Overview of financial audit stages - F8

In the process of financial auditing, auditors go through a number of stages in order to arrive at the audit report.

1. Audit planning and risk assessment - In this stage, staffing is an important consideration. Furthermore, auditors will gain an understanding of the entity and its environment, particularly to assess the risk of material misstatements in financial statement. Audit procedures to be undertaken will be planned in detailed. (Timing = before year-end)

2. Test of control - Auditors will decide whether to rely on the internal controls of the company. This may first involve the use of internal control questionnaire (ICQ) and internal control evaluation questionnaire (ICEQ). The result will indicate whether the internal control is strong or weak. If it is strong then test of controls (TOC)/compliance testing will be undertaken to determine whether it is really strong. However if the internal control is perceived to be weak earlier, then auditors will follow a substantive approach (ignore TOC).
After TOC, if the internal controls are really strong, then a reduced substantive procedures can be performed later. If the internal controls are actually weak, then the full substantive procedures have to be undertaken. (Timing = before and/or after year-end)

3. Substantive procedure - If the internal controls are strong, auditors will rely more on substantive analytical procedures (comparing information to determine any material differences). If the internal controls are weak, auditors will rely more on test of details (select sample and find hard evidence to assure the amount recorded is correct). The purpose of substantive procedure is to substantiate financial statement assertions (eg. whether receivables are valued correctly). (Timing = after year-end)

4. Finalisation - review of subsequent events and going concern would be undertaken. Furthermore, an overall review of financial statements will be done which analytical procedure may be used. Any important matters that come to auditors' attention during the audit will be reported to management. Finally an independent auditor's report will be produced. (Timing = near and at the end of audit)