CHAPTER 4: OVERVIEW OF

THE AUDIT PROCESS AND

PRELIMINARY ACTIVITIES
PREPARED BY: INST. JOHN PAUL C. DE GUZMAN, CPA
 GENERAL OVERVIEW OF THE AUDIT
PROCESS

• ENTITY PREPARES AND PRESENTS FINANCIAL

STATEMENTS
• THE AUDITOR PERFORMS AUDIT PROCEDURES
• THE AUDITOR GATHERS AUDIT EVIDENCE
• THE AUDITOR EXPRESSES AN AUDIT OPINION
 ENTITY PREPARES AND PRESENTS
FINANCIAL STATEMENTS

• THE FS SUBJECT TO AUDIT ARE THOSE OF THE ENTITY, PREPARED

AND PRESENTED BY THE MANAGEMENT OF THE ENTITY WITH
OVERSIGHT FROM THOSE CHARGED WITH GOVERNANCE

• THE AUDIT OF THE FS DOES NOT RELIEVE MANAGEMENT OR THOSE

CHARGED WITH GOVERNANCE OF THOSE RESPONSIBILITIES.
FINANCIAL STATEMENTS ASSERTIONS (OLD)
• ACCOUNT BALANCES
RIGHTS AND OBLIGATIONS – THE ENTITY HOLDS OR
CONTROLS THE RIGHTS TO ASSETS, AND LIABILITIES ARE
OBLIGATIONS OF THE ENTITY
EXISTENCE – ASSETS, LIABILITIES AND EQUITY INTERESTS
EXIST.
COMPLETENESS – ALL ASSETS, LIABILITIES AND EQUITY
INTERESTS THAT SHOULD HAVE BEEN RECORDED HAVE BEEN
RECORDED
VALUATION AND ALLOCATION – ASSETS, LIABILITIES AND
EQUITY INTERESTS ARE INCLUDED IN THE FINANCIAL
FINANCIAL STATEMENTS ASSERTIONS (OLD)
• CLASSES OF TRANSACTIONS
COMPLETENESS – ALL TRANSACTIONS AND EVENTS THAT
SHOULD HAVE BEEN RECORDED HAVE BEEN RECORDED
OCCURRENCE – TRANSACTIONS, AND EVENTS THAT HAVE
BEEN RECORDED HAVE OCCURRED AND PERTAIN TO THE
ENTITY
CUTOFF – ALL TRANSACTIONS AND EVENTS THAT SHOULD
HAVE BEEN RECORDED HAVE BEEN RECORDED IN THE
CORRECT ACCOUNTING PERIOD
ACCURACY – AMOUNTS AND OTHER DATA RELATING TO
RECORDED TRANSACTIONS AND EVENTS HAVE BEEN
FINANCIAL STATEMENTS ASSERTIONS (OLD)
• PRESENTATION AND DISCLOSURE
OCCURRENCE AND RIGHTS AND OBLIGATIONS – DISCLOSED
EVENTS, TRANSACTIONS AND OTHER MATTERS HAVE
OCCURRED AND PERTAIN TO THE ENTITY
COMPLETENESS – ALL DISCLOSURES THAT SHOULD HAVE
BEEN INCLUDED IN THE FS HAVE BEEN INCLUDED
CLASSIFICATION AND UNDERSTANDABILITY – FINANCIAL
INFORMATION IS APPROPRIATELY PRESENTED AND
DESCRIBED, AND DISCLOSURES ARE CLEARLY EXPRESSED.
ACCURACY AND VALUATION – FINANCIAL AND OTHER
