Although not all audit engagements are the same in substance or in scope, they often share basic steps in preparation, planning, field testing and audit procedures, and rendering the audit opinion. Professionals, business owners, employees and clients should be familiar with the audit process because of its prevalence in business and its relevance to each company stakeholder.
Prior to actually beginning an audit, there are several important steps. First, the audit firm should decide whether or not to accept the client, or whether to continue to perform work on its behalf. If the client has been involved in unethical business conduct or has changed its business to a riskier industry, the renewal of an annual engagement is not an automatic process.
Provided the auditor is accepting the engagement, there should be a review of the permanent file and workpapers relating to any previous period to refresh staff on certain recurring issues relating to the client and to re-familiarize auditors with the client's business.
Then the audit firm discusses the basics of the engagement with the client, including the timetable of fieldwork, the scope and duration of the audit, and expected delivery date of the audit opinion. These and other pertinent details such as the fee structure are documented in the engagement letter, which serves as the contract for professional services.
Once the auditor has been formally retained by the client, substantive audit planning can begin. A critical element of planning the audit is determining materiality. Materiality is a flexible concept that is the subject of much academic research and professional best practices, but it is basically a function of assets or income that would impact the decision-making of a user of financial statements.
The auditor should also conduct a thorough risk assessment, taking into account the industry of the client, the integrity of management, its corporate governance policies, and its system of internal controls. This assessment is the basis of selecting which audit procedures to perform and what specific fieldwork to conduct.
To obtain evidence on the effectiveness of internal controls, the auditor conducts various audit procedures that are carefully selected during audit planning and any others that are required in the auditor's professional opinion for any unexpected issues that may arise. These often include analytical procedures and other statistical analysis, independent balance verifications of both deposits and obligations, review of physical and information security procedures, and observation of operations and transactions.
The auditor documents the results of the fieldwork in the workpapers and compiles evidence necessary to support the forthcoming audit opinion.
After completing fieldwork and obtaining evidence regarding the effectiveness of the client's internal controls, the auditor will be able to render an opinion on whether or not the financial statements are free from the risk of material misstatement. Depending on the level of confidence in the quality of the financial reporting, there are several types of audit reports that an auditor may issue, some of which may contain language adverse to the client's interests.
Although this may make for an awkward conclusion to an engagement, the independent audit only has value if it is rendered with professional discretion, as not all audits will result in an unqualified opinion.