Auditing Process Steps: Comprehensive Overview Cheatsheet

Introduction to Auditing

Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria, then communicating the results to interested users.

Types of Audits

The Auditing Process: Step-by-Step

1. Audit Planning and Preparation

• Define audit objectives and scope

  • Determine the purpose, boundaries, and limitations of the audit
  • Identify the time period to be covered
  • Define the specific processes, departments, or functions to audit

• Perform preliminary risk assessment

  • Identify high-risk areas that require special attention
  • Consider internal and external factors affecting the auditee
  • Review previous audit findings and follow-up actions

• Develop the audit strategy

  • Determine audit approach (substantive, controls-based, or combined)
  • Decide on sampling methodology
  • Establish materiality thresholds

• Create the audit plan and program

  • Document specific procedures to be performed
  • Assign responsibilities to audit team members
  • Establish timeline and milestones
  • Determine resource requirements

• Communicate with stakeholders

  • Notify relevant parties about upcoming audit
  • Schedule opening meeting
  • Request preliminary documentation

2. Understanding the Entity and its Environment

• Review organizational structure

  • Examine organizational charts
  • Identify key personnel and their responsibilities
  • Understand reporting relationships

• Analyze business processes

  • Document key business processes
  • Identify critical control points
  • Understand transaction flows

• Review policies and procedures

  • Examine documented policies
  • Understand standard operating procedures
  • Identify regulatory requirements

• Assess control environment

  • Evaluate management’s philosophy and operating style
  • Review oversight by governance bodies (board, audit committee)
  • Assess organizational structure and assignment of authority

• Identify significant changes

  • Note changes in management, processes, or systems
  • Consider industry developments
  • Review economic conditions affecting the entity

3. Risk Assessment and Materiality

• Identify and assess risks

  • Determine potential risks of material misstatement
  • Consider fraud risk factors
  • Evaluate impact of IT systems on risk

• Determine materiality

  • Establish quantitative materiality thresholds
  • Consider qualitative factors affecting materiality
  • Set performance materiality for specific testing

• Link risks to audit procedures

  • Design audit procedures responsive to identified risks
  • Focus resources on higher-risk areas
  • Determine extent of testing based on risk assessment

• Document risk assessment

  • Record identified risks and their assessment
  • Link risks to specific financial statement assertions
  • Document rationale for risk ratings

4. Evaluating Internal Controls

• Identify key controls

  • Document preventive and detective controls
  • Identify automated and manual controls
  • Map controls to relevant risks

• Test design effectiveness

  • Evaluate whether controls are properly designed
  • Determine if controls address relevant risks
  • Identify control gaps or weaknesses

• Test operating effectiveness

  • Observe control performance
  • Inspect evidence of control operation
  • Reperform control activities
  • Interview personnel responsible for controls

• Evaluate control deficiencies

  • Identify control weaknesses
  • Classify deficiencies (material weakness, significant deficiency, or deficiency)
  