Audit and Assurance
The audit process
Understand the objective of an audit (reasonable assurance that financial statements are free from material misstatement), the ethical requirements (independence, objectivity, competence, confidentiality, professional behaviour), and the stages: engagement acceptance, planning and risk assessment, understanding the entity and its environment including internal control, assessing risks of material misstatement at financial statement and assertion level, designing responses, performing procedures, evaluating evidence, and reporting. Know the assertions (occurrence, completeness, accuracy, cut-off, classification, existence, rights and obligations, valuation, presentation) and match procedures to them. Understand materiality, sampling, audit documentation, the auditor's report structure, key audit matters, going concern, subsequent events, and the auditor's responsibilities regarding fraud and laws and regulations.
Traps to watch
- An audit provides reasonable, not absolute, assurance and is not a guarantee of fraud detection.
- Tests of controls support a lower assessed risk but do not replace substantive procedures entirely.
- Confirmation of receivables addresses existence, not valuation or recoverability.
- A modified opinion is about materiality and pervasiveness; distinguish qualified, adverse and disclaimer.
- Independence threats must be identified and safeguards applied, not simply noted.
Worked example
An auditor discovers inventory valued at 400,000 when net realisable value is 250,000, and materiality is 50,000. The misstatement of 150,000 is material but not pervasive; management refuses to adjust. The auditor issues a qualified opinion due to material misstatement.
Rule of thumb
For every procedure, name the assertion it addresses and the evidence it produces; for every issue, assess materiality and pervasiveness before choosing an opinion.