Audit Overview
An audit is an examination of financial statements to express an opinion on whether they are prepared in accordance with the applicable financial reporting framework.
Audit Objective
To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to express an opinion.
🔄Audit Process
1. Pre-Engagement (Acceptance)
- Evaluate integrity of management
- Assess auditor competence and independence
- Obtain engagement letter
2. Planning
- Understand the entity and its environment
- Understand internal control
- Determine materiality
- Develop audit strategy and plan
3. Risk Assessment
- Identify risks of material misstatement (RMM)
- Assess inherent risk and control risk
- Design responses to assessed risks
4. Evidence Gathering
- Test of controls (if relying on controls)
- Substantive procedures (tests of details, analytical)
5. Completion
- Evaluate misstatements
- Subsequent events review
- Management representations
- Form audit opinion
6. Reporting
- Issue independent auditor's report
- Communicate with those charged with governance
📋Audit Evidence (PSA 500)
Audit Procedures
Inspection
Examining records, documents, or physical assets
Observation
Watching a process or procedure being performed
External Confirmation
Responses from third parties (banks, customers)
Recalculation
Checking mathematical accuracy
Reperformance
Independent execution of procedures or controls
Analytical Procedures
Evaluating through analysis of relationships
Inquiry
Seeking information from knowledgeable persons (internal or external)
Evidence Attributes
Sufficient
Quantity (enough to support conclusion)
Appropriate
Quality (relevant and reliable)
✓Management Assertions
| Category | Assertions | Description |
|---|---|---|
| Transactions & Events | Occurrence | Transactions actually occurred |
| Completeness | All transactions recorded | |
| Accuracy | Correct amounts and classification | |
| Account Balances | Existence | Assets/liabilities exist |
| Rights & Obligations | Entity has rights to assets/owes liabilities | |
| Completeness | All amounts recorded | |
| Valuation & Allocation | Appropriate amounts |
🛡️Internal Control (PSA 315)
COSO Components
- 1. Control Environment - Tone at the top, ethics, governance
- 2. Risk Assessment - Identifying and analyzing risks
- 3. Control Activities - Policies and procedures (authorization, reconciliation)
- 4. Information & Communication - Financial reporting system, internal communication
- 5. Monitoring - Ongoing and separate evaluations
📄Audit Opinions (PSA 700/705)
| Opinion | Condition | Impact |
|---|---|---|
| Unmodified | FS free from material misstatement | "Present fairly" |
| Qualified | Material but not pervasive misstatement OR limitation | "Except for" |
| Adverse | Material and pervasive misstatement | "Do not present fairly" |
| Disclaimer | Unable to obtain sufficient evidence (pervasive) | "Unable to form opinion" |
Key Audit Matters (KAM)
Matters that required significant auditor attention. Required for listed entities. Communicated in a separate section of the audit report.
Key Reminders
Remember
- Audit = Reasonable assurance (not absolute)
- Evidence = Sufficient + Appropriate
- COSO = 5 components
Opinion Types
- Unmodified = Clean
- Material + Not Pervasive = Qualified
- Material + Pervasive = Adverse/Disclaimer