Audit & Assurance Service

Audit & Assurance Service

Definition of an audit

In general, an audit consists of evaluation of a subject matter with a view to express an opinion on whether the subject matter is fairly presented.

There are different types of audits that can be performed depending on the subject matter under consideration, for example:

  • Audit of financial statements.
  • Compliance audit
  • Audit of internal control over financial reporting

Audit of Financial Statements 

These are undertaken to form an independent opinion on the financial statements of a company. Companies prepare their financial statements in accordance with a framework of generally accepted accounting principles (GAAP) relevant to the jurisdictions where they operate, also referred to broadly as accounting standards or international financial reporting standards.

We usually evaluate the fair presentation of those financial statements using a framework of generally accepted auditing standards (GAAS) which set out requirements and guidance on how to conduct an audit, also referred to simply as auditing standards.

Purpose of Financial Statements  Audit

Companies produce financial statements that provide information about their financial position and performance. This information is used by a wide range of stakeholders (e.g., investors) in making economic decisions. Typically, those that own a company, the shareholders, are not those that manage it. Therefore, the owners of these companies (as well as other stakeholders, such as banks, suppliers and customers) take comfort from independent assurance that the financial statements fairly present, in all material respects, the company’s financial position and performance.

To enhance the degree of confidence in the financial statements, we are engaged to examine the financial statements, including related disclosures produced by management, to give their professional opinion on whether they fairly reflect, in all material respects, the company’s financial performance over a given period(s) (an income statement) and financial position as of a particular date(s) (a balance sheet) in accordance with relevant GAAP. In many cases this is required by law.

The Audit Process

Professional Judgement and Scepticism

 In undertaking an audit, we consider the mandatory and detailed GAAP that set out how a company should account for and disclose even the most complex transactions. However, many of the issues that arise in an audit—particularly those involving valuations or assumptions about the future—involve estimates to which we will usually bring our professional judgement and experience to bear. Indeed, many accounting measures can only ever be estimates that are inevitably based on imperfect knowledge or dependent upon future events. For example, if a company was involved in legal action, it would need to estimate the amount at which the case would be resolved; or if it was planning to sell a plant & machinery it owns, it would have to estimate the sale price. In such cases, we may determine the reasonable range of possible values, and consider whether the company’s estimates lie within that range. The uncertainties that affect this judgement need to be disclosed and—if they could have a material effect—we may include an emphasis of matter paragraph in their report. These are areas where we use our experience and skill to reach an opinion on the financial statements. The words ‘opinion’ and ‘true and fair’ are deliberately chosen to make clear that judgement is involved. They underline the fact that our report is not a guarantee but rather reflects our professional judgement based on work performed in accordance with established standards.

Auditing standards also require us to maintain professional scepticism—an attitude that includes a questioning mind and a critical assessment of audit evidence. The ability to think in a critical manner about how the current economic environment may affect the company’s financial statements, to identify significant risks of material misstatement, to develop appropriate audit responses, to obtain and assess the sufficiency and appropriateness of audit evidence and to reach well-informed professional judgements is integral to performing a quality audit.

Phases of an Audit

Audit process can be summarized in 5 phases:

Planning — Initial planning activities include our formal acceptance of the client by the audit firm, verifying compliance with independence requirements, building the audit team and performing other procedures to determine the nature, timing and extent of procedures to be performed in order to conduct the audit in an effective manner.

Risk Assessment — This involves the use of our knowledge of the business, the industry, and the environment in which the company operates to identify and assess the risks that could lead to a material misstatement in the financial statements. Those risks often involve a high degree of judgement and require our significant level of knowledge and experience, particularly on large and complex engagements. This requires a good understanding of the business and its risks, which is typically built up over several years as part of our knowledge. It also means that the need to be well informed about the industry and wider environment in which the company operates, and about what its competitors, customers, suppliers and—where relevant—regulators are doing.

Audit Strategy and Plan — Once the risks have been assessed, we develop an overall audit strategy and a detailed audit plan to address the risks of material misstatement in the financial statements. Among other things, this includes designing a testing approach to various financial statement items, deciding whether and how much to rely on the company’s internal controls, developing a detailed timetable, and allocating tasks to the audit team members. The audit strategy and plan is continually reassessed throughout the audit and adjusted to respond to new information obtained about the business and its environment.

Evidence Gathering — We apply professional skepticism and judgement when gathering and evaluating evidence through a combination of testing the company’s internal controls, tracing the amounts and disclosures included in the financial statements to the company’s supporting books and records, and obtaining external third-party documentation. This includes testing management’s material representations and the assumptions they used in preparing their financial statements. Independent confirmation may be sought for certain material balances such as cash.

Finalization—Finally, we exercise professional judgement and form their overall conclusion, based on the tests they have carried out, the evidence they have obtained and the other work they have done. This conclusion forms the basis of the audit opinion. As auditors, we interact with the company during all the phases of the audit process listed above. There will be continuing discussions and meetings with management, both at operational and senior executive levels, and with those charged with governance. Using their professional skepticism and judgement, auditors challenge management’s assertions regarding the numbers and disclosures in the financial statements.

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Windfalls & Partners Consulting is an indigenous professional services and management consulting firm with business coverage in Accounting, Audit, Tax & Business Advisory.