Audits

The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework, which enhances the degree of confidence that intended users can place in the financial statements. 

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FREQUENTLY ASKED QUESTIONS (FAQ) ABOUT AUDITS

What is the purpose of an audit?

The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework, which enhances the degree of confidence that intended users can place in the financial statements. 

What are the objectives of an audit?

The overall objectives of the auditor, in conducting an audit of financial statements, are to 

In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor's report is insufficient in the circumstances for purposes of reporting to the intended users of the financial statements, GAAS require that the auditor disclaim an opinion or withdraw from the engagement, when withdrawal is possible under applicable law or regulation. 

Does an unmodified (i.e., clean) audit opinion mean that the financial statements are perfectly accurate?

No. As the basis for the auditor's opinion, auditing standards require the auditor to obtain "reasonable assurance" about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high, but not absolute, level of assurance. Reasonable assurance is not an absolute level of assurance because there are inherent limitations of an audit that result in most of the audit evidence, on which the auditor draws conclusions and bases the auditor's opinion, being persuasive rather than conclusive. 

Will all transactions and account balances of the financial statements be verified/tested during an audit?

No. The concept of materiality is applied by the auditor when both planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and uncorrected misstatements, if any, on the financial statements. In general, misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. Judgments about materiality are made in light of surrounding circumstances, and involve both qualitative and quantitative considerations. These judgments are affected by the auditor's perception of the financial information needs of users of the financial statements, and by the size or nature of a misstatement, or both. The auditor's opinion addresses the financial statements as a whole. Therefore, the auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by fraud or error, that are not material to the financial statements as a whole, are detected.

What is the general process for performing an audit?

In general, the auditor will

The auditor also may have certain other communication and reporting responsibilities to users, management, those charged with governance, or parties outside the entity, regarding matters arising from the audit. These responsibilities may be established by GAAS or by applicable law or regulation. 

Is an auditor required to be independent?

Yes. The auditor must be independent of the entity when performing an engagement in accordance with GAAS unless (a) GAAS provides otherwise or (b) the auditor is required by law or regulation to accept the engagement and report on the financial statements. When the auditor is not independent and neither (a) nor (b) are applicable, the auditor is precluded from issuing a report under GAAS. 

What preconditions must exist before the auditor can accept an engagement?

In order to accept an audit engagement, the auditor must determine that:

In addition, the Auditor will speak with the predecessor auditor, if applicable, to determine whether to accept the engagement; such discussion topics include:

What will be included in the Engagement Letter (i.e., the contract between the auditor and the entity under audit)?

The agreed-upon terms of the audit engagement will be documented in an audit engagement letter or other suitable form of written agreement and will include the following: 

What quality control policies does the Auditor follow to ensure that the audit complies with professional standards and applicable legal and regulatory requirements?

The firm has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that:

To do so, the firm designs and implements quality control policies to cover the following areas:

What documentation does the Auditor include in the audit file?

The auditor prepares audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand 

The auditor will assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis, no later than 60 days following the report release date. The audit file will be retained for at least five years from the report release date. 

What procedures does the Auditor perform around detecting fraud?

The primary responsibility for the prevention and detection of fraud rests with the management and those charged with governance of the entity. The Auditor is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error. In order to identify and assess the risks of material misstatement due to fraud and in designing procedures to detect such misstatement, the Auditor will:

What procedures does the Auditor perform around whether the entity has complied with applicable laws and regulations?

It is the responsibility of management, with the oversight of those charged with governance, to ensure that the entity's operations are conducted in accordance with the provisions of laws and regulations. The Auditor is required to identify material misstatement of the financial statements due to noncompliance with laws and regulations. However, the auditor is not responsible for preventing noncompliance and cannot be expected to detect noncompliance with all laws and regulations. The Auditor's procedures include the following:

What does the Auditor communicate to those charged with governance (e.g., the board of directors)?

Recognizing the importance of effective two-way communication in an audit of financial statements, the Auditor is required to communicate the following to an appropriate person(s) within the governance structure:

At the beginning of the audit:

After the audit is completed:

What does the auditor communicate to management regarding the entity's internal controls?

The auditor will appropriately communicate to those charged with governance and management deficiencies in internal control that the auditor has identified during the audit and that, in the auditor's professional judgment, are of sufficient importance to merit their respective attentions. Such communications will be made in writing within 60 days following the auditor's report release date, and will include the following:

What procedures does the Auditor perform when planning the audit?

In developing the audit plan, the auditor will establish an overall audit strategy that sets the scope, timing, and direction of the audit by doing the following:

What procedures does the auditor perform when gaining an understanding of the entity and its environment and assessing the risks of material misstatement?

