What stages does an audit go through?
What an auditor does from arriving at the company to writing the report: planning, risk assessment, gathering evidence and the opinion.
Many people picture an audit as "inspectors arrive and hunt for mistakes". In reality, an audit is a carefully planned process. Its goal is not to hunt for mistakes but to obtain assurance about the financial statements.
Let us look at the stages using the example of the "Sharq Mebel" company.
Stage 1: How do the engagement and familiarisation work?
The audit firm and the company sign an engagement contract: what will be examined, for which period and by when. The auditor gets to know the company's business: what it produces, to whom it sells, and which software it uses for accounting.
Stage 2: How are risks assessed?
The auditor identifies where errors are most likely. At "Sharq Mebel", the stock of furniture and timber in the warehouse is large. So inventories are a high-risk area. The auditor also sets the level of materiality: how large an error must be to seriously affect the statements.
Stage 3: How is evidence gathered?
This is the longest stage: - Inspecting documents (contracts, invoices, acceptance certificates) - Attending the inventory count and counting stock in the warehouse - Obtaining balance confirmations from customers and the bank - Recalculating computations - Making inquiries of staff and observing processes
The auditor does not check everything but tests on a sample basis. Samples are larger in high-risk areas.
Stage 4: How is the opinion written?
The errors found are discussed with management. The company may correct them. Then the auditor writes the auditor's report: whether the statements are fairly presented in all material respects or not.
| Stage | Key question | Result |
|---|---|---|
| Engagement and familiarisation | What are we examining? | Audit engagement contract |
| Risk assessment | Where are errors most likely? | Audit plan |
| Gathering evidence | Do the figures match reality? | Working papers |
| Opinion | Can the statements be relied upon? | Auditor's report |
Test yourself
5 questions on this topic: pick an option or reveal the answer.
The management of "Quvasoy sement" estimated the warranty repair provision at 80 000 000 soum. Based on its own data, the auditor set a reasonable range of 88 000 000 – 100 000 000 soum. Under the ISA 540 approach, what is the misstatement at a minimum?
At year-end, "Pskent kafel" recorded an allowance for doubtful debts. To test the allowance, the auditor examined the January–February bank statements to see which debtors paid after the year ended. Which of the three approaches in ISA 540 is being applied?
Which three main inherent risk factors does ISA 540 (Revised, auditing accounting estimates) single out when assessing risks for accounting estimates?
The auditor sent an external confirmation request to one of the debtors of "Guliston ulgurji", but the debtor did not respond at all. What does the auditor usually do?
The management of "Nurota marmar" did not allow the auditor to send its largest customer a letter confirming the balance owed. Following the logic of ISA 505, what does the auditor do?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- International Standards on Auditing (ISA) · general structure of the audit process
- Law "On Auditing Activity" · check the current version
- Example · prepared by the author