University of Economics

KIỂM TO Faculty of Accounting

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CHAPTER 5

AUDIT PROCESS
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INTRODUCTION
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Audit process

Planning phase

Implementing phase

Completing phase
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The role of audit planning
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• Helping the auditor to devote appropriate attention
to important areas of the audit.
• Helping the auditor identify and resolve potential problems on a
timely basis.
• Helping the auditor properly organize and manage the audit
engagement so that it is performed in an effective and efficient
manner.
• Assisting in the selection of engagement team members with
appropriate levels of capabilities and competence to respond to
anticipated risks, and the proper assignment of work to them.
• Facilitating the direction and supervision of engagement team
members and the review of their work.
• Assisting, where applicable, in coordination of work done by
auditors of components and experts. 3
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PLANNING PHASE
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Audit planning involves four things, all of which should be done
early in the audit:
1. The auditor decides whether to accept a new client or continue
serving an existing one. This determination is typically made by an
experienced auditor who is in a position to make important decisions.
The auditor wants to make this decision early, before incurring any
significant costs that cannot be recovered.
2. The auditor identifies why the client wants or needs an audit. This
information is likely to affect the remaining parts of the planning
process.
3. To avoid misunderstandings, the auditor obtains an understanding
with the client about the terms of the engagement.
4. The auditor develops an overall strategy for the audit, including
engagement staffing and any required4 audit specialists.
 Client Acceptance and Continuance
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New Client Investigation
Before accepting a new client, most CPA firms investigate the
company to determine its acceptability. They do this by examining, to
the extent possible, the prospective client’s standing in the business
community, financial stability, and relations with its previous CPA
firm.
Continuing Clients
Many CPA firms evaluate existing clients annually to determine
whether there are reasons for not continuing to do the audit. Previous
conflicts over the appropriate scope of the audit, the type of opinion
to issue, unpaid fees, or other matters may cause the auditor to
discontinue association. The auditor may also drop a client after
determining the client lacks integrity.
=>Investigating new clients and reevaluating existing ones is an
essential part of deciding acceptable 5audit risk.
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PLANNING PHASE
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Audit strategy (overall audit plan)

Once the auditor has gained a thorough understanding of the client
and its business, the audit strategy can be developed. That is, the
scope and conduct of the audit can be determined or more
specifically, plans can be made regarding:
-How much and what evidence to gather
-How and when this should be done

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PLANNING PHASE
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Audit strategy (overall audit plan)

The overall audit plan can be develop in board terms:
-The nature of audit procedures to be performed – in particular, the
expected emphasis to be placed on, respectively, testing
compliance with internal controls and substantive testing of
transactions and account balances
-The timing of audit procedures – the procedures expected to be
performed during the interim audit and the final audit
-The extent of audit procedures – the amount of audit evidence
expected to be collected in relation to each audit segment

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PLANNING PHASE
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The audit program

-The audit program operationalises the audit strategy.
-It sets out in detail the audit procedures to be performed in each
segment of the audit, indicating those to be performed during the
interim audit and those to be performed during the final audit.
-It frequently includes details of such things as the size of samples
to be tested and how the samples are to be selected.
-The audit program often lists audit procedures in the form of
instructions audit staff can follow. As the procedures are
performed, they are signed off by the staff member concerned and
cross-referenced to relevant audit working papers.

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 Planning an Audit and Designing an Audit Approach
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IMPLIMENTING PHASE
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In implementing phase, the auditor needs to accumulate sufficient

appropriate evidence to support the opinion issued.

Auditor need to:

-Gather evidences => performing AUDIT PROCEDURES

-Decide the sample size and sample items to select from the
population => conducting AUDIT SAMPLING

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Audit (1) Physical (8) Analytical

examination procedures
procedures

(2) (7)
Documentation Observation

Audit
procedures
(6)
(3)
Reperformance
Confirmation

(4) Inquiries of (5)

the client 11
Recalculation
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IMPLEMENTING PHASE
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Audit procedures – physical examination

Physical examination is the inspection or count by the auditor of a

tangible asset.

Physical examination is most often associated with inventory and

cash, but it is also applicable to the verification of securities, notes
receivable, and tangible fixed assets.

