Overview of the audit opinion formulation process

Overall Objectives in Conducting an Audit
The overall objective of an audit is to obtain reasonable assurance about whether the financial statements are free from material misstatement and to report on the financial statements based on the auditor’s findings. In completing these objectives, the auditor:

● Complies with relevant ethical requirements
● Plans and performs an audit with professional skepticism
● Exercises professional judgment
● Obtains sufficient appropriate evidence on which to base the auditor’s opinion
● Conducts the audit in accordance with professional auditing standards

Overview of the Audit Opinion Formulation Process 

To be able to provide reasonable assurance, auditors go through a structured process, which we refer to as the Audit Opinion Formulation ProcessThat process is presented in Exhibit 1.3

Phase I of the audit opinion formulation process concerns client acceptance and continuance. Auditors are not required to perform audits for any organization that asks; auditors choose whether or not to perform each individual audit. Audit firms have procedures to help them ensure that they are not associated with clients where management integrity is in question or where a company might otherwise present the audit firm with unnecessarily high risk (such as client financial failure or regulatory action against the client). Once a client is accepted (or the audit firm decides to continue to provide services to a client), the auditor needs to perform risk assessment procedures to thoroughly understand the client’s business (or update prior knowledge in the case of a continuing client), its industry, its competition, and its management and governance processes (including internal controls) to determine the likelihood that financial accounts might be in error (Phase II).

In some audits, the auditor will also obtain evidence about internal control operating effectiveness through testing those controls (Phase III). Much of what most people think of as auditing, the obtaining of substantive evidence about accounts, disclosures, and assertions, occurs in Phase IV. The information gathered in Phases I through III will greatly influence the  amount of testing to be performed in Phase IV. Finally, in Phase V, the auditor will complete the audit and make a decision about what type of audit report to issue.

Parties Involved in Preparing and Auditing Financial Statements Various parties are involved in preparation and audit of financial statements and related disclosures; these parties are depicted in Exhibit 1.4. Management has responsibilities for (a) preparing and presenting financial statements in accordance with the applicable financial reporting framework; (b) designing, implementing, and maintaining internal control over financial reporting; and (c) providing the auditors with information relevant to the financial statements and internal controls. The internal audit function provides management and the audit committee with assurance on internal controls and reports. The audit committee, a subcommittee of the organization’s board of directors, oversees both management and the internal auditors, and they also hire the external auditor. The external auditor’s job is to obtain reasonable assurance about whether management’s statements are materially accurate and to provide a publicly available report. External auditors conduct their procedures and make judgments in accordance with professional standards . The audited financial statements are provided to users who have an interest in the organization.

Providers of External Auditing Services
The external auditing profession includes sole-practitioner firms, local and regional firms, and large multinational professional services firms such as the Big 4. The Big 4 firms are KPMG, Deloitte Touche Tohmatsu (Deloitte in the United States), PricewaterhouseCoopers (pwc), and Ernst & Young. The organizational structure of these firms is quite complex. For example, each of the Big 4 firms is actually a network of member firms. Each of the member firms enters into agreements to share a common name, brand, and quality standards. In most cases, member firms are organized as a partnership or limited liability corporation within each country. Some smaller firms also practice  internationally through an affiliation with a network of firms. For example, a number of regional or local firms belong to an affiliation of such firms under the name of Moore Stephens, and another group operates under the name of Baker Tilly. Many public accounting firms have also organized their practices along industry lines to better serve clients in those industries. These often include categories such as financial services, retailing, not-for-profit, manufacturing, and government. 

The organizational hierarchy of audit firms is structured with partners (or owners) at the top level; these individuals are responsible for the overall conduct of each audit. Next in the hierarchy are the managers, who review the audit work performed by seniors and staff personnel. Seniors are responsible for overseeing the day-to-day activities on a specific audit, and they oversee entry-level personnel who perform many of the basic auditing procedures. Partners and managers are responsible for many audit engagements that are being conducted simultaneously, whereas seniors and staff are usually assigned to fewer audits at one time.

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