Audit

Audit

Phase-1.  Audit Planning

Audit planning involves developing an overall strategy for performing the audit. During planning auditors establish an understanding with their client as to the nature of services to be provided and the responsibilities of each party—this is ordinarily accomplished through use of an engagement letter.  In addition, they develop an overall audit strategy, an audit plan, and an audit program.

Phase-2. Obtain an Understanding of the Client and Its Environment [Including Internal Control]

Auditors must attain a sufficient background to assess the risk of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures. Risk assessment procedures are used here and include inquiries of management and others within the entity, analytical procedures, observation and inspection, and other procedures.

Phase-3.  Assess Risks of Misstatement and Design Further Audit Procedures

Auditors use the information collected while obtaining their understanding of the client and its environment to identify classes of transactions (transaction classes), account balances, and disclosures that might be materially misstated.  Assessing the risks of misstatement (the risk assessment) is performed both at the overall financial statement level and at the relevant assertion level and includes considering:

What could go wrong?

How likely it is that it will go wrong?

What are the likely amounts involved?

Phase-4.  Perform Tests of Controls

Tests of controls are performed to determine whether key controls are properly designed and operating effectively.

Phase-5.  Perform Substantive Procedures—General

Substantive procedures (also referred to as substantive tests) are used to “substantiate” account balances.  Substantive procedures restrict detection risk, the risk that audit procedures will incorrectly lead to a conclusion that a material misstatement does not exist in an account balance when in fact such a misstatement does exist.

Phase-6.  Complete the Audit

Auditors perform a number of procedures near the end of the audit.  For example, evidence is aggregated and evaluated for sufficiency.

Analytical procedures are performed (again) to assist the auditor in assessing conclusions reached and for evaluating overall financial statement presentation.

Phase-7.  Audit Report

A standard unqualified audit report is issued by CPAs when their examination and the results thereof are satisfactory. This standard unqualified report is modified as the audit examination deviates from normal, or as the financial statements fail to comply with generally accepted accounting principles (GAAP).

In the corporate world much has been changed since Enron came up with a big scandal. Auditors were specifically blamed for deceiving the shareholders and hiding the long incurred losses. Much has been said from there on. A lot has been debated in the context of auditing the auditors, and many have given suggestions and further consequences that relates to Enron specifically and other such incidences in general.

Enron was the waking call for auditing the auditors' role in the corporate affairs. This call also made way for the mistrust of the auditor's sole role in the dealing of accounting matters. This has displayed that many auditors may be corrupt; they may conceal, hide, and deceive not just the shareholders but also the very motive of their actions. They have a way of not just making ...