Process of Audit

The process of audit is a structured and systematic approach undertaken by an auditor to examine and evaluate the financial statements of an entity. It ensures that the accounts present a true and fair view of the financial position and performance in compliance with the applicable accounting framework. The audit process begins with planning and continues through execution, supervision, documentation, and reporting. Each stage plays a crucial role in achieving the overall objective of the audit—forming and expressing an independent opinion on the financial statements.

1. Importance of Planning in the Audit Process

Planning is the foundation of an effective audit. According to SA 300 – Planning an Audit of Financial Statements, the objective of the auditor is to plan the audit so that it is performed in an effective and efficient manner. Proper planning helps in identifying key risk areas, allocating resources, and completing the audit within a specified timeframe.

Benefits of Planning

Audit planning provides multiple advantages:

• Ensures appropriate attention is given to significant areas of the audit.
• Helps identify potential problems early and resolve them efficiently.
• Enables proper organisation of audit work for effective performance.
• Facilitates appropriate allocation of responsibilities among engagement team members.
• Assists in supervision and review of the work performed by assistants.
• Aids in coordination of work done by other auditors or experts where applicable.

Thus, an effectively planned audit reduces audit risk to an acceptable low level and enhances the quality of the auditor’s opinion.

2. Nature of Audit Planning

Audit planning is a continuous and iterative process rather than a discrete phase. It generally begins soon after the completion of the previous audit and continues until the current audit is completed. The process involves consideration of several important aspects before detailed audit procedures are performed.

Key matters considered during audit planning include:

• Analytical procedures for risk assessment.
• Understanding of the legal and regulatory framework applicable to the entity.
• Determination of materiality.
• Involvement of experts in complex areas.
• Performance of other risk assessment procedures.

Active involvement of the engagement partner and senior team members enhances the quality and efficiency of the audit plan. Discussions with management may be conducted to coordinate the audit, but such discussions should not compromise the independence or effectiveness of the audit process87757bos280825-ch2a.

3. Elements of the Planning Process

The audit planning process comprises two broad components:

1. Preliminary Engagement Activities
2. Planning Activities

(I) Preliminary Engagement Activities

Preliminary activities help the auditor decide whether to continue or accept the engagement and ensure compliance with ethical requirements.

These activities include:

(a) Continuance of Client Relationship

The auditor must assess whether the relationship with the client should continue. This involves evaluating the integrity of key management, the competence of the engagement team, and the results of previous engagements.

(b) Compliance with Ethical Requirements

The auditor must remain independent and unbiased throughout the audit. Continuous evaluation of independence is necessary to avoid conflicts of interest. Where any threat to independence arises, appropriate safeguards must be applied or, in extreme cases, withdrawal from the engagement may be considered.

(c) Understanding the Terms of Engagement

The auditor should establish a clear understanding with the client through an engagement letter. This document outlines the scope of the audit, the auditor’s responsibilities, and management’s responsibilities, thereby avoiding misunderstandings later in the engagement.

Together, these activities help the auditor in identifying events or circumstances that may affect the ability to plan and perform the audit effectively.

(II) Planning Activities

Planning activities involve two major steps:

1. Establishing the Overall Audit Strategy
2. Developing the Audit Plan

4. Establishing the Overall Audit Strategy

The overall audit strategy defines the scope, timing, and direction of the audit and serves as a framework for developing the audit plan.

The auditor determines:

• The nature and quantity of resources to be deployed for specific audit areas.
• The time when resources will be utilised (e.g., interim or final audit).
• The manner in which resources will be directed and supervised.

Factors Considered in Developing Audit Strategy

1. Identifying the characteristics of the engagement – including applicable financial reporting framework, nature of business, and industry-specific requirements.
2. Defining reporting objectives – to determine audit timing and the form of communication.
3. Considering significant factors – such as industry changes, volume of transactions, or regulatory developments.
4. Using knowledge from previous engagements – to understand internal controls and risk areas.
5. Determining the nature, timing, and extent of resources – to ensure appropriate team composition and audit budgeting.

A well-established audit strategy ensures that the audit is directed towards key risk areas and that the audit objectives are achieved within the available resources and time frame.

5. Developing the Audit Plan

After finalising the overall strategy, the auditor develops a detailed audit plan. The audit plan outlines specific audit procedures to be performed, their timing, and the extent of work to be undertaken.

According to SA 300, the audit plan should include:

• Nature, timing, and extent of planned risk assessment procedures.
• Nature, timing, and extent of further audit procedures at the assertion level.
• Other planned audit procedures required to comply with Standards on Auditing.