Physical examination is a direct means of verifying that an asset

actually exists (existence objective), and to a lesser extent whether
existing assets are recorded (completeness objective). In some
cases, it is also a useful method for evaluating an asset’s condition
or quality (valuation and allocation objective).
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 Audit procedures – physical examination
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• Be considered one of the most reliable and

useful types of audit evidence
Advantages
• Be an objective means of ascertaining both
the quantity and the description of the asset
• Be not sufficient evidence to verify that
existing assets are owned by the client
(rights and obligations objective)
Disadvantages
• In many cases the auditor is not qualified to
judge qualitative factors such as
obsolescence or authenticity (realizable
value objective)
• Just applied for tangible asset
• Costly and time-consuming
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 Audit procedures – documentation
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Documentation is the auditor’s inspection of the client’s documents

and records to substantiate the information that is, or should be,
included in the financial statements.

Documentation includes the examination and matching of

documents, books and related documents:

-The matching of financial statements with accounting records

-The matching of accounting books with relevant documents

-The matching of the bookkeeping and the other books

-The matching of documents and relating documents

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 Audit procedures – documentation
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Vouching
- Vouching of items in the financial statements back to the original
documents to ensure that they are valid and have been correctly
recorded.
- It tests for overstatement.
Finish Occurrence objective Start

Vouchers Financial
Journal Ledger
statement

Start Completeness objective Finish

Tracing
- Tracing transactions from their beginning through to the financial
statements to ensure that no items were missed out.
- It tests for understatement 15
 Audit procedures – documentation
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• Be widely used as evidence in audits because it
is usually readily available at a relatively low
cost.
Advantages
• Sometimes, it is the only reasonable type of
evidence available.
• Be useful evidence for the auditor to verify the
accuracy of the client’s records
• Auditors should consider the reliability and the
authenticity of documentation because the
Disadvantages documents may be repaired or tampered
• Reliable evidence depends on whether it is
internal or external and, when internal, whether it
was created and processed under conditions of
effective internal16control
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Audit procedures – confirmation

Confirmation describes the receipt of a direct written response

from a third party verifying the accuracy of information that was
requested by the auditor.

The response may be in electronic or paper form.

The request is made to the client, and the client asks the third
party to respond directly to the auditor.

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 Audit procedures – Confirmation
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 Audit procedures – Confirmation
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Type of confirmation letter

Non-Blank Blank
Specify the confirmed figure and Not specify the confirmed figure
require the recipient to fill in the but require the recipient to fill in
confirmation letter whether this the confirmation letter what the
figure is correct or not figure is ore write other
comments on the letter
Positive Negative
Required response Just required
in all cases response when the
confirmed figure is
not correct

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 Audit procedures – Confirmation
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• Because confirmations come from sources
independent of the client and provide highly
reliable evidence, they are a highly regarded and
Advantages often-used type of evidence => To be considered
reliable evidence, confirmations must be
controlled by the auditor from the time they are
prepared until they are returned.
• Be useful in verifying many types of information.

• Confirmations are relatively costly to obtain and

may cause some inconvenience to those asked
Disadvantages to supply them.
• Costly and time-consuming
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 Audit procedures – Inquiry
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Definition:
Inquiry is the obtaining of written or oral information from the client
in response to questions from the auditor.

Advantage:
Considerable evidence is obtained from the client through inquiry
Disadvantage:
It usually cannot be regarded as conclusive because it is not from
an independent source and may be biased in the client’s favor
=> it is normally necessary to obtain corroborating evidence
through other procedures
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 Audit procedures – Recalculation
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ÁN Definition:
Recalculation involves rechecking a sample of calculations made
by the client.
Rechecking client calculations consists of testing the client’s
arithmetical accuracy and includes such procedures as extending
sales invoices and inventory, adding journals and subsidiary
records, and checking the calculation of depreciation expense and
prepaid expenses.
Advantage:
Highly reliable evidence in term of mathematical accuracy
Disadvantage:
The calculation and allocation are sometimes complex, time
consuming, especially when the client has large scale and diverse
business activities. 22
 Audit procedures – Reperformance
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Definition:
Reperformance is the auditor’s independent tests of client
accounting procedures or controls that were originally done as part
of the entity’s accounting and internal control system.
Whereas recalculation involves rechecking a computation,
reperformance involves checking other procedures.
For example
The auditor may compare the price on an invoice to an approved
price list, or may reperform the aging of accounts receivable.
The auditor to recheck transfers of information by tracing
information included in more than one place to verify that it is
recorded at the same amount each time.
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IMPLEMENTING PHASE
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Audit procedures – Observation
Definition:
Observation is the use of the senses to assess client activities.
Throughout the engagement with a client, auditors have many
opportunities to use their senses—sight, hearing, touch, and smell
—to evaluate a wide range of items.
Advantage:
Observation is useful in most parts of the audit.
Disadvantage:
Observation is rarely sufficient by itself because of the risk of client
personnel changing their behavior because of the auditor’s
presence => Therefore, it is necessary to follow up initial
impressions with other kinds of corroborative
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evidence.
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Audit procedures – Analytical procedure

Definition:
Analytical procedures use comparisons and relationships to assess
whether account balances or other data appear reasonable
compared to the auditor’s expectations.
For example, an auditor may compare the gross margin percent in
the current year with the preceding year’s.
Analytical procedures are defined by auditing standards as
evaluations of financial information made by a study of plausible
relationships among financial and nonfinancial data.
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IMPLEMENTING PHASE
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Audit procedures – Analytical procedure

Analytical procedures are used extensively in practice, and are

required during the planning and completion phases on all audits.

