PDF Overview of a Risk-Based Audit Process

OVERVIEW OF RISK- BASED AUDIT PROCESS AUDITING AND ASSURANCE PRINCIPLES HENLY S. PAHILAGAO, CPA, PHD Engagement Overview PREENGAGEME INTERNAL AUDIT SUBSTANTIV NT CONTROL ISSUE...

OVERVIEW OF RISK- BASED AUDIT PROCESS AUDITING AND ASSURANCE PRINCIPLES HENLY S. PAHILAGAO, CPA, PHD Engagement Overview PREENGAGEME INTERNAL AUDIT SUBSTANTIV NT CONTROL ISSUE PLANNING E PROCEDURES CONSIDERATI REPORT PROCEDURES ON  An audit approach that begins with an assessment of the types of likelihood of Risk-Based misstatements in account balance and then adjusts the amount and type of audit Audit Approach work, to the likelihood of material misstatements occuring in account balances.`  Identification of the client’s strategy and the process for developing that strategy. Examination of the core business process The auditors and resource management perform the following: Identification for each of the key processes the objectives, inputs, activities, outputs, systems and transactions. Assessment of the risks that the processes will not meet the goals and controls related to those risks.  Risk is a concept used to express Meaning of uncertainty about events and/or their Risk outcomes that could have a material effect on the organization.  Audit Risk- risk that an auditor may give an unqualified opinion on financial statements that are materially misstated. Four Critical Components of Risk Engagement Risk- the economic risk that a CPA firm is exposed to simply because it is associated with a particular client including loss of reputation, inability of the client to pay the auditor, or financial loss because management is not honest and inhibits the audit process.  Financial Reporting Risk- those risk that relate directly to the recording of transactions and the presentation of financial data in an organization’s financial statements. Four Critical Components of Risk Business Risk – those risk that affect the operations and potential outcomes of organizational activities.  Phase I –Risk Assessment Performance of preliminary engagement activities to decide whether to The Risk – accept/continue an audit engagement. Based Audit Process Planning the audit to develop an overall audit strategy and audit plan. Performance of risk assessment procedures to identify/assess risk of material misstatement through understanding the entity.  Phase II –Risk Response The Risk – Designing overall responses and Based Audit further audit procedures to the assessed risk of material Process misstatement. Implementing responses to assessed risk of material misstatement to reduce audit risk to an acceptably low level.  Phase III –Reporting 1.Reporting the audit evidence obtained to The Risk – determine what additional audit work (if Based Audit any) is required. Process 2.Forming an opinion based on audit findings and preparing the auditor’s report CONDUCTING AN AUDIT OF FINANCIAL STATEMENTS Pre-engagement (PSA 210 and 220)  Evaluate compliance with ethical requirements (PSA 220) Pre- Evaluate continuance of engagement relationship with existing clients Procedures (PSA 220) Establish the terms of the engagement (PSA 210)  Client selection and retention Communication between predecessor and successor auditors Pre- engagement Engagement letters Arrangements Staff assignment Time budget  The auditor maintains the necessary independence and ability to perform the engagement. There are no issues with management integrity that may affect the auditor’s willingness to continue Client Selection the engagement. and Retention There is no misunderstanding with the client as to the terms of the engagement.  It is competent to perform the engagement and has the capabilities including time and resources to do so CPA Firm shall assess Can comply with the relevant ethical requirements and whether Has considered the integrity of the client and does not have information that would lead it to conclude that the client lacks integrity  Whether the financial reporting framework to be applied in the financial statements are acceptable Agreement of management that it acknowledges and understands its responsibility. Preconditions Preparation of financial statements in accordance with applicable financial reporting framework including to Audit where relevant to their fair presentation. Internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatements whether due to fraud or error, and `  To provide the auditor with; Access to all information of which management is aware that is relevant to the preparation of financial statements such as records, documentation and other matters Preconditions Additional information that the auditor may request from to Audit management for the purpose of the audit; and Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence` Terms of Audit Engagements PHILIPPINE STANDARD ON AUDITING 210  To establish standards and provide guidance on: Purpose Agreeing the terms of the engagement with the client; and The auditor’s response to a request by a client to change the terms of an engagement to one that provides a lower level of assurance.  The auditor and the client should agree on the terms of the engagement. Terms of The agreed terms would need to be recorded in an audit Engagement engagement letter or other suitable form of contract.  The objective of the audit of financial statements; Management’s responsibility for the financial statements; Principal Management’s responsibility for establishing and maintaining effective internal control; Contents of Engagement The scope of the audit; Letter/Contrac The form of any reports or other communication of results of the t engagement; unavoidable risk that even some material misstatement may remain undiscovered; and Unrestricted access to whatever records, documentation and other information requested in connection with the audit.  Arrangements regarding the planning and performance of the audit. Expectation of receiving from management written confirmation concerning representations made in connection with the audit. Other Request for the client to confirm the terms of the information to engagement by acknowledging receipt of the engagement letter. be included Description of any other letters or reports the auditor expects to issue to the client. Basis on which fees are computed and any billing arrangements.  Arrangements concerning the involvement of other auditors and experts in some aspects of the audit. Arrangements concerning the involvement of internal auditors and other client staff. To be added, Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit. when relevant Any restriction of the auditor’s liability when such possibility exists. A reference to any further agreements between the auditor and the client.  Factors that influence the decision Who appoints the auditor of the component. Separate letter Whether a separate auditor’s report is to be issued to Components on the component. Legal requirements. The extent of any work performed by other auditors.  Factors that may make it appropriate to send a new letter: Any indication that the client misunderstands the objective and scope of the audit. Any revised or special terms of the engagement. Recurring A recent change of senior management or those Audits charged with governance. A significant change in ownership. A significant change in nature or size of the client’s business. Legal or regulatory requirements.  Consider Change in Reasonableness of basis for Engagement requesting a change Legal or The auditor should not agree to a change of contractual engagement where there is no implications of the reasonable justification for change. doing so.  change relates to information that is incorrect, incomplete or otherwise unsatisfactory. Change is not reasonable when.. E.g. The auditor is unable to obtain sufficient appropriate audit evidence regarding receivables and the client asks for the engagement to be changed to a review engagement.  A change in circumstances that affects the entity’s Change is reasonable requirements or when… A misunderstanding concerning the nature of service originally requested  Where the terms of the engagement are changed, the auditor and When there is the client should agree reasonable on the new terms. justification the report issued would be that appropriate for the revised terms of engagement.  No reference is made to: To avoid The original engagement; or confusion Any procedures except where the engagement is changed that may have been to an engagement to undertake agreed-upon performed in the procedures and thus reference to the original procedures performed is a normal part of the engagement, report.  The auditor should continue with original engagement If unable to If not allowed to continue… agree to a withdraw and consider whether there is change in any obligation, either contractual or otherwise, to report to other parties, such engagement as those charged with governance or shareholders, the circumstances necessitating the withdrawal