The auditor is required to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity's internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.  To do so, the auditor will 

Through these methods, the auditor will gain an understanding of and document the following:

Based on this information, the auditor will identify and assess the risk of material misstatement at the financial statement and assertion levels, and determine whether any risks are "significant" or those for which substantive procedures alone would not be sufficient as a response.

How does the auditor apply materiality in planning and performing the audit?

The concept of materiality is applied by the auditor both in planning and performing the audit; evaluating the effect of identified misstatements on the audit and the effect of uncorrected misstatements, if any, on the financial statements; and in forming the opinion in the auditor's report.  In planning the audit, the auditor makes judgments about misstatements that will be considered material. These judgments provide a basis for determining the nature and extent of risk assessment procedures; identifying and assessing the risks of material misstatement; and determining the nature, timing, and extent of further audit procedures. 

The materiality determined when planning the audit does not necessarily establish an amount below which uncorrected misstatements, individually or in the aggregate, will always be evaluated as immaterial. The circumstances related to some misstatements may cause the auditor to evaluate them as material even if they are below materiality. Therefore, when evaluating the effect on the financial statements of all uncorrected misstatements, the auditor considers not only the size but also the nature of uncorrected misstatements, and the particular circumstances of their occurrence.

How does the auditor design and implement responses to identified risks of material misstatement and evaluate the audit evidence obtained in an audit of financial statements?

In designing audit procedures to be performed, the auditor considers the reasons for the assessed risk of material misstatement and the likelihood of material misstatement, then obtains more persuasive audit evidence the higher the auditor's assessment of risk. The auditor's procedures fall into two categories: tests of controls and substantive procedures.

Based on the audit procedures performed and the audit evidence obtained, the auditor will evaluate, before the conclusion of the audit, whether the assessments of the risks of material misstatement at the relevant assertion level remain appropriate, and whether sufficient appropriate audit evidence has been obtained. If the auditor has not obtained sufficient appropriate audit evidence about a relevant assertion, the auditor will attempt to obtain further audit evidence. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should express a qualified opinion or disclaim an opinion on the financial statements. 

What additional procedures are performed when the entity uses a service provider? 

Many entities outsource aspects of their business activities to organizations that provide services ranging from performing a specific task under the direction of the entity to replacing entire business units or functions of the entity. Services provided by a service organization are relevant to the audit of a user entity's financial statements when those services and the controls over them affect the user entity's information system, including related business processes, relevant to financial reporting. 

The auditor will first obtain an understanding of how the user entity uses the services of a service organization in the user entity's operations. The auditor will then evaluate the design and implementation of relevant controls at the user entity that relate to the services provided by the service organization, including those that are applied to the transactions processed by the service organization. To do this, the auditor will perform one of the following procedures:

Based on this information, the auditor will then assess the risk of material misstatement related to the classes of transactions relevant to the service organization's procedures. In responding to assessed risks, the auditor will determine whether sufficient appropriate audit evidence concerning the relevant financial statement assertions is available from records held at the user entity and, if not, perform further audit procedures to obtain sufficient appropriate audit evidence or use another auditor to perform those procedures at the service organization on the user auditor's behalf .

What happens if misstatements are identified in the audit?

Throughout the audit, the auditor will accumulate misstatements identified during the audit, other than those that are clearly trivial. The auditor will then communicate on a timely basis with the appropriate level of management all misstatements accumulated during the audit, and request management to correct those misstatements. If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor will obtain an understanding of management's reasons for not making the corrections and will take that understanding into account when evaluating whether the financial statements as a whole are free from material misstatement. The auditor will then determine whether uncorrected misstatements are material, individually or in the aggregate, based on the size and nature of the misstatements, both in relation to particular classes of transactions, account balances, or disclosures and the financial statements as a whole, and the particular circumstances of their occurrence and the effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances, or disclosures and the financial statements as a whole.  

What are the different types of audit procedures that the auditor performs?

The auditor designs and performs audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence. Sufficiency is the measure of the quantity of audit evidence. Appropriateness is the measure of the quality of audit evidence (that is, its relevance and reliability in providing support for the conclusions on which the auditor's opinion is based). Relevance relates to the logical connection with, or bearing upon, the purpose of the audit procedure and, when appropriate, the assertion under consideration. The reliability of information to be used as audit evidence and, therefore, of the audit evidence itself is influenced by its source and nature and the circumstances under which it is obtained, including the controls over its preparation and maintenance, when relevant. 

