How does an audit engagement work?

Posted on Oct 13, 2021

Whether you are a manager, a director, a creditor or an investor, the audit engagement is a report that will give you a lot of comfort regarding the integrity of a company's financial information. In fact, it is the engagement that provides the highest level of assurance regarding the credibility of the information provided in the financial statements.

During this in-depth examination, the chartered professional accountant (CPA auditor) with a public accounting license certifies that the financial statements do not contain any significant anomalies. He also makes appropriate recommendations to management to improve the quality of the audited companies. This provides users of the financial statements with increased confidence regarding the financial position of the company.

In this article, we explore the different standards of the audit mission, how it is conducted and the difference between an internal and external audit.

What are the audit standards?

In order to make the auditor's report more reliable, informative and useful for informed decision-making, there is a set of standards that govern the audit of each entity.

All auditors must share high auditing standards. Canadian Auditing Standards (CAS) are intended to protect the public interest by setting out ground rules for audit engagements. Strict adherence to these standards minimizes the risk of practitioner error that could lead to misinterpretation by the user.

What are the audit assertions?

According to the Office québécois de la langue française, the assertions contained in financial statements are: a set of statements made implicitly or explicitly concerning the recognition, measurement, presentation and communication of the various elements of the financial statements.

The auditor designs and performs audit procedures to address the accounting assertions. If all assertions are met, the presentation of the financial statements is considered reliable and consistent.

The assertions used by the auditor relate to the following categories:

  • categories of operations
  • account balances
  • the presentation and information provided

The assertions regarding the end-of-period account balances are as follows:

  • Existence: The assets, liabilities and equity presented exist;
  • Completeness: All assets, liabilities and equity are presented;
  • Valuation: All assets, liabilities and equity are appropriately valued and any necessary value adjustments have been recorded;
  • Rights and obligations: The entity has the rights corresponding to the assets presented and the liabilities correspond to its obligations
  • Classification and presentation: Assets, liabilities and equity are presented under the proper accounts and all required information is disclosed through notes to the financial statements.

The assertions regarding the transactions that occurred during the fiscal period are as follows:

  • Reality: All transactions presented occurred
  • Completeness: All transactions that have occurred are presented
  • Accuracy: Transactions are reported at the correct amount
  • Separation of periods: Transactions are presented in the correct financial period
  • Classification and presentation: Transactions are posted to the correct accounting accounts

Differences between an internal and external audit

Although internal and external auditing share some similarities, they differ in certain points:

The status of the auditor

The internal auditor is a member of the company's staff, while the external auditor is an independent professional working within an accounting firm.

The beneficiaries of the audit

The internal audit is carried out for the benefit of managers and the direction (internal users), while the external audit is intended for any stakeholder (external users) with an interest in the company: shareholders, creditors, authorities, customers and suppliers.

The objectives of the audit

The objective of the internal audit is to analyze the operational, financial reporting and risk management processes in order to make the necessary recommendations to comply with the company's standards.

The external audit aims to certify the reliability of the company's financial statements. To achieve this objective, the external auditor is also called upon to examine both the transactions and the company's internal control process.

The scope of application

The scope of the external audit covers all elements involved in the preparation of the financial statements.

The scope of internal auditing is broader, as it includes all company functions (production, procurement, recruitment, etc.), both financial and operational. The scope of the internal audit is determined by the audit committee, which reports to the board of directors. The external audit is governed by the standards of practice of public accounting.

Periodicity of audits

External auditors are involved in certifying annual and quarterly financial statements. Internal auditors work as part of a team following an engagement plan throughout the year.

Difference between notice to reader, review engagement and audit

Conduct of an audit assignment

Whether it is for an internal or external audit engagement, the CPA must prepare his or her audit plan according to the objectives and structure of the company being audited.

The mission has four main phases:

  • Mission letter
  • Planning
  • Implementation
  • Recommendations

These phases are divided into five steps:

1 - Acceptance of the mission

This step mainly concerns the external audit engagement. Acceptance of the assignment must be documented by signing an engagement letter in which the auditor presents his or her responsibilities, those of management, the limits of the assignment and his or her ability to complete the assignment. 2.

2 - Orientation and planning

The auditor should adopt the method most appropriate for the engagement, beginning with :

  • General knowledge of the company and its environment
  • The drafting of a mission plan to specify the scope and schedule of the work

3 - Assessment of internal control

The initial assessment of internal control identifies the strengths and weaknesses that will be addressed during the audit process. The auditor should, therefore, provide recommendations for corrective actions to improve deficient controls.

4 - Analytical and corroborative procedures

This step consists of verifying the figures in the annual accounts with analytical procedures and supporting documents. For this purpose, the auditor performs the following procedures:

  • Physical observation
  • External confirmations of account balances
  • Review of supporting internal documents (contracts, invoices, receiving slips, delivery slips, payroll records, etc.)
  • Analytical processes: reasonability analysis, comparisons, reconciliations, management interviews, etc.

5 - Reports

At a meeting with management, the auditor presents his/her report, which should include:

  • His/her opinion on the presentation of the financial information
  • Internal control risks and weaknesses
  • Recommendations

Audit engagements are becoming increasingly important as a means of improving the efficiency of the internal process and ensuring the company's image to external stakeholders.

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