INFORMATION ARE DISCLOSED FAIRLY AND AT APPROPRIATE
FINANCIAL STATEMENTS ASSERTIONS (NEW)
• CLASSES OF TRANSACTIONS
PRESENTATION – TRANSACTIONS AND EVENTS ARE
APPROPRIATELY AGGREGATED AND DISAGGREGATED AND
CLEARLY DESCRIBED, AND RELATED DISCLOSURES ARE
RELEVANT AND UNDERSTANDABLE IN THE CONTEXT OF THE
REQUIREMENTS OF THE APPLICABLE FINANCIAL REPORTING
FRAMEWORK.
COMPLETENESS – ALL TRANSACTIONS AND EVENTS THAT
SHOULD HAVE BEEN RECORDED HAVE BEEN RECORDED
OCCURRENCE – TRANSACTIONS, AND EVENTS THAT HAVE
BEEN RECORDED HAVE OCCURRED AND PERTAIN TO THE
ENTITY
FINANCIAL STATEMENTS ASSERTIONS (NEW)
• CLASSES OF TRANSACTIONS
CUTOFF – ALL TRANSACTIONS AND EVENTS THAT SHOULD
HAVE BEEN RECORDED HAVE BEEN RECORDED IN THE
CORRECT ACCOUNTING PERIOD
ACCURACY – AMOUNTS AND OTHER DATA RELATING TO
RECORDED TRANSACTIONS AND EVENTS HAVE BEEN
RECORDED APPROPRIATELY
CLASSIFICATION – TRANSACTIONS AND EVENTS HAVE BEEN
RECORDED IN THE PROPER ACCOUNTS
FINANCIAL STATEMENTS ASSERTIONS (NEW)
• ACCOUNT BALANCES
PRESENTATION – ASSETS, LIABILITIES, AND EQUITY
INTERESTS ARE APPROPRIATELY AGGREGATED AND
DISAGGREGATED AND CLEARLY DESCRIBED, AND RELATED
DISCLOSURES ARE RELEVANT AND UNDERSTANDABLE IN THE
CONTEXT OF THE REQUIREMENTS OF THE APPLICABLE
FINANCIAL REPORTING FRAMEWORK.
ACCURACY AND VALUATION AND ALLOCATION – ASSETS,
LIABILITIES, AND EQUITY INTERESTS HAVE BEEN INCLUDED IN
THE FS AT APPROPRIATE AMOUNTS AND ANY RESULTING
VALUATION OR ALLOCATION ADJUSTMENTS HAVE BEEN
FINANCIAL STATEMENTS ASSERTIONS (NEW)
• ACCOUNT BALANCES AND RELATED DISCLOSURES
RIGHTS AND OBLIGATIONS – THE ENTITY HOLDS OR
CONTROLS THE RIGHTS TO ASSETS, AND LIABILITIES ARE
OBLIGATIONS OF THE ENTITY
EXISTENCE – ASSETS, LIABILITIES AND EQUITY INTERESTS
EXIST.
COMPLETENESS – ALL ASSETS, LIABILITIES AND EQUITY
INTERESTS THAT SHOULD HAVE BEEN RECORDED HAVE BEEN
RECORDED, AND ALL RELATED DISCLOSURES THAT SHOULD
HAVE BEEN INCLUDED IN THE FS HAVE BEEN INCLUDED.
CLASSIFICATION – ASSETS, LIABILITIES AND EQUITY
 ADDITIONAL RESPONSIBILITIES