The purposes of analytical procedures:

•Understand the Client’s Industry and Business
•Assess the Entity’s Ability to Continue as a Going Concern
•Indicate the Presence of Possible Misstatements in the Financial
Statements
•Reduce Detailed Audit Tests
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IMPLEMENTING PHASE
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Audit procedures – Analytical procedure

Five types of analytical procedures

1. Compare client data with industry data
2. Compare client data with similar prior-period data
3. Compare client data with client-determined expected results
4. Compare client data with auditor-determined expected results
5. Compare client data with expected results using nonfinancial
data

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 Audit procedures – Analytical procedure
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The analytical methods

1.Ratio Analysis
Ratios are expressed as one financial statement data in relation to
another.
2. Trend Analysis
Trend analysis refers to the comparison of a current balance with a
previous year's balance.
3. Reasonable Tests
Nonfinancial data for the current period is used to calculate an
expected amount for the account balance.
4. Model-Based Procedures
Model-based procedures use client-operating data and external
data, such as industry and economic information, to predict account
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balances for items under audit.
 Common financial ratios
Liquidity Activity Ratios
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Short-term Debt-Paying Ability

Short-term Debt-Paying Ability

Short-term Debt-Paying Ability

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Audit procedures – Analytical procedure

The effectiveness of analytical procedure depends

on:
•Nature of the assertion being tested
•Plausibility and predictability of the relationship in
the data
Advantages •Availability and reliability of the data used to
develop the expectation
•Precision of the expectation that the auditor
develops
•Rigor of the analytical
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procedure
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Audit procedures – Analytical procedure

• There must be reliable data for comparison

• Consistency is not necessarily conclusive – that
we are comparing with may all be wrong
Disadvantages • Good control procedures are necessary if we are
to rely on analytical procedure as a main audit
test
• Material items should not be tested using
analytical procedure alone
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IMPLEMENTING PHASE
Audit procedures – Example
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IMPLEMENTING PHASE
Audit procedures – Example
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Audit sampling
Audit sampling
Before these tests can be performed, the auditor needs to decide
for each audit procedure the sample size and sample items to
select from the population. When the auditor decides to select less
than 100 percent of the population for testing to make inferences
about the population, it is called audit sampling.

Representative sample
When selecting a sample from a population, the auditor strives to
obtain a representative sample. A representative sample is one
in which the characteristics in the sample are approximately the
same as those of the population. This means that the sampled
items are similar to the items not sampled.
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IMPLEMENTING PHASE
Audit sampling
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ÁN Example:
Assume a client’s internal controls require a clerk to attach a
shipping document to every duplicate sales invoice, but the clerk
fails to follow the procedure exactly 3 percent of the time.
•If the auditor selects a sample of 100 duplicate sales invoices and
finds three are missing attached shipping documents, the sample is
highly representative.
•If two or four such items are found in the sample, the sample is
reasonably representative.
•If no or many missing items are found, the sample is
nonrepresentative.
In practice, auditors never know whether a sample is
representative, even after all testing is complete => increase the
likelihood of a sample being representative by using care in
designing the sampling process, sample selection, and evaluation
of sample results. 36
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Audit sampling
Reason for audit sampling:

•Auditors only have responsibility to detect material misstatements,

not all misstatements.

•If auditors test all of population, instead of testing the sample, it will
costly and time-consuming but may not provide the absolute
certainty.

•The audit has been effective and efficient, this means that the
benefit is more than the cost.

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IMPLEMENTING PHASE
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Audit sampling
Sampling risk is the risk that an auditor reaches an incorrect
conclusion because the sample is not representative of the
population.
Sampling risk is an inherent part of sampling that results from
testing less than the entire population.
Auditors have two ways to control sampling risk:
•Adjust sample size, increasing sample size reduces sampling risk
•Use an appropriate method of selecting sample items from the
population, increasing the likelihood of representativeness

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Audit sampling
Nonsampling risk is the risk that audit tests do not uncover
existing exceptions in the sample.
The two causes of nonsampling risk are:
•The auditor’s failure to recognize exceptions because of
exhaustion, boredom, or lack of understanding of what to look for.
•Inappropriate or ineffective audit procedures.
Careful design of audit procedures, proper instruction,
supervision, and review are ways to control nonsampling risk.