 The different types of audit procedures include the following:

What specific procedures does the auditor perform around investments in securities and derivative instruments?

When investments in securities are valued based on an investee's financial results, excluding investments accounted for using the equity method of accounting, the auditor will obtain sufficient appropriate audit evidence in support of the investee's financial results, as follows: 

With respect to investments in derivative instruments and securities measured or disclosed at fair value, the auditor will 

The auditor will also evaluate management's conclusion (including the relevance of the information considered) about the need to recognize an impairment loss for a decline in a security's fair value below its cost or carrying amount and obtain sufficient appropriate audit evidence supporting the amount of any impairment adjustment recorded, including evaluating whether the requirements of the applicable financial reporting framework have been complied with. The auditor will also obtain sufficient appropriate audit evidence about the amount of unrealized appreciation or depreciation in the fair value of a derivative that is recognized or that is disclosed because of the ineffectiveness of a hedge, including evaluating whether the requirements of the applicable financial reporting framework have been complied with .

What specific procedures does the auditor perform around inventory?

If inventory is material to the financial statements, the auditor will obtain evidence regarding the existence and condition of inventory by 

If attendance at physical inventory counting is impracticable, the auditor will perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory (e.g., by inspecting purchase and sales invoices).

In addition, if inventory under the custody and control of a third party is material to the financial statements, the auditor will 

What specific procedures does the auditor perform around litigation, claims, and assessments?

The auditor will design and perform audit procedures to identify litigation, claims, and assessments involving the entity that may give rise to a risk of material misstatement; such procedures might include the following:

If the audit procedures above indicate that actual or potential litigation, claims, or assessments exist, the auditor will seek direct communication with the entity's external legal counsel through a letter of inquiry prepared by management and sent by the auditor requesting the entity's external legal counsel to communicate directly with the auditor. 

What responsibilities does the auditor have around performing external confirmations?

Audit evidence is more reliable when it is obtained from independent sources outside the entity, when it is obtained directly by the auditor, and when it exists in documentary form, whether paper, electronic, or other medium.  As such, the auditor will:

What responsibilities does the auditor have regarding opening balances in an initial audit engagement?

To obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period's financial statements, the auditor will:


What responsibilities does the auditor have when performing substantive analytical procedures?

When designing and performing analytical procedures, the auditor will

If analytical procedures performed in accordance with this section identify fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount, the auditor will investigate such differences by 


What responsibilities does the auditor have when sampling a population for testing?

When designing an audit sample, the auditor will

The auditor will then perform audit procedures, appropriate to the purpose, on each item selected. If the audit procedure is not applicable to the selected item, the auditor will perform the procedure on a replacement item. If the auditor is unable to apply the designed audit procedures, or suitable alternative procedures, to a selected item, the auditor will treat that item as a deviation .

The auditor will investigate the nature and cause of any deviations or misstatements identified and evaluate their possible effect on the purpose of the audit procedure and on other areas of the audit; and project the results of audit sampling to the population. The auditor will then evaluate the results of the sample, including sampling risk, and determine whether the use of audit sampling has provided a reasonable basis for conclusions about the population that has been tested.

What responsibilities does the auditor have when auditing accounting estimates (e.g., fair value estimates)?

Some financial statement items cannot be measured precisely but can only be estimated. Such financial statement items are referred to as accounting estimates. The nature and reliability of information available to management to support the making of an accounting estimate varies widely, which thereby affects the degree of estimation uncertainty associated with accounting estimates. The degree of estimation uncertainty affects, in turn, the risks of material misstatement of accounting estimates, including their susceptibility to unintentional or intentional management bias.

When performing risk assessment procedures, the auditor will obtain an understanding of the following:

Based on the assessed risks of material misstatement, the auditor will

What responsibilities does the auditor have when considering the entity's related party relationships and transactions?

Because related parties are not independent of each other, financial reporting frameworks establish specific accounting and disclosure requirements for related party relationships, transactions, and balances to enable users of the financial statements to understand their nature and actual or potential effects on the financial statements. Therefore, the auditor has a responsibility to perform audit procedures to identify, assess, and respond to the risks of material misstatement arising from the entity's failure to appropriately account for or disclose related party relationships, transactions, or balances. 

The auditor will inquire of management and others within the entity regarding the following :

The auditor will also inspect the following for indications of the existence of related party relationships or transactions that management has not previously identified or disclosed to the auditor:

In forming an opinion on the financial statements, the auditor will evaluate the following:

What responsibilities does the auditor have relating to subsequent events and subsequently discovered facts in an audit of financial statements?

