Seven elements to audit process
- Risk assessment
- Acceptance
- Planning
- Systems and control analysis
- Substantive testing
- Completion modules
- Engagement and client management
Risk assessment and engagement and client management elements
Run throughout the whole of the audit process
Benefits from conducting interim activities before year end (4)
- Resources spread throughout the year
- Can provide with status report before year end
- Issues are identified before year end so can plan audit approach accordingly
- Better understanding of the business, processes and controls can be obtained
Request to submit proposal for audit may come from client either
- Directly to audit firm
OR - Via an advertisement inviting tenders
Procedures undertaken prior to winning the client involve: (4)
- Understanding the client and services to be provided
- Preparing budgets and considering resources
- Drafting proposal document for audit services
- Giving presentation to client
Proposal document outlines services the firm will provide and approach it will adopt. Includes (4):
- Estimate of the audit fee
- Audit team profile and details of team members’ experience relevant to audit client
- Initial assessment of key risk areas
- Client deliverables, meetings and engagement timetable
Acceptance risk
Risk which may impact the auditor’s decision to take on the engagement
Decision to accept or continue relationship with a client should be made
On an annual basis
Acceptance decisions based on (2):
- Commercial (financial/ reputational) considerations
- Considerations of regulations and standards
Professional risks arise when
The audit firm does not comply with professional standards, laws and regulations
Seven main acceptance procedures an auditor should perform when gathering information
- Identify user and nature of engagement
- Assess client’s legal and financial stability
- Assess integrity of TCWG, management and owners
- Communicate with previous auditor
- Evaluate audit firm’s ability to audit entity
- Perform client identification checks
- Agree the basis for performance
Limitations imposed by the client (3)
- Absence or poor condition of important accounting records
- Management’s disregard of its’ responsibility to maintain adequate internal control
- Restrictions imposed by prospective client on conduct of audit
Factors to consider with regards to independence (4)
- Relationships
- Long association with engagements
- Fees, remuneration, gifts and hospitality
- Non-audit services
Procedures audit firm should undertake to ensure independence (3)
- Circulating the client’s name to staff
- Preparing high level budget to ensure fees are appropriate
- Investigate database of existing client for conflict of interest
Continuance risk
Risk that may impact the auditor’s decision to continue an existing client relationship
Auditors of public companies appointed/ reappointed
At AGM
Auditors of private companies appointed/ reappointed
Automatically reappointed
Safeguards to eliminate or reduce risk (4)
- Recruiting audit staff to ensure sufficient time to complete engagement
- Using auditor expert
- Using separate engagement team
- Second partner review
US and UK listed clients - items which may impact ability to accept engagements (5)
- Increased threats to independence eg staff holding shares
- Increased legal and reputational exposure
- Restrictions over total fee levels and NAS
- Increased audit work
- Increased competency requirements to meet regulatory rules
US listed companies only
- Requirements for registration with PCAOB
- Requirements to comply with PCAOB oversight and monitoring
- Prohibition of NAS according to SOX rules
- Increased competency requirements as a result of S404 sign off requirements