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IMPLEMENTING PHASE
Audit sampling methods
KIỂM TO
ÁN Audit sampling methods can be divided into two
broad categories:
•Statistical sampling
•Nonstatistical sampling
Assume that an auditor selects a sample of 100 duplicate sales
invoices from a population, tests each to determine whether a
shipping document is attached, and determines that there are three
exceptions. Let’s look at those actions step-by-step:

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Audit sampling methods

Statistical sampling differs from nonstatistical sampling in that, by

applying mathematical rules, auditors can quantify (measure)
sampling risk in planning the sample (step 1) and in evaluating the
results (step 3). A 95 percent confidence level provides a 5 percent
sampling risk.

In nonstatistical sampling, auditors do not quantify sampling risk.

Instead, auditors select sample items they believe will provide the
most useful information, given the circumstances, and reach
conclusions about populations on a judgmental basis. For that
reason, the use of nonstatistical sampling is often termed
judgmental sampling. 41
IMPLEMENTING PHASE
Audit sampling methods
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Nonstatistical Sampling Statistical Sampling

Sample Determined by auditor Auditor judgment is quantified

size judgment and sample size determined by
probability theory

Sample Any method that the auditor The sample must be randomly
selection believe is representative of selected to give each item in
the population, either the population an equal chance
haphazard or random-based to be included in the sample
selection can be used

Evaluation Based on auditor judgment Statistical inference is used to

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Audit sampling selection
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Probabilistic sample selection
When using probabilistic sample selection, the auditor randomly
selects items such that each population item has a known
probability of being included in the sample. This process requires
great care and uses one of several methods discussed shortly.
Nonprobabilistic sample selection
In nonprobabilistic sample selection, the auditor selects sample
items using professional judgment rather than probabilistic
methods. Auditors can use one of several nonprobabilistic sample
selection methods.
Note: When statistical sampling is used, the sample must be a probabilistic one
and appropriate statistical evaluation methods must be used with the sample
results to make the sampling risk computations. Auditors may make nonstatistical
evaluations when using probabilistic selection, but it is never acceptable to evaluate
a nonprobabilistic sample using statistical methods.
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 IMPLEMENTING PHASE
Audit sampling selection
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Probabilistic sample selection Nonprobabilistic sample selection

Simple random sample selection Directed sample selection

Systematic sample selection Block sample selection

Probability proportional to size Haphazard sample selection

sample selection

Stratified sample selection

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Audit sampling selection

Probabilistic sample selection -Simple random sample
In a simple random sample, every possible combination of
population items has an equal chance of being included in the
sample.
Random numbers are a series of digits that have equal probabilities
of occurring over long runs and which have no identifiable pattern.
Auditors most often generate random numbers by using one of
three computer sample selection techniques: electronic
spreadsheets, random number generators, and generalized audit
software.

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 IMPLEMENTING PHASE
Audit sampling selection
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ÁN Probabilistic sample selection -Simple random sample
Example: The auditor wants 50 sample items from a population of
sales invoices numbered from 3689 to 9452.

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 IMPLEMENTING PHASE
Audit sampling selection
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Probabilistic sample selection -systematic sample selection
In systematic sample selection (also called systematic sampling),
the auditor calculates an interval and then selects the items for the
sample based on the size of the interval. The interval is determined
by dividing the population size by the desired sample size.
Example
In a population of sales invoices ranging from 652 to 3,151, with a
desired sample size of 125,
The interval is 20 [(3,151 – 651)/125].
The auditor first selects a random number between 0 and 19 (the
interval size) to determine the starting point for the sample.
If the randomly selected number is 9, the first item in the sample will
be invoice number 661 (652 + 9). The remaining 124 items will be
681 (661 + 20), 701 (681 + 20), and47so on through item 3,141.
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Audit sampling selection

Probabilistic sample selection -systematic sample selection
Advantages:

- Its ease of use.

- In most populations, a systematic sample can be drawn quickly

and the approach automatically puts the numbers in sequence,
making it easy to develop the appropriate documentation.

Disadvantages:

- The possibility of bias => when auditors use systematic selection,

they must consider possible patterns in the population data that can
cause sample bias. 48
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Audit sampling selection

Probabilistic sample selection – Probability Proportional to Size and
Stratified Sample Selection
Take a sample in which the probability of selecting any individual
population item is proportional to its recorded amount. This method
is called sampling with probability proportional to size (PPS), and
it is evaluated using non - statistical sampling or monetary unit
statistical sampling.