• PSA 200 PROVIDES THAT MANAGEMENT AND, WHERE

APPROPRIATE, THOSE CHARGED WITH GOVERNANCE HAVE THE
RESPONSIBILITY:
FOR THE PREPARATION OF THE FS IN ACCORDANCE WITH THE
APPLICABLE FINANCIAL REPORTING FRAMEWORK; THIS
INCLUDES THE DESIGN, IMPLEMENTATION, AND
MAINTENANCE OF INTERNAL CONTROL RELEVANT TO THE
PREPARATION AND PRESENTATION OF FS THAT ARE FREE
FROM MATERIAL MISSTATEMENTS, WHETHER DUE TO FRAUD
OR ERROR; AND
 ADDITIONAL RESPONSIBILITIES
• PSA 200 PROVIDES THAT MANAGEMENT AND, WHERE APPROPRIATE,
THOSE CHARGED WITH GOVERNANCE HAVE THE RESPONSIBILITY:

• TO PROVIDE THE AUDITOR WITH:

 ALL INFORMATION SUCH AS RECORDS AND DOCUMENTATIONS, AND
OTHER MATTERS THAT ARE RELEVANT TO THE PREPARATION AND
PRESENTATION OF THE FINANCIAL STATEMENTS
 ANY ADDITIONAL INFORMATION THAT THE AUDITOR MAY REQUEST
FROM THE MANAGEMENT AND, WHERE APPROPRIATE, THOSE
CHARGED WITH GOVERNANCE
 UNRESTRICTED ACCESS TO THOSE WITHIN THE ENTITY FROM WHOM
THE AUDITOR DETERMINES IT NECESSARY TO OBTAIN AUDIT EVIDENCE
 ENTITY PREPARES AND PRESENTS
FINANCIAL STATEMENTS

• MANAGEMENT AND, WHERE APPROPRIATE, THOSE

CHARGED WITH GOVERNANCE ARE RESPONSIBLE FOR:
THE IDENTIFICATION OF APPLICABLE FINANCIAL REPORTING
FRAMEWORK, IN THE CONTEXT OF ANY RELEVANT LAWS OR
REGULATIONS
THE PREPARATION AND PRESENTATION OF THE FINANCIAL
STATEMENTS BY THAT FRAMEWORK
AN ADEQUATE DESCRIPTION OF THAT FRAMEWORK IN THE
FINANCIAL STATEMENTS
 THE AUDITOR PERFORMS AUDIT
PROCEDURES
• OVERALL OBJECTIVES OF THE AUDITOR IN
CONDUCTING THE AUDIT OF FS:
• TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE
FS AS A WHOLE ARE FREE FROM MATERIAL MISSTATEMENT,
WHETHER DUE TO FRAUD OR ERROR, THEREBY ENABLING
THE AUDITOR TO EXPRESS AN OPINION ON WHETHER THE
FINANCIAL STATEMENTS ARE PREPARED, IN ALL MATERIAL
RESPECTS, IN ACCORDANCE WITH AN APPLICABLE FINANCIAL
REPORTING FRAMEWORK; AND
• TO REPORT ON THE FS AND COMMUNICATE AS REQUIRED BY
THE PSA, IN ACCORANCE WITH AUDITOR’S FINDINGS.
 THE AUDITOR PERFORMS AUDIT
PROCEDURES
• MAJOR AUDIT PROCEDURES:
• RISK ASSESSMENT PROCEDURES - ARE PERFORMED TO OBTAIN AN
UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT,
INCLUDING THE ENTITY’S INTERNAL CONTROL, TO IDENTIFY AND
ASSESS THE RISKS OF MATERIAL MISSTATEMENT, WHETHER DUE
TO FRAUD OR ERROR, AT THE FS AND ASSERTION LEVELS.
• TEST OF CONTROLS – DESIGNED TO EVALUATE THE OPERATING
EFFECTIVENESS OF CONTROLS IN PREVENTING, OR DETECTING
AND CORRECTING, MATERIAL MISSTATEMENTS AT THE ASSERTION
LEVEL.
• SUBSTANTIVE PROCESURE – DESIGNED TO DETECT MATERIAL
MISSTATEMENTS AT THE ASSERTION LEVEL.
 THE AUDITOR PERFORMS AUDIT
PROCEDURES
• SPECIFIC AUDIT PROCEDURES:
• INQUIRY – CONSISTS OF SEEKING INFORMATION FROM
KNOWLEDGEABLE PERSONS, BOTH FINANCIAL AND NON-
FINANCIAL, THROUGHOUT THE ENTITY OR OUTSIDE THE ENTITY.
• INSPECTION – REFERS TO EXAMINATION OF PHYSICAL DOCUMENTS,
RECORDS, OR ASSETS TO ASSESS THEIR ACCURACY,
COMPLETENESS, AND COMPLIANCE WITH RELEVANT REGULATIONS
AND ACCOUNTING STANDARDS.
• OBSERVATION – CONSISTS OF LOOKING AT A PROCESS OR
PROCEDURE BEING PERFORMED BY OTHERS.
• ANALYTICAL PROCEDURES – CONSIST OF EVALUATIONS OF
FINANCIAL INFORMATION MADE BY A STUDY OF PLAUSIBLE
 THE AUDITOR PERFORMS AUDIT
PROCEDURES
• SPECIFIC AUDIT PROCEDURES:
• REPERFORMANCE – INVOLVES THE AUDITOR’S INDEPENDENT
EXECUTION OF PROCEDURES OR CONTROLS THAT WERE
ORIGINALLY PERFORMED AS PART OF THE ENTITY’S INTERNAL
CONTROL
• RECALCULATION – CONSISTS OF CHECKING THE MATHEMATICAL
ACCURACY OF DOCUMENTS OR RECORDS.
• CONFIRMATION – A SPECIFIC TYPE OF INQUIRY IS THE PROCESS OF
OBTAINING A REPRESENTATION OF INFORMATION OR AN EXISTING
CONDITION DIRECTLY FROM A THIRD PARTY.
 THE AUDITOR GATHERS AUDIT EVIDENCE

