Engagement Risk • Auditing Standards
• Partner Rotation
• Management’s Integrity • Financial Period
• Conflict Checks
• Organisational Structure • Subject under Audit
• Fee
• Nature of business and environment • Fee
• Financial Results • Timing of audit and key personnel
• Prior Knowledge and Experience
• Fraud Risks

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The Audit Cycle
Overview

Audit Cycle

Client Acceptance &

Planning Execution Conclusion
Continuance

Chapter 1: Overview of the Audit Process and Pre-engagement Activities Documentation 10

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Phase II
Client Acceptance & Continuance

After having accepted the engagement, let’s plan our audit strategy…
APM
• Summarize all risk
Engagement Team assessment
procedures,
• Determine the
Material ABCOTDs judgments and
engagement team
• Audit Strategy conclusions for the
PAR & Materiality • Assign areas to audit plan in a
• Which parts of
• Material each member summary memo
the FS do we
Inquiries of Fraud Fluctuations that want to test and • Hold discussion
and Error need our attention how (controls with the team
Understand the Is key management • Identify additional testing vs. regarding
entity, its personnel aware of: risks substantive) significant risks
environment and and fraud
• Known Fraud • Determine our • Audit Plan
internal control potential
• How is the • Suspected Fraud materiality levels – • What are the
company what is material to
• Material Errors risks on the
operating? the users of the FS significant areas
• What are the and how do we
processes? want to address
• What is the them
business?

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The Audit Cycle
Overview

Audit Cycle

Client Acceptance &

Planning Execution Conclusion
Continuance

Chapter 1: Overview of the Audit Process and Pre-engagement Activities Documentation 12

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Phase III
Audit Execution

(1) (2)
Non-account specific Foreign exchange testing for rates at corporate level applicable for all subsidiaries
procedures Journal Entry Testing
First-time adoption IFRS / IAS 17  IFRS 16 / IAS 18  IFRS 15 / IAS 39  IFRS 9

(3) (4) (5) (6)

Assets Liabilities Equity Income Statement
Usually vouching from Usually verifying from Usually analytical and Usually a combination of
records to evidence outside the ledger to the vouching to share register the 3 first testing methods
(existence) records (completeness)

(7)
Procedures on Financial
Statements

Chapter 1: Overview of the Audit Process and Pre-engagement Activities Documentation 13

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The Audit Cycle
Overview

Audit Cycle

Client Acceptance &

Planning Execution Conclusion
Continuance

Chapter 1: Overview of the Audit Process and Pre-engagement Activities Documentation 14

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Phase IV
​Evaluate & Conclude

Concluding
Subsequent
Analytical Events
Procedures Going Concern
Management Audit Report Comprehensive
Archive
Litigations Audit Results Representations to Report
& Shareholders to BoD
Compliance Misstatements ASM
with Laws
EQCR

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 Audit Life Cycle

This is a visual depiction of an audit life cycle for a 31 December fiscal year-end Large Public Interest Entity (PIE). The
timing of Audit Quality Milestones (AQMs) and activities may vary based on the nature and size of the entity. Whilst the
AQMs are mandated only for relevant PIE engagements, engagement teams may elect to follow the AQM dates and
activities outlined for non-PIE engagements. AQMs are designed to drive the earlier timing and sequencing of audit
planning and interim activities and to assist engagement teams in focusing attention on performing the right audit
activities at the right time, driving effective project management.

Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Jan Feb

Fiscal AQM #1 AQM #2 AQM #3 AQM #4 AQM #5 AQM #6 Report

Year-end Issuance

Interim Testing: Interim tests of operating effectiveness of controls and substantive testing procedures are performed.
Quarterly Reviews: Quarterly financial statements are required for publicly traded companies. We perform reviews of
interim financial information.

Year-End Testing: Testing of operating effectiveness of controls and substantive testing procedures are
performed, including procedures to rollforward interim work.

