The audit process includes procedures to obtain audit evidence to provide the auditor with reasonable assurance that the financial statements are free of material misstatement. An audit will examine the financial records of the entity being audited to verify they are accurate. This is done through a systematic review of the financial transactions.
There are five main stages of an audit
- Planning – This is the initial planning stage, where an auditor will accept the client, complete due diligence procedures and put arrangements in place to start work. Audit planning is a vital area of the audit to ensure that appropriate attention is devoted to important areas, potential problems are identified and work is properly coordinated.
- Risk assessment – Audit risk is fundamental to the audit process because auditors do not check all of the transactions. The business will be analysed to assess and identify what the auditor thinks the main risks are in the business. This assessment will then enable the auditor to target their work on these riskier areas and avoid inefficiencies.
- Audit strategy – The audit strategy sets out the direction of the audit and ensures that the tests are specific to the risks identified.
- Gathering evidence – This is the actual testing stage which will include the testing of controls and substantive testing. Tests are needed as evidence to support the assertion that the financial records of an entity are complete and show a true and fair view.
- Concluding – The final part of the audit is when the auditor will assess the evidence gathered and give an opinion on the financial statements. If the auditor gives and ‘unqualified’ opinion this means that no material misstatements were found and the accounts are true and fair
Due to the time it would take to test every single item in the financial statements the concept of materiality is used throughout the audit.
Information is considered to be ‘material’ if by excluding or incorrectly accounting for it, it would influence the actions of the users of the financial statements. Auditors therefore base what they test in the financial statements on how material the items are.