The primary purpose of any financial statement audit is to get an illuminating picture of the audited enterprise and the environment it operates in, including the internal control structures of the enterprise, so as to come up with informed opinions about the financial statements. In this process, it is crucial to identify and assess “material misstatement” risks caused by error or fraud, and thus to develop the basis required for the design and implementation of the efforts to be made in consideration of such risks of material misstatement.
The 3 basic stages of any audit process can be summarized as follows: Gathering information about the enterprise and the environment it operates in with a view to identifying and assessing any audit risks applicable; gathering audit evidence through the execution of the audit procedures; and finally, evaluating the quality and timing of the audit procedures, and reviewing the audit results.
- Activities preceding the audit
These include the administrative procedures carried out in the beginning of the audit.
- Risk assessment and planning
The audit teams implement risk assessment procedures to serve as the basis of the assessment of the “material misstatement” risks regarding the financial statements and the management’s assertions, and to determine any error-fraud factors. The goal is to get a better understanding of the enterprise including its internal controls, and the environment it operates in. Analytical procedures, observation and investigation procedures are executed for risk assessment, and meetings are held with the applicable management tiers.
- Management’s assertions:
The management’s statements included in the financial statements, explicitly or otherwise, and employed by the auditor to discern and analyze various potential inaccuracies, are reviewed.
- Covering risks:
The audit activities are executed by the audit teams gathering adequate and applicable audit evidence to cover any material misstatement risks concerning the financial statements or the assertions therein and implementing applicable audit procedures regarding the risks.
- Evaluation and conclusion:
At this stage, the procedures to conclude the analysis and to come up with an explicit opinion regarding the overall financial statements would take place. These procedures are composed of the following tasks:
- Application of the analytical procedures to come up with a conclusion regarding the financial statements as a whole
- Assessment of the audit evidence gathered
- Assessment of the misstatements identified, including the omitted points
- Assessment of the financial statements with reference to all material issues, to see if they were drawn up with the applicable conceptual financial reporting framework or not
- Execution of the audit procedures regarding the events which took place after the balance sheet date
- Execution of required procedures on comparative financial statements
- Obtaining management’s statements regarding the results of the independent audit process
- Reporting and communication:
The audit report is produced and submitted to the management. Management, the members of the corporate management structures, and other stakeholders are contacted to engage in an assessment of the conclusions of the audit report. The additional information as well as other pieces of data provided in the operating report would be checked for accuracy.