An Overview THE AUDIT PROCESS

MAJOR PHASES IN AN AUDIT Client acceptance and retention Establish terms of the engagement Plan the audit Consider internal control

MAJOR PHASES IN AN AUDIT Conduct substantive tests Complete the audit Issue audit report

 The audit firm must have existing policies and procedures on client acceptance and retention  The purpose is to minimize association with client who lacks integrity  Investigation on prospective client prior to acceptance must be documented in a memo or completion of client acceptance questionnaire or checklist. CLIENT ACCEPTANCE AND RETENTION

1.Obtain and review available financial information  annual reports  interim financial statements  income tax returns 2.Inquire of third parties about any information concerning the integrity of the prospective client and its management  Bankers  Lawyers  Credit agency  Members of the business community List of procedures EVALUATING A PROSPECTIVE CLIENT

3.Communicate with predecessor auditors about whether there were any disagreements about: Accounting principles Audit procedures Other similar related matters Successor auditor should request permission of the prospective client before contacting the predecessor auditors Inquiry should include questions related to  integrity of management,  disagreements over accounting and auditing issues  Communications with audit committees or group regarding fraud, illegal acts, and internal control related matters  The predecessor’s understanding of the reason for the change in auditors Predecessor auditors should respond fully unless an unusual circumstances exists (lawsuit) If predecessor auditors’ response is limited, the successor auditor must be informed that the response is limited. If prospective client refuses to permit the predecessor auditors to respond, the successor auditor should have reservations about acceptance.

4.Consider whether prospective client has any circumstances that will require special attention or that may represent unusual business or audit risks: Litigation Going-concern problems 5.Determine if the firm is independent of the client and if able to provide the desired service 6.Determine if the firm has the necessary technical skills and knowledge of the industry to complete the engagement 7.Determine if acceptance of the client would violate any applicable regulatory agency requirements or the Code of Professional Conduct.

1.What services to be performed 2.Engagement letter should document the terms agreed to:  Responsibilities of the management’  Responsibilities of the auditors  Assistance to be provided by the client personnel and internal auditors  Expected audit fees. ESTABLISH TERMS OF THE ENGAGEMENT

1.Owner-manager ( in small privately held companies) 2.Large private companies”  Auditor is appointed by vote of the stockholders after recommendation by the board or audit committee.  Audit committee is composed of the members of the board of directors who do not hold positions in the company. THE AUDIT COMMITTEE

1.Financial reporting and disclosure process 2.Encourage fair reporting from the perspective of:  Stockholders  Creditors  Employees 3.Provide for the independence of the external and internal auditors 4.Meets with the external auditor to discuss about responsibilities significant accounting policies Scope of the auditor’s work Conduct of special investigations RESPONSIBILITIES OF AUDIT COMMITTEES

1.Formalizes the arrangement reached between the auditor and the client. 2.Serves as a contract 3.Outlines the responsibilities of the parties 4.Includes arrangements involving the use of specialists or internal auditors 5.Includes any limitations of the liability of the auditor or client like:  Misrepresentations to the auditor by the management 6.Additional services to be provided relating to regulatory requirements 7.Arrangements regarding other services (assurance, tax, consulting) THE ENGAGEMENT LETTER

1.Gather information about their activities 2.Assess the competence and objectivity of the internal auditors and the effect of their work to the audit 3.Consider the effect of the internal auditors’ work on the audit process  Understanding of the internal control’  Risk assessment  Substantive procedures THE INTERNAL AUDITORS

1.Consider the extent of the effect of the internal auditors’ work 2.Coordinate audit work with internal auditors 3.Evaluate and test the effectiveness of the internal auditors’ work. CONSIDERING EFFECTS OF THE INTERNAL AUDITORS’ WORK ON THE AUDIT

1.Educational level and professional experience 2.Professional certification and continuing education’ 3.Audit policies, procedures and checklists 4.Practices regarding their assignments 5.Supervision and review of their audit activities 6.The quality of their working paper documentation, reports and communications 7.Evaluation of their performance. FACTORS IN ASSESSING THE COMPETENCE OF INTERNAL AUDITORS

1.Organizational status of the internal auditor for the internal audit function  Coverage  Access to board of directors  Access to audit committee 2.Policies to maintain internal auditors’ objectivity about the areas audited FACTORS IN ASSESSING THE OBJECTIVITY OF INTERNAL AUDITORS

ENGAGEMENT PLANNING