Divide the population into subpopulations, usually by dollar size,

and take larger samples from the subpopulations with larger sizes.
This is called stratified sampling, and it is evaluated using
nonstatistical sampling or variables statistical sampling.
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Audit sampling selection

Nonprobabilistic sample selection – directed sample selection
In directed sample selection auditors deliberately select each item
in the sample based on their own judgmental criteria instead of
using random selection. Commonly used approaches include:
•Items Most Likely to Contain Misstatements

•Items Containing Selected Population Characteristics

•Large Dollar Coverage

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Audit sampling selection

Nonprobabilistic sample selection – block sample selection
In block sample selection auditors select the first item in a block,
and the remainder of the block is chosen in sequence.

For example, assume the block sample will be a sequence of 100

sales transactions from the sales journal for the third week of
March. Auditors can select the total sample of 100 by taking 5
blocks of 20 items, 10 blocks of 10, 50 blocks of 2 or one block of
100.

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Audit sampling selection

Nonprobabilistic sample selection – block sample selection
Haphazard sample selection is the selection of items without any
conscious bias by the auditor. In such cases, the auditor selects
population items without regard to their size, source, or other
distinguishing characteristics.

Advantage: the difficulty of remaining completely unbiased in the

selection

Disadvantage: they are often useful in situations where the cost of

more complex sample selection methods outweighs the benefits
obtained from using these approaches.
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Monetary unit sampling

A critical feature of MUS is the definition of the sampling unit as an

individual dollar in an account balance.

By focusing on the individual dollar as the sampling unit, MUS

automatically emphasizes physical units with larger recorded
balances.

Because the sample is selected on the basis of individual dollars,

an account with a large balance has a greater chance of being
included than an account with a small balance.

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 IMPLEMENTING PHASE
Monetary unit sampling
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The sampling unit is 1 dollar and the population size is 207,295

dollars, not the 40 physical units

An account with a $1,425 balance has a 10 times greater probability

of selection than one with a $143 balance, as it contains 10 times
as many dollar units. 54
 IMPLEMENTING PHASE
Monetary unit sampling
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Example: Choose 4 in 12 accounts receivable
items as follow with probabilistic sample selection.

No. Balance Accumulated balance

1 654 654
2 1.854 2.508
3 190 2.698
4 373 3.071
5 501 3.572
6 333 3.905
7 1.115 5.020
8 378 5.398
9 152 5.550
10 726 6.276
11 304 6.580
12 192 55 6.772
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Monetary unit sampling

Simple random sample

Choose first four digit, the starting point for the sample: row 1010 column
1, downtrend. Then, the chosen numbers are: 5018, 2001, 6602, 0445
=> Chosen accounts receivable items: 7, 2, 12, 1.

Systematic sample selection

The interval = 6772 / 4 = 1693
The starting point for the sample: between 0 and 1692, assume that
1410
Next chosen numbers: 1410, 3103, 4796, 6489
=> Chosen accounts receivable items: 2, 5, 7, 11
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Stratified Sampling
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For many populations, auditors separate the
population into two or more subpopulations before applying audit
sampling. This is called stratified sampling, where each
subpopulation is a called a stratum.

Stratification enables the auditor to emphasize certain population

items and deemphasize others. In most audit sampling situations,
including confirming accounts receivable, auditors want to
emphasize the larger recorded dollar values, so they define each
stratum on the basis of the size of recorded dollar values.

Example:

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 COMPLETING STAGE
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Complete the audit and issue an audit report
For operational audit: auditors conclude the efficiency and
effectiveness of any part of an organization’s operating procedures
and methods and give recommendations for improving operations

For financial statement audit: auditors provide reasonable

assurance, but not absolute assurance, that the financial statements
are presented fairly, in all material respects, and/or give a true and
fair view in accordance with the financial reporting framework.

For compliance audit: auditors conclude whether the auditee is

following specific procedures, rules, or regulations set by some
higher authority give recommendations for improving the quality
management or handling violations.
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 KIỂM TO
COMPLETING STAGE
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Complete the audit and issue an audit report

 Reports are essential to audit and assurance engagements

because they communicate the auditor’s findings. Users of financial
statements rely on the auditor’s report to provide assurance on the
company’s financial statements.

 The auditor will likely be held responsible if an incorrect audit

report is issued.

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The auditor’s standard unqualified audit report contains seven
distinct parts:
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