Financial statements may be affected by certain events that occur after the date of the financial statements (e.g., those that provide evidence of conditions that existed at the date of the financial statements, or those that provide evidence of conditions that arose after the date of the financial statements).  As such, the auditor will perform audit procedures designed to obtain sufficient appropriate audit evidence that all subsequent events that require adjustment of, or disclosure in, the financial statements have been identified; such procedures will cover the period from the date of the financial statements to the date of the auditor's report or as near as practicable thereto. If, as a result of the procedures performed, the auditor identifies subsequent events that require adjustment of, or disclosure in, the financial statements, the auditor will determine whether each such event is appropriately reflected in the financial statements in accordance with the applicable financial reporting framework.

The auditor is not required to perform any audit procedures regarding the financial statements after the date of the auditor's report. However, if a subsequently discovered fact becomes known to the auditor before the report release date, the auditor will discuss the matter with management and, when appropriate, those charged with governance, and determine whether the financial statements need revision.

If a subsequently discovered fact becomes known to the auditor after the report release date, the auditor will discuss the matter with management and, when appropriate, those charged with governance, and determine whether the financial statements need revision. If the audited financial statements (before revision) have been made available to third parties, the auditor will assess whether the steps taken by management are timely and appropriate to ensure that anyone in receipt of those financial statements is informed of the situation, including that the audited financial statements are not to be relied upon. 

What does the client agree to in the representation letter?

Written representations are a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. The auditor will request management to provide a written representation that

AUDIT STANDARDS

AU-C Section 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With GAAS

AU-C Section 210: Terms of Engagement

AU-C Section 220: Quality Control for an Engagement Conducted in Accordance with GAAS

AU-C Section 230: Audit Documentation

AU-C Section 240: Consideration of Fraud in a Financial Statement Audit

AU-C Section 250: Consideration of Laws and Regulations in an Audit of Financial Statements 

AU-C Section 260: The Auditor's Communication with Those Charged with Governance

AU-C Section 265: Communicating Internal Control Related Matters Identified in an Audit 

AU-C Section 300: Planning an Audit 

AU-C Section 315: Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement 

AU-C Section 320: Materiality in Planning and Performing an Audit 

AU-C Section 330: Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained 

AU-C Section 402: Audit Considerations Relating to an Entity Using a Service Organization 

AU-C Section 450: Evaluation of Misstatements Identified During the Audit 

AU-C Section 500: Audit Evidence 

AU-C Section 501: Audit Evidence—Specific Considerations for Selected Items 

AU-C Section 505: External Confirmations 

AU-C Section 510: Opening Balances—Initial Audit Engagements, Including Reaudit Engagements 

AU-C Section 520: Analytical Procedures 

AU-C Section 530: Audit Sampling 

AU-C Section 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures 

AU-C Section 550: Related Parties 

AU-C Section 560: Subsequent Events and Subsequently Discovered Facts 

AU-C Section 570: The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern 

AU-C Section 580: Written Representations 

AU-C Section 585: Consideration of Omitted Procedures After the Report Release Date 

AU-C Section 600: Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) 

AU-C Section 610: Using the Work of Internal Auditors 

AU-C Section 620: Using the Work of an Auditor’s Specialist 

AU-C Section 700: Forming an Opinion and Reporting on Financial Statements 

AU-C Section 705: Modifications to the Opinion in the Independent Auditor’s Report 

AU-C Section 706: Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor’s Report 

AU-C Section 708: Consistency of Financial Statements 

AU-C Section 720: Other Information in Documents Containing Audited Financial Statements 

AU-C Section 725: Supplementary Information in Relation to the Financial Statements as a Whole 

AU-C Section 730: Required Supplementary Information 

AU-C Section 800: Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks 

AU-C Section 805: Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement 

AU-C Section 806: Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements 

AU-C Section 810: Engagements to Report on Summary Financial Statements 

AU-C Section 905: Alert That Restricts the Use of the Auditor's Written Communication 

AU-C Section 910: Financial Statements Prepared in Accordance With a Financial Reporting Framework Generally Accepted in Another Country 

AU-C Section 915: Reports on Application of Requirements of an Applicable Financial Reporting Framework 

AU-C Section 920: Letters for Underwriters and Certain Other Requesting Parties 

AU-C Section 925: Filings With the U.S. Securities and Exchange Commission Under the Securities Act of 1933 

AU-C Section 930: Interim Financial Information 

AU-C Section 935: Compliance Audits 

AU-C Section 940: An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements  

AU-C Section 945: Auditor Involvement With Exempt Offering Documents