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Sharmori Richardson
BE-406
Auditing
Auditing has played a crucial role in instilling integrity among companies when reporting
financial statements to the general public as well as their investors. If you look back in the late
1990’s, there were a series of financial crimes from big corporations such as Enron and World
Com. It was auditors that investigated the crimes and helped formed a safer environment for
investors to invest in companies. The term auditing speaks for itself as it is the “accumulation
and evaluation of evidence about information to determine and report on the degree of
correspondence between the information and established criteria” (Arens et al., 2014). In other
words, “it evaluates the fairness and accurateness of transactions for an organization”
(Investopedia, 2018). To assess the company’s fairness and accurateness, auditors perform an
audit report to form an opinion on a company’s financial statements. This paper will discuss the
Firstly, the first phase of the auditing process is planning and designing an audit
procedure. To plan and design the audit, the auditor or the audit firm must understand the
industry of the business and its environment; understand the internal control of the business and
As it relates to the first objective, to assess the risk of misstatements, in the financial
statements and to interpret information obtained through the audit, the auditor must have an
excellent understanding of the client’s business, strategies and processes. (Arens et al., 2014)
The auditor must also understand the accounting treatments for their client’s industry. For
THE PROCESS OF AN AUDIT 3
example, when auditing an insurance company, the auditor must understand how loss reserves
are calculated.
Internal controls are described as “methods put in place by a company to ensure the
integrity of financial accounting information, meet operational and profitability targets, and
the operations of a company and the process of an audit report. It is best utilized when it is
applied through multiple divisions throughout the organization. If internal controls are
considered effective, planned assessed control risk can be reduced, and the amount of audit
evidence to be accumulated can be significantly less than when internal controls are not effective
After performing first two objectives of the first phase of the auditing process, the auditor will
create the official audit plan, the procedures as well as the duration for the audit to be completed.
At the end of phase one, the auditor should have a well-defined auditing strategy and plan and a
Problems can have derived in the first phase of the auditing process. For example, one of
your clients’ (insurance firm) Financial controller has been dismissed, and his tasks have been
allocated between the finance department team, which has increased the workload for all
employees. In this case, as an auditor, the student would be very attentive with this situation. As
an employee, taking on another individual’s tasks can seem stressful and overwhelming. Some
employees also don’t have the required skills in completing the tasks. In this case, the student
THE PROCESS OF AN AUDIT 4
would remain alert throughout the audit for accounting errors as well as requesting help from the
finance director to provide the audit team with assistance for auditing issues as there is no
Secondly, the second phase of the auditing process is performing tests of controls and
substantive test of transactions. Auditors perform tests of controls and substantive tests of
transactions to obtain evidence in support of the specific controls that contribute to the auditor’s
assessed control risk and to gather evidence in favor of the monetary correctness of transactions.
Test of Controls.
client entity to prevent or detect material misstatements” (Arens et al., 2014). They are
performed either to test the system, because the auditor wants to place reliance on controls or
when substantive procedures on its own cannot produce sufficient appropriate audit evidence.
For this test, the auditor will on test key controls, which are “the controls which contribute to the
reliance the auditor can place on figures in the financial statements” (Messier et al.,2012).
However, if the test reveals that controls are weak, the auditors will enhance their use of
substantive testing, which will increase the time and the cost of the audit (Bragg, 2018).
Substantive tests of transactions are “audit procedures testing for monetary misstatements
to determine whether the six transaction-related audit objectives have been satisfied for each
class of transactions” (Arens et al., 2014). Auditors perform substantive tests to obtain sufficient
and appropriate audit evidence to express an audit opinion. The assertions for transactions,
balances or disclosures also with the risks identified during the planning phase, assists the
THE PROCESS OF AN AUDIT 5
controls and substantive tests of transactions at the same time for efficiency.
As phase two plays a crucial role in the auditing process, some problems can derive from
performing the tests. For example, the purchase ledger supervisor left in 4 months ago and no
reconciliations and purchase ledger control accounts have been completed. This has increased
errors within trade payables, and payables might be overstated at the end of the year. In this
scenario, the student would increase the testing on trade payables at the end of the year, with a
particular focus on completeness of payables. A detailed review of the year-end purchase ledger
control account reconciliation should be performed with a focus on any unusual reconciliation
items.
The purpose of the third phase is to obtain sufficient additional evidence to determine
whether the ending balances and footnotes in financial statements are fairly stated. The nature
and extent of the work will depend heavily on the findings of the first two phases as well as the
categories of the third phase which are substantive analytical procedures and tests of details of
balances.
Analytical Procedures.
plausible relationships among both financial and non-financial data” (Arens et al., 2014). The
test plays an important part in a risk-based audit approach. The primary objective of this test is to
obtain assurance, in combination with another audit testing, concerning financial statement
assertions for one or more audit areas (ACCA Global, 2018). Also, with the primary objective of
THE PROCESS OF AN AUDIT 6
analytical procedures, the four steps that are used in the process of analytical methods. These
computing the difference; and investigating substantial differences and drawing conclusions
Test of details of balances is “an audit procedure that tests for monetary misstatements to
determine whether the eight balance-related objectives have been satisfied for each significant
account balance” (Arens et al., 2014). Test of details of ending balances are essential to the
conduct of the audit because much of the evidence is obtained from third-party sources and
Problems can derive from phase three of the auditing process. For example, Preliminary
analytical review of the profit and loss statement has a suspect that the client is paying fictitious
invoices. This results in a significant increase in expenses. For this scenario, the student would
update the analytical review with the full year results and conduct interviews with management
to gain knowledge about these fictitious invoices. From here, the student will do further test to
obtain additional evidence as to where these fictitious invoices are coming from
Lastly, the final step in the audit process is to evaluate the results of the audit evidence
and choose the appropriate audit opinion to issue. After completing the first three phases,
objectives, summarize the results, publish the audit report and perform other forms of
and disclosure-related objective, and it also obtains sufficient appropriate evidence that
information disclosed in the footnotes reflects actual transactions and balances that have
occurred and that represent obligations of the client to support the occurrence and rights and
obligation objectives (Arens et al., 2014). Furthermore, auditors perform audit procedures related
to contingent liabilities and subsequent events. A contingent liability is a potential liability that
may occur depending on the outcome of an uncertain future event (Investopedia, 2018). A
subsequent event is an event that occurs after a reporting period, but before the financial
statements for that period have been issued or are available to be issued (Bragg, 2017). Both of
these terminologies will show up in the disclosure of footnotes as they will affect the financial
statements.
In addition to performing additional tests, an auditor must gather the four types of
evidence for financial statements as a whole during the completion of the phase. This evidence
obtaining a client representation letter and reading information in the annual report to make sure
that it is consistent with the financial statements. Once this evidence is combined, the auditor can
now issue an audit report. The types of auditing reports are unqualified opinion, qualified
After the posting of the audit report, the auditor is required to communicate significant
deficiencies in internal control to the audit committee or senior management. Auditors are also
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expected to communicate certain other matters to those charged with governance, such as the
audit committee or a similarly designated body, upon completion of the audit, if not sooner.
Just like the first three phases, phase four can also create a problem. For example,
completed the audit report and as a result of conducting the audit, the company did not maintain
GAAP accounting principles. Instead of writing a qualified report, you wrote an unqualified
report. In this case, the student would follow AICPA auditing standards on how to write a
qualified report and learn the structure of report so a mistake like that can never happen again.
Conclusion
After eleven weeks of learning about the auditing industry, the student concludes that the
four phases are crucial to completing an audit. Not only do the four phases need to be carried out,
but auditors need to ensure they carefully look at the financial statements. Sometimes, they are
not able to identify the little errors. Those errors can lead to a more significant issue. Once these
steps are completed, the audit will be successful. The student will also like to thank his
instructor, Dr. Arlene Harris for simplifying and helping him in gaining a better understanding as
References
ACCA Global . (2018, February 2). Analytical Procedures . Retrieved from ACCA:
http://www.accaglobal.com/crsh/en/student/exam-support-resources/professional-exams-
study-resources/p7/technical-articles/analytical-procedures.html
Arens, A. A., Elder, R. J., & Beasley, M. S. (2014). Auditing & Assurance Services: An
Bragg, S. (2017, November 26). Subsequent Events Definition . Retrieved from Accounting
Tools : https://www.accountingtools.com/articles/subsequent-events-definition-and-
usage.html
Bragg, S. (2018, January 20). Test of Controls . Retrieved from Accounting Tools :
https://www.accountingtools.com/articles/what-are-tests-of-controls.html
https://www.investopedia.com/terms/a/audit.asp
https://www.investopedia.com/terms/c/contingentliability.asp
Messier, W. F., Glover, S. M., & Prawitt, D. F. (2012). Auditing and Assurance Services: A