The external audit process steps represent a set of sequential professional stages carried out by the independent auditor with the aim of obtaining sufficient and appropriate audit evidence, assessing the risks of material misstatement, and then forming a professional opinion on the financial statements and issuing the auditor’s report in accordance with the applicable professional standards.
The process typically includes planning the audit, understanding the entity and its environment, assessing risks, designing and performing audit procedures, evaluating evidence and misstatements, and then completing the audit work and issuing the report.
The Saudi Organization for Chartered and Professional Accountants has adopted the International Standards on Auditing, including the standards on planning, risk assessment and response, audit evidence, forming an opinion, and reporting.
External audit is not limited to examining the figures in the financial statements; it relies on a risk-based approach and professional evidence, whereby the auditor determines the nature, timing, and extent of procedures according to their assessment of the risks of material misstatement.
ISA 315 is one of the fundamental standards in this process, as it focuses on identifying and assessing the risks of material misstatement, thereby providing a basis for designing appropriate audit procedures.
External Audit Process Steps
The external audit process steps are as follows:
1. Accepting the Audit Engagement: The process begins with assessing whether the engagement can be accepted, including verifying the auditor’s independence, the availability of expertise and resources, the nature of the entity’s activity, and the ability to obtain the required information and evidence.
2. Planning the Audit: The auditor develops a strategy and plan that define the nature, timing, and extent of the work, directing attention and resources toward the areas most exposed to risks.
3. Understanding the Entity and Its Environment: The auditor becomes familiar with the entity’s activity, structure, operations, accounting policies, technical systems, and internal control, which helps identify the areas most exposed to material misstatement.
4. Assessing the Risks of Material Misstatement: The auditor identifies the risks that may affect the financial statements, such as the complexity of transactions, accounting estimates, weak controls, fraud and errors, and changes in laws or activity.
5. Determining Materiality: The auditor determines the level of materiality that helps assess the impact of misstatements and direct audit procedures toward the most significant items.
6. Assessing the Internal Control System: The auditor understands the controls related to the preparation of the financial statements, such as approval authorities, segregation of duties, and control over revenues, inventory, payments, systems, and data.
7. Designing Audit Procedures: The auditor determines the appropriate procedures to respond to risks, which may include inspection, observation, inquiry, recalculation, analytical procedures, external confirmations, and sampling.
8. Gathering Audit Evidence: The auditor gathers sufficient and appropriate evidence, such as contracts, invoices, account statements, confirmations, accounting records, financial reports, and legal documents.
9. Performing Tests and Analytical Procedures: The auditor applies the planned tests, such as examining samples of transactions, analyzing trends, comparing data between periods, and verifying revenues, inventory, and other items.
10. Examining Significant Accounts and Balances: Focus is placed on accounts with a material impact or high risks, such as cash, accounts receivable, inventory, assets, loans, revenues, and expenses.
11. Examining Accounting Estimates: The auditor evaluates estimates that rely on management’s judgments and assumptions, such as provisions and impairment of assets, to verify the appropriateness of the method and data used.
12. Evaluating Identified Misstatements: The auditor evaluates the errors and misstatements identified and their impact on the financial statements, and may request that management make the necessary corrections.
13. Reviewing Subsequent Events and Going Concern: The auditor examines significant events occurring after the date of the financial statements and assesses the circumstances that may affect the entity’s ability to continue as a going concern.
14. Completing and Documenting the Audit: The auditor documents the procedures, evidence, test results, professional conclusions, and significant matters discussed with management or those charged with governance.
15. Forming the Opinion and Issuing the Report: After evaluating the evidence and the financial statements as a whole, the auditor determines the appropriate type of opinion and then issues the audit report in accordance with professional requirements and standards.
The Importance of Following the External Audit Process Steps
Following a systematic approach in external audit helps direct the auditor’s efforts toward the most important and risky areas, rather than dealing with all operations at the same level of examination.
The risk-based approach also contributes to improving the use of audit resources, determining the appropriate procedures for each area, and obtaining sufficient and appropriate evidence to support the professional opinion.
The IAASB has confirmed that risk assessment represents the basis for designing audit responses and gathering appropriate audit evidence.
The Difference Between External Audit and Internal Audit
External audit focuses primarily on the independent audit of the financial statements and forming a professional opinion on them in accordance with the applicable financial framework.
Internal audit, on the other hand, goes beyond the financial statements to broader areas, such as governance, risk management, control, and operational processes, in accordance with the scope of the internal audit function within the establishment.
The two functions may interact, or the external auditor may benefit from some of the work of internal audit in cases permitted by the standards, but this does not eliminate the external auditor’s responsibility for the opinion issued.
What Affects the Duration of the External Audit Process?
There is no single fixed duration for all external audit processes, as the duration varies according to a set of factors, such as:
- The size of the establishment.
- The number of branches and operations.
- The complexity of the activity.
- The quality of the accounting records.
- The strength of the internal control system.
- The level of risks.
- The number of accounts and transactions.
- The readiness of documents.
- The speed of management’s response to the auditor’s requests.
- The use of systems and technologies in financial operations.
The more organized and timely the data and documents are, the more efficiently and systematically the audit stages can be performed.
External Audit Services from CLA
External audit helps conduct an independent examination of the financial statements to verify their accuracy, completeness, and compliance with accounting standards and applicable regulations.
CLA Saudi Arabia provides audit and assurance services professionally and independently, supporting the reliability of financial information and enhancing the confidence of the parties concerned with it.
Frequently Asked Questions About the External Audit Process Steps
What is the first step in the external audit process?
The process typically begins with accepting the audit engagement and determining the terms of the engagement, then planning the audit, understanding the entity and its environment, and assessing risks in accordance with the nature of the engagement and the relevant professional standards.
What are the most important stages of external audit?
The fundamental stages include accepting the engagement, planning, understanding the entity, assessing risks, determining materiality, assessing relevant controls, designing and performing audit procedures, gathering evidence, evaluating misstatements, completing procedures, and then forming the opinion and issuing the report.
Why does the auditor begin with risk assessment?
Because risk assessment helps the auditor identify the areas most exposed to material misstatement and then design audit procedures that suit the nature and level of these risks. ISA 315 is one of the fundamental standards governing the identification and assessment of the risks of material misstatement.
What is meant by audit evidence?
Audit evidence is the information used by the auditor to reach the conclusions on which their professional opinion is based. It may include documents, records, data, confirmations, analytical procedures, and other evidence appropriate to the nature of the engagement.
Does the external auditor examine all of the company’s transactions?
Not necessarily; the nature and extent of audit procedures depend on risks, materiality, the nature of accounts and operations, and other professional factors. Sampling, analytical procedures, and other methods can be used in accordance with the standards and the scope of the engagement.
Finally, we have reached the end of the article, in which we reviewed a range of information about the external audit process steps. You can contact us at CLA to obtain our services.
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