Overall approach of an audit

Overall approach of an audit

The audit process includes six stages, in which the auditors, when planning the audit, investigate the potential audit client, establish an understanding with the client, assess risk of misstatements, and check how does the auditor will respond to those risk. The stages 2, 3 and 4 are related to the internal control, the next stages are related to the interpretation of results the auditor performs.

Plan the audit

First of all, the audit process starts planning the audit, in this stage is establish the requirements for the engagement, including the financial statements to be audited, any other requirements, and the timing it requires. Also auditors found an understanding with their clients, and they must develop an audit strategy, plan and program.

Obtain understanding of client, its environment, and internal control

The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control. They perform risk assessment procedures.

An auditor of Coca-Cola Company that want to start an audit process should look into the administration which is in charge of the company, to investigate their criminal record, their income, the way they work and the substantiation of their salary. A second example would be to inspect subordinates income of the same company, if these are really rewarding, according to earnings of the company, in order to know what percentage is used to pay salaries and if that can be checked.

If an auditor will start a process by a long-established company in the market like Walmart, will be much easier inquiring of others outside the company, such as banks or rating organizations since it is a company that is in constant check-up, due to its competition with other supermarkets.

Asses the risk of misstatement and design further audit procedures

This stage is about identifying and assess risk of material misstatement for account balances, classes of transactions, and disclosures, considering what can go wrong, the magnitude, likelihood of a material misstatement. Also auditors may design further audit procedures. Financial statements not fairly presented in accordance with the financial reporting framework, a lack of sufficient capital to continue operations, and to manipulate the financial statements are three examples of material misstatement.

Perform further audit procedures

Further audit procedures ordinarily consist of substantive procedures and, when the assessed level of risk presumes that controls operate effectively, tests of controls. Examples of test of controls: INE (formerly named IFE) carries out an inspection of documents, reports, and electronic files, in order to validate the authenticity

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