AQMs and Example Activities

AQM #1— Begin engagement planning. 1) Document assessment and conclusions on client acceptance or continuance and engagement risk
classification. 2) Evaluate and document compliance with independence requirements. 3) Obtain an appropriately executed engagement letter.
4) Document preliminary group audit scoping decisions. 5) Execute a strategy meeting and document an Adoption Plan for the current year
audit.
AQM #2—Continue engagement planning. 1) Document the decisions made relative to the audit plan and risk assessment as a result of
planning discussion(s). 2) Document a comprehensive project plan and budget by area.
AQM #3—Perform and review planning. 1) Complete risk assessment procedures to identify RoMMs, including EQC review. 2) Obtain
scoping memo(s) from specialist(s) to confirm agreed upon scope. 3) Communicate with ADCs the scope and timing of work to be performed. 4)
Document planned procedures 5) Provide component auditors Part II of the Group Audit Referral Instructions 6) Interact with component
auditors and document required partner-led discussions 7) Finalize audit consultations related to scoping and materiality, if applicable. 8)
Complete audit planning memorandum.
AQM #4—Begin preparations for interim fieldwork. 1) Communicate any resource needs to the NPPD or designee 2) Review the status of
the detailed Adoption Plan with the EQCR and obtain concurrence that the team is on track to achieve agreed outcomes.
AQM #5—Complete and review interim testing. 1) Complete procedures to evaluate design and determine implementation, and test the
operating effectiveness of relevant controls, except those that only occur on or after this milestone date 2) Complete planned substantive
procedures that can be executed by this milestone date
AQM #6—Finalize interim testing and prepare for final fieldwork. 1) Complete remaining procedures planned to be finalized before client
year-end, including EQC review, where applicable. 2) Receive and review audit documentation that was planned to be prepared by specialists
before year-end.
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Question 1

A It is required by law or regulation

Which of the following is a
reason we may perform an
audit (select all that It is requested by shareholders or governing
B
apply)? bodies

C It is requested by specific parties

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Question 1

A It is required by law or regulation

Which of the following is a
reason we may perform an
audit (select all that It is requested by shareholders or governing
B
apply)? bodies

C It is requested by specific parties

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 Group Audits

A group audit is the audit of the financial statements of a group (i.e., financial
statements that include the financial information of more than one component). Group

A component is an entity or business activity for which group or component

management prepares financial information that are included in the group financial
statements. A key to effective and efficient group audits is open, continuous, two-
way communication between the group and the component auditors. When Component Component
auditing group financial statements, there are special considerations including:

Identification of significant components

The identification of significant components Component materiality
involves the exercise of professional
The group engagement team determines the
judgment. Below are some factors to
component materiality to be used by the
consider:
component auditors. The component
• Financial significance of the component
materiality is required to be lower than the
• Significant risks at the component level
group’s to address aggregation risk. Different
that could have a significant impact on the
component materiality may be established for
group
different components.
• Fraud risk factors that indicate a risk of
material
misstatement due to fraud
• If the component has continued reported or
current year losses

Understanding the component Procedures performed by

Company
auditors Headquarters component auditors
Components The group determines the procedures that the
The group engagement team has to assess the
competency of the component audit team. This component auditor needs to perform. Testing
may include: procedures could include:
• Experience with the component auditor and • An audit or review of the financial information of the component
discussions, including visits and teleconferences using component materiality.
• Confirmation regarding licensure and • Specified procedures.
certifications
• Reviews of audit documentation • An audit of one or more account balances, classestoof transactions,
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 Overall Audit Process

Client Acceptance
and Continuance
Understand Entity
Top-Down Risk Understand Entity
and
Assessment Level Controls
Its Environment
Preliminary
CONTROLS
Analytical
Procedures 1
Evaluate the
Design and
Determine the
Going Concern Entity and Fraud Implementation of
Evaluation Risk Assessment Controls

Understand Processes and IT Applications

Informed by both Top
Down and Assertion Level
Risk Assessment
Identification of 
Group Audit Scoping
Material ABCOTDs CONTROLS SUBSTANTIVE

Tests of
Details
Assertion Level Operating
Assertion Level Risk Assessment (GRAs)
Risk Assessment Effectiveness
Testing Substantive
Analytical
Procedures

Execution of Substantive and Internal Control Procedures

Results of Procedures Final Audit Procedures Auditor’s Reporting

Conclude
and Report
Concluding Subsequent Going
Evaluate Evaluate CAM/KAM
Analytical Events Concern
Deficiencies Misstatements Evaluation
Procedures Procedures Evaluation

1 
PCAOB - Test and Evaluation of Design

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 Engagement Team Structure
Lead Client Service Partner/Engagement Partner:
• Responsible for the overall planning, execution, and quality of the audit.
• Performs an overriding review of the audit documentation, except for areas of significant risk, where they perform a primary review.
• Responsible for supervision and review of the entire engagement team, including component auditors, specialists, and USI COEs/ADCs.
• Responsible for signing the auditor’s report.
• Depending on the size of the engagement there may be multiple Partners on an engagement.

ONE TEAM
Engagement Component Auditors:
Audit Senior Managers and Managers:
Quality Control
Reviewer • Some engagement teams may involve component
(EQCR): • Assist Partners in the overall planning and auditors. A component auditor performs work on
execution as well as the supervision of the the financial information of a component that is
• Most engagements engagement team. used as audit evidence for the group audit.
have an EQCR, who • Perform a primary review of the audit • The component auditor may be from other practitioner firms
is independent from documentation. or may be from other public accounting firms.
the engagement • Responsible for the billing of the work performed.
team and whose role • Responsible for mentoring and providing on the
is to perform an job training to junior engagement team members.
evaluation of the
significant judgments
made by the Specialists:
engagement team Audit Senior and Audit In Charge:
• In order to have the appropriate skills and competency on
and the related
• Primary role is to manage the day- our engagement team, we may involve specialists.
conclusions reached
in forming an overall to-day engagement. • An auditor’s specialist possesses special skill or knowledge in a
conclusion on the subject matter.
• Responsible for managing the Experienced • The specialist teams have similar responsibilities as the core
audit and in
Assistant/Assistant and providing direction on the engagement team, only their efforts are focused on their specialty.
preparing our
audit fieldwork to be performed including • Specialists that are common on an audit engagement team include
auditor’s report in
ensuring quality work, all procedures are Tax specialists, Valuation specialists, and Data Analytics (DA)
order to provide
performed, and established deadlines are met. specialists.
concurring approval
• Responsible for performing a detailed review of • When areas of the audit require the use of specialists’ skills or
of issuance.
the audit documentation and executing audit knowledge, effective teaming between the auditors and specialists
procedures for higher is a key component to executing a high-quality audit.
risk areas.

Audit Experienced Assistant and Assistant :

• Execute audit procedures based on your understanding of the entity’s business, the risks it faces, and the internal control processes.
• Use our cutting-edge audit tools and technologies to perform the detailed audit work under the supervision of a Senior including testing controls,
performing detailed audit procedures, and analytical procedures.
• Responsible for documenting the work performed, having it reviewed, and responding to
review notes.
• Use professional skepticism to evaluate audit evidence and communicate potential deficiencies or errors to the Senior in a timely manner.

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Question 2

A Client Acceptance and Continuance

Which of the following
parts of the audit process
do you think you will be
B Group Audit Scoping
primarily involved in as an
Assistant?

C Identification of Significant Accounts

Execution of Substantive and Internal

D
Control Procedures

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Question 2

A Client Acceptance and Continuance

Which of the following
parts of the audit process
do you think you will be
B Group Audit Scoping
primarily involved in as an
Assistant?

C Identification of Significant Accounts

Execution of Substantive and Internal

D
Control Procedures

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Any Questions?

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