THE AUDIT PROCESS - Accepting An Engagement: Financial Statement Assertions
THE AUDIT PROCESS - Accepting An Engagement: Financial Statement Assertions
Engagement
An audit of financial statements generally begins with the
financial statements prepared by the entity’s management.
Without these financial statements, there can be no audit to
perform. A general approach to auditing financial statements
would require consideration of financial statement assertions,
audit procedures, and audit evidence before forming an
audit opinion.
Audit procedures
The objective of the audit is to determine the validity of the
financial statement assertion. To accomplish this, auditors
normally develop specific audit objectives for each of the
relevant assertions. These audit objectives serve as a guide
auditors in assessing risks of material statement and in
designing the appropriate audit procedures a to be
performed.
The selection of the appropriate procedures, to satisfy a
particular objective, is affected by a number of factors
including the auditor’s assessment of materiality and risk.
Regardless of the procedures selected, there is only one
basic criterion. The procedures selected should enable the
auditor to gather sufficient appropriate evidence about the
validity of an assertion.
Audit Evidence
Audit procedures are the means used by the auditor to
obtain sufficient appropriate evidence. Audit evidence
refers to the information obtained by the auditor in arriving
at the conclusions on which the audit opinion is based.
Audit evidence will comprise source documents and
accounting records underlying the financial statements
and corroborating information from other sources. This
evidence will either prove or disprove the validity of the
assertions made by management on the financial
statements.
Audit Opinion
The results of the procedures performed and the audit
evidence obtained are carefully evaluated to arrive at the
appropriate opinion about the fair presentation of the
financial statements.
Audit Planning
In planning an audit, the auditor obtains more detailed
knowledge of the client’s business and industry is important
because it helps the auditor in understanding the transactions
and events affecting the financial statements. In addition,
such knowledge also helps in the early identification of the
potential problems that might be encountered in the audit.
The auditor’s understanding of the client, combined with
the assessment of risk and materiality, should enable the
auditor to develop an overall plan and a detailed
approach for the expected conduct and scope of the
audit.
Issuing a Report
On the basis of audit evidence gathered and evaluated, the
auditor forms a conclusion about the financial statements. This
conclusion (in the form of an opinion) is communicated to
various interested users through an audit report.
Accepting an Engagement
An important element of the firm’s quality control policies and
procedures is a system for deciding whether to accept or
reject an audit engagement. In making this decision, the firm
should consider:
Its competence;
Its independence;
The integrity of the prospective client’s management; and
The adequacy of the accounting records
Competence
One of the primary considerations before accepting an audit
engagement is to determine whether the auditor has the
necessary skills and competence to handle the engagement.
According to the Code of Ethics, professional accountants
should not portray themselves as having expertise which they
do not possess. Competence is acquired through a
combination od education, training and experience.
Independence
Essential to the credibility of the auditor’s report is the
concept of independence. Before accepting an audit
engagement, the auditor should consider whether there
are any threats to the audit team’s independence and
objectivity and, if so, whether adequate safeguards can
be established.
Engagement letter
According to PSA 210, the auditor and the clients should
agree on the terms of the engagement and the agreed
terms will have to be recorded in an engagement letter.
The engagement letter serves as the written contract
between the auditor and the client. This letter sets forth:
in addition, the auditor may also include the following
items in the engagement letter:
Billing arrangements;
Expectations of receiving management representation
letter;
Arrangements concerning the involvement of others
experts, other auditors, internal auditors and other client
personnel); and
Request for the client to confirm the terms of the
engagement.