• THE AUDITOR OBTAINS SUFFICIENT APPROPRIATE AUDIT

EVIDENCE TO BE ABLE TO DRAW REASONABLE CONCLUSIONS
ON WHICH TO BASE THE AUDIT OPINION.

• AUDIT EVIDENCE – REFERS TO INFORMATION USED BY THE

AUDITOR IN ARRIVING AT THE CONCLUSIONS ON WHICH THE
AUDITOR’S OPINION IS BASED.
 THE AUDITOR EXPRESSES AN AUDIT
OPINION

• UNMODIFIED OPINION
• MODIFIED OPINION
QUALIFIED OR ADVERSE
QUALIFIED OR DISCLAIMER
 AUDIT PROCESS

• PRELIMINARY ENGAGEMENT ACTIVITIES

 WILL REQUIRE A DECISION FROM THE AUDITOR ON WHETHER OR
NOT TO ACCEPT A NEW CLIENT OR CONTINUE A RELATIONSHIP
WITH AN EXISTING ONE
 REQUIRE EVALUATION NOT ONLY OF THE AUDITOR’S
QUALIFICATION, BUT ALSO THE INTEGRITY AND AUDITABILITY OF
THE CLIENT’S FINANCIAL STATEMENTS.

• PRIMARY OBJECTIVE: TO MINIMIZE THE LIKELIHOOD OF BEING

ASSOCIATED WITH A CLIENT WHOSE MANAGEMENT LACKS INTEGRITY
 AUDIT PROCESS

• PLANNING AN AUDIT OF THE FINANCIAL STATEMENTS

 AUDIT PLANNING – 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 TO UNDERSTAND THE
TRANSACTIONS AND EVENTS AFFECTING THE FS.
 A PRELIMINARY ASSESSMENT OF RISK AND MATERIALITY IS ALSO
MADE DURING THIS PHASE.

• 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.
 AUDIT PROCESS

• STUDY AND EVALUATION OF INTERNAL CONTROL

 IT IS APPROPRIATE TO STUDY AND EVALUATE THE
CONTROLS BECAUSE INTERNAL CONTROL AFFECTS
THE RELIABILITY OF THE FS.

• PRIMARY OBJECTIVE: TO ESTABLISH A BASIS FOR

RELIANCE ON INTERNAL CONTROLS, IN
DETERMINING THE NATURE, TIMING AND EXTENT
OF THE AUDIT PROCEDURES TO BE PERFORMED.
 AUDIT PROCESS

• EVIDENCE GATHERING (SUBSTANTIVE TESTING)

 THE AUDITOR PERFORMS THE SUBSTANTIVE TEST TO DETERMINE
WHETHER THE ENTITY’S FS ARE PRESENTED FAIRLY IN
ACCORDANCE WITH FINANCIAL REPORTING STANDARDS.

• PRIMARY OBJECTIVE: TO ASCERTAIN THE DEGREE OF

CORRESPONDENCE BETWEEN THE FS PREPARED BY THE
CLIENT’S MANAGEMENT AND THE FINANCIAL REPORTING
FRAMEWORK. WITH THIS, THE AUDITOR WILL BE ABLE TO
CONCLUDE WHETHER OR NOT THE FS ARE PRESENTED FAIRLY
IN ACCORDANCE WITH FINANCIAL REPORTING STANDARDS.
 AUDIT PROCESS

• COMPLETING THE AUDIT

WRAP-UP PROCEDURES ARE PERFORMED;
CONCLUSIONS REACHED ARE REVIEWED, AND AN
OVERALL OPINION IS FORMED DURING THIS PHASE.

• PRIMARY OBJECTIVE: TO ASSIST THE AUDITOR IN

ASSESSING WHETHER THE CONCLUSION REACHED
IS CONSISTENT WITH THE EVIDENCE GATHERED.
 AUDIT PROCESS

• ISSUANCE OF THE AUDIT REPORT

 THE AUDITOR PREPARES AND ISSUES AN AUDIT
REPORT THAT DESCRIBES THE SCOPE OF THE AUDIT
AND STATES THE AUDITOR’S CONCLUSION
REGARDING THE FAIRNESS OF THE FS.

• PRIMARY OBJECTIVE: TO COMMUNICATE THE

CONCLUSIONS REACHED BY THE AUDITOR TO
VARIOUS INTENDED USERS.
 AUDIT PROCESS

• POST-AUDIT RESPONSIBILITIES
 THE AUDITOR PERFORMS PROCEDURES THAT WILL
ENABLE HIM/HER TO IDENTIFY AREAS OF
IMPROVEMENT IN THE CURRENT AND FUTURE
ENGAGEMENTS.

• PRIMARY OBJECTIVE: TO ASSESS AND EVALUATE

THE QUALITY OF SERVICES DELIVERED BY THE
ENGAGEMENT TEAM.
 PRELIMINARY ENGAGEMENT ACTIVITIES
• IN DECIDING WHETHER TO ACCEPT OR REJECT AN
ENGAGEMENT, THE AUDITOR’S FIRM SHOULD CONSIDER THE
FOLLOWING:
• ITS COMPETENCE
• ITS INDEPENDENCE
• ITS ABILITY TO SERVE THE CLIENT PROPERLY
• AUDITABILITY OF THE PROSPECTIVE CLIENT
• INTEGRITY OF THE PROSPECTIVE CLIENT’S MANAGEMENT
 COMPETENCE
• THE AUDITOR CAN ONLY ACCEPT ENGAGEMENTS WHOSE
REQUIREMENTS ARE WITHIN THE AUDITOR’S CAPACITY AND
CAPABILITY.

• TO DETERMINE WHETHER THE AUDITOR HAS THE DEGREE OF

COMPETENCE REQUIRED BY THE ENGAGEMENT, THE AUDITOR
OBTAINS A PRELIMINARY KNOWLEDGE OF THE CLIENT’S
BUSINESS AND INDUSTRY.
 INDEPENDENCE
• INDEPENDENCE OF MIND – THE STATE OF MIND THAT PERMITS
THE EXPRESSION OF A CONCLUSION WITHOUT BEING AFFECTED
BY INFLUENCES THAT COMPROMISE PROFESSIONAL JUDGMENT,
ALLOWING AN INDIVIDUAL TO ACT WITH INTEGRITY, AND
EXERCISE OBJECTIVITY AND PROFESSIONAL SKEPTICISM
• INDEPENDENCE IN APPEARANCE – THE AVOIDANCE OF FACTS
AND CIRCUMSTANCES THAT ARE SO SIGNIFICANT THAT IS
REASONABLE AND INFORMED THIRD PARTY, HAVING
KNOWLEDGE OF ALL RELEVANT INFORMATION, INCLUDING
SAFEGUARDS APPLIED WOULD REASONABLY CONCLUDE A
FIRMS, OR A MEMBER OF THE ASSURANCE TEAM’S INTEGRITY,
FIRM’S ABILITY TO SERVE THE PROSPECTIVE
CLIENT

• BEFORE ACCEPTANCE OF THE ENGAGEMENT, THE FIRM

CONSIDERS RESOURCES IN EVALUATING WHETHER THE FIRM
HAS THE ABILITY TO SERVE THE PROSPECTIVE CLIENT PROPERLY.
 EVALUATE AUDITABILITY

• ACCOUNTING RECORDS, DOCUMENTS AND OTHER

INFORMATION THAT SUPPORTS THE CLIENT’S FINANCIAL
STATEMENTS SHOULD BE MADE AVAILABLE TO THE AUDITOR.
 INVESTIGATE THE INTEGRITY OF THE
PROSPECTIVE CLIENT’S MANAGEMENT
• MAIN OBJECTIVE: TO MINIMIZE THE LIKELIHOOD OF BEING
ASSOCIATED WITH A CLIENT WHOSE MANAGEMENT LACKS
INTEGRITY.

• EVERY TIME COMMUNICATION IS MADE TO PARTIES OTHER THAN

THE CLIENT, THE AUDITOR SHALL SEEK PERMISSION FROM THE
CLIENT AND DOCUMENT THE ITEMS DISCUSSED.
 INVESTIGATE THE INTEGRITY OF THE
PROSPECTIVE CLIENT’S MANAGEMENT
• MATTERS TO BE DISCUSSED WITH THE PREDECESSOR AUDITOR:
• REASONS FOR CHANGE IN AUDITORS
• DISAGREEMENTS BETWEEN PREDECESSOR AUDITOR AND CLIENT
MANAGEMENT
• MATTERS THAT MIGHT BEAR ON INTEGRITY OF MANAGEMENT
(INCONSISTENCIES AND FRAUD)
 AGREE ON THE TERMS OF ENGAGEMENT
AND PREPARE AN ENGAGEMENT LETTER

• THE AUDITOR SHALL DECIDE WHETHER TO ACCEPT OR DECLINE

THE PROPOSED AUDIT ENGAGEMENT.

• IF AUDITOR DECIDES TO ACCEPT THE ENGAGEMENT, THE

AUDITOR AND THE CLIENT SHALL AGREE ON THE TERMS OF THE
ENGAGEMENT.
 BASIS OF AUDIT ENGAGEMENT

• ESTABLISHING PRECONDITIONS FOR AN AUDIT; AND

• CONFIRMING THAT THERE IS A COMMON UNDERSTANDING
BETWEEN THE AUDITOR AND MANAGEMENT AND, WHERE
APPROPRIATE, THOSE CHARGED WITH GOVERNANCE ON THE
TERMS OF THE AUDIT ENGAGEMENT.
 PRECONDITIONS FOR AN AUDIT

• THE AUDITOR SHALL ESTABLISH THE PRESENCE

OF THE PRECONDITIONS FOR AN AUDIT BY:
DETERMINING THAT THE FINANCIAL REPORTING
FRAMEWORK (FRF) IS ACCEPTABLE AND IS AVAILABLE
TO INTENDED USER APPLIED TO FSS; AND
OBTAINING THE AGREEMENT OF MANAGEMENT
REGARDING ITS RESPONSIBILITY
 PRECONDITIONS FOR AN AUDIT

• PREPARATION AND PRESENTATION OF THE

FINANCIAL STATEMENTS
• DESIGN, IMPLEMENTATION AND MONITORING OF
INTERNAL CONTROL TO FINANCIAL STATEMENTS
• TO PROVIDE THE AUDITOR WITH:
• ACCESS TO ALL INFORMATION RELEVANT TO AUDIT
• ADDITIONAL INFORMATION THE AUDITOR MAY REQUEST
• UNRESTRICTED ACCESS TO PERSONS WITHIN THE ENTITY
 PRECONDITIONS FOR AN AUDIT

LIMITATION ON SCOPE PRIOR TO AUDIT

ENGAGEMENT ACCEPTANCE
• THE AUDITOR SHALL NOT ACCEPT AN AUDIT
ENGAGEMENT, IF MANAGEMENT OR THOSE CHARGED
WITH GOVERNANCE IMPOSES A LIMITATION ON THE
SCOPE OF WORK THAT WILL RESULT TO DISCLAIMER OF
OPINION UNLESS REQUIRED BY LAW OR REGULATION
TO DO SO.
 AGREEMENT ON AUDIT ENGAGEMENT
TERMS
• THE AGREED TERMS NEED TO BE RECORDED IN AN AUDIT
ENGAGEMENT LETTER OR OTHER SUITABLE FORM OF
CONTRACT.
• AUDIT ENGAGEMENT LETTER IS A WRITTEN TERMS OF AN
ENGAGEMENT IN THE FORM OF A LETTER BY THE AUDITOR TO
THE CLIENT. AN ENGAGEMENT LETTER DOCUMENTS AND
CONFIRMS THE AUDITOR’S ACCEPTANCE OF THE APPOINTMENT.
• IT IS IN THE INTEREST OF BOTH THE CLIENT AND THE
AUDITOR THAT THE AUDITOR SENDS THE ENGAGEMENT
LETTER, PREFERABLY BEFORE THE COMMENCEMENT OF THE
 CONTENTS OF ENGAGEMENT LETTER
• MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
AND INTERNAL CONTROL
• INHERENT LIMITATIONS OF AUDITS
• SCOPE OF AN AUDIT
• UNRESTRICTED ACCESS
• FORMAT OF REPORTS
• OBJECTIVE OF THE AUDIT
• TIMETABLES AND FEES
 AUDIT FEES, COMPUTATION AND BILLING

• THE REQUIREMENT FOR FEES CHARGED SHOULD BE REFLECTIVE OF

THE FAIR VALUE OF THE WORK PERFORMED AND TO BE PERFORMED,
AND SHOULD TAKE INTO ACCOUNT THE FOLLOWING, AMONG OTHERS:
 THE SKILL AND KNOWLEDGE REQUIRED FOR THE TYPE OF WORK INVOLVED;
 THE LEVEL OF TRAINING AND EXPERIENCE OF THE PERSONS ENGAGED ON THE
WORK;
 THE TIME NECESSARILY CONSUMED BY PERSONNEL ENGAGED ON THE WORK;
AND
 THE DEGREE OF RESPONSIBILITY ASSUMED AND URGENCY THAT THE WORK
ENTAILS.
TYPICAL BILLING METHODS USED BY THE
AUDITOR
 AUDITS OF COMPONENTS
• WHO APPOINTS THE COMPONENT AUDITOR;
• WHETHER A SEPARATE AUDITOR’S REPORT IS TO BE ISSUED ON
THE COMPONENT;
• LEGAL REQUIREMENTS IN RELATION TO AUDIT APPOINTMENTS;
• DEGREE OF OWNERSHIP BY PARENT; AND
• DEGREE OF INDEPENDENCE OF THE COMPONENT MANAGEMENT
FROM THE PARENT ENTITY.
 RECURRING AUDITS
• GENERAL RULE: NO NEED TO SEND A NEW ENGAGEMENT LETTER
• EXCEPTIONS:
• MISUNDERSTANDING OF THE OBJECTIVE AND SCOPE
• ANY REVISED OR SPECIAL TERMS
• A RECENT CHANGE OF SENIOR MANAGEMENT
• A SIGNIFICANT CHANGE IN OWNERSHIP
• A SIGNIFICANT CHANGE IN ENTITY’S NATURE OR SIZE
• A CHANGE IN LEGAL OR REGULATORY REQUIREMENTS
• A CHANGE IN THE FINANCIAL REPORTING FRAMEWORK
• A CHANGE IN OTHER REPORTING REQUIREMENTS
 ACCEPTANCE FOR CHANGE IN
ENGAGEMENT
• CHANGE IN CIRCUMSTANCE (VALID)
• CLIENT MISUNDERSTOOD THE OBJECTIVE OF ENGAGEMENT
(VALID)
• RESTRICTION ON SCOPE OF ENGAGEMENT (INVALID)
• RELATES TO INFORMATION THAT IS INCORRECT,
INCOMPLETE, OR OTHERWISE UNSATISFACTORY (INVALID)
• UNABLE TO OBTAIN SUFFICIENT APPROPRIATE AUDIT
EVIDENCE REGARDING ASSERTIONS (INVALID)
 IF IT IS REASONABLY JUSTIFIED

• STOP THE ORIGINAL ENGAGEMENT

• AGREE ON NEW TERMS
• PERFORM THE NEW ENGAGEMENT
• ISSUE THE NEW REPORT
 IF IT IS INVALID OR NOT JUSTIFIED

• REFUSE TO CHANGE THE ENGAGEMENT

• REQUEST TO CONTINUE THE ORIGINAL ENGAGEMENT
• IF THE CLIENT AGREES, CONTINUE
• WHEN PROHIBITED TO CONTINUE, WITHDRAW FROM THE
ENGAGEMENT