61.The audit process can be summarized in five phases:
01.Planning:-
Initial planning activities include formal acceptance of the client by the audit firm, verifying compliance with independence requirements,
building the audit team and performing other procedures to determine the nature, timing and
extent of procedures to be performed in order to conduct the audit in an effective manner.
02.Risk assessment:-
Auditors use their knowledge of the business, the industry and the environment in
which the company operates to identify and assess the risks that could lead to a material misstatement in
the financial statements. Those risks often involve high degree of judgement and require a significant
level of knowledge and experience by the auditor,particularly on large and complex engagements. This
requires a good understanding of the business and its risks, which is typically built up over a number of
years as part of the audit firm’s and auditor's knowledge. It also means that the auditors need to be
well informed about the industry and wider environment in which the company operates, and
about what its competitors, customers, supplier sand—where relevant—regulators are doing.
03.Audit strategy and plan:-
Once the risks have been assessed, auditors develop an overall audit strategy and a detailed audit plan to address the risks
of material misstatement in the financial statements.Among other things, this includes designing a testing
approach to various financial statement items,deciding whether and how much to rely on the
company’s internal controls, developing a detailed timetable, and allocating tasks to the audit
team members. The audit strategy and plan is continually reassessed throughout the audit and
adjusted to respond to new information obtained about the business and its environment.
04.Gathering evidence:-
Auditors apply professional skepticism and judgement when gathering and
evaluating evidence through a combination of testing the company’s internal controls, tracing the amounts
and disclosures included in the financial statements to the company’s supporting books and records, and
obtaining external third party documentation. This includes testing management’s material
representations and the assumptions they used in preparing their financial statements.
05.Finalization:-
Finally, the auditors exercise professional judgement and form their overall conclusion, based on the tests they have carried out,
the evidence they have obtained and the other work they have done. This conclusion forms the basis of
the audit opinion.Auditors interact with the company during all the
phases of the audit process listed above. There will be continuing discussions and meetings with
management, both at operational and nonconsecutive levels, and with those charged with
governance. Using their professional skepticism and judgement, auditors challenge management’s
assertions regarding the numbers and disclosures in the financial statements.
Audit strategy and plan—Once the risks have
been assessed, auditors develop an overall audit
strategy and a detailed audit plan to address the risks
of material misstatement in the financial statements.
Among other things, this includes designing a testing
approach to various financial statement items,
deciding whether and how much to rely on the
company’s internal controls, developing a detailed
timetable, and allocating tasks to the audit
team members. The audit strategy and plan is
continually reassessed throughout the audit and
adjusted to respond to new information obtained
about the business and its environment.
Gathering evidence—Auditors apply professional
scepticism and judgement when gathering and
evaluating evidence through a combination of testing
the company’s internal controls, tracing the amounts
and disclosures included in the financial statements
to the company’s supporting books and records, and
obtaining external third party documentation. This
includes testing management’s material
representations and the assumptions they used in
preparing their financial statements. Independent
confirmation may be sought for certain material
balances such as cash.