Understanding the Client’s Business

A deep understanding of the client’s business operations, internal controls, and environment is essential for developing a realistic and effective audit plan. For example, a manufacturing entity may require specific audit procedures for inventory and production costs, while a financial institution may need procedures for evaluating compliance with RBI guidelines.

Relationship Between Audit Strategy and Audit Plan

While audit strategy provides the overall direction, the audit plan translates that strategy into actionable procedures. These two components are interrelated, and any change in one may require modification of the other.

6. Supervision, Review, and Changes During Audit

The audit process is dynamic. As the audit progresses, new information may emerge that requires changes in the audit strategy or plan.
Examples include:

• Discovery of new risk areas.
• Changes in business conditions.
• Audit evidence that contradicts previous findings.

The auditor must revise the audit plan to address such developments appropriately. The extent of supervision and review of audit work depends on factors such as:

• Size and complexity of the entity.
• Risk of material misstatement.
• Competence and experience of team members.

Continuous review ensures that audit objectives are met efficiently and that work performed aligns with professional standards.

7. Documentation in the Audit Process

Proper documentation forms the backbone of the audit process. It provides evidence that the audit was conducted in accordance with professional standards.

The auditor must document:

1. The overall audit strategy.
2. The detailed audit plan.
3. Any significant changes made during the audit and reasons for such changes.

Documentation serves multiple purposes:

• It records key planning decisions.
• It facilitates review and supervision.
• It acts as evidence in case of professional disputes or allegations of negligence.

Audit documentation may include audit programmes, checklists, working papers, and review notes, all tailored to the specific engagement.

8. Audit Programme

An audit programme is the practical implementation of the audit plan. It lists out the detailed procedures to be performed during the audit, arranged in a logical sequence to ensure completeness and systematic coverage.

Characteristics of an Audit Programme

• It contains a list of verification and examination steps to be performed.
• It specifies the scope and extent of checking for each area.
• It may include instructions for the team on sampling, documentation, and techniques to be adopted.

An audit programme ensures that every important area is covered and that no aspect is overlooked.

Key Considerations in Preparing an Audit Programme

• Stay within the scope of the audit assignment.
• Prepare a written programme describing all procedures.
• Identify the best sources of evidence.
• Coordinate related procedures to ensure consistency.
• Include audit objectives for each area of verification.
• Review and update the programme periodically to remain relevant.

9. Audit Evidence

Audit evidence refers to the information collected by the auditor to form an opinion on the financial statements. The audit programme is designed to obtain sufficient and appropriate audit evidence.

Types of Audit Evidence

1. Documentary examination – such as invoices, ledgers, and contracts.
2. Physical examination – like counting cash or verifying inventory.
3. Confirmations and explanations – obtained from management or third parties.
4. Analytical procedures – comparison of financial data and ratios.
5. Review of internal controls – to assess reliability of systems and records.

Proper evaluation of audit evidence enables the auditor to draw valid conclusions and express an informed opinion.

10. Advantages and Limitations of Audit Programme

Advantages

• Provides clear instructions to audit assistants.
• Ensures systematic and complete audit coverage.
• Fixes responsibility and facilitates supervision.
• Acts as a record of work done and serves as evidence of diligence.
• Helps in preparing audit plans for future years.

Limitations

• May lead to mechanical execution without understanding objectives.
• Can become rigid if not reviewed regularly.
• Inefficient staff may rely too heavily on the checklist.
• May restrict initiative of experienced assistants.

These limitations can be overcome by encouraging critical thinking among audit staff and by periodically reviewing and updating the programme.

11. Continuous Review and Updating

The audit process must be flexible. Periodic reviews ensure that the audit plan and programme remain relevant to the client’s changing business environment.
For instance, if a client introduces a new business division or adopts a new accounting software, the audit procedures must be updated accordingly. Regular review helps maintain efficiency, accuracy, and compliance with the latest regulatory and professional standards.

Conclusion

The process of audit is not confined to a single phase but is a continuous and evolving cycle that starts with planning and ends with reporting. Each stage—strategy formulation, planning, supervision, execution, documentation, and review—contributes to the overall quality of the audit. A well-planned and methodically executed audit ensures compliance with standards, minimises audit risk, and enhances the reliability of financial statements.

For aspiring Chartered Accountants, understanding the audit process in depth is essential to develop professional competence and uphold the integrity of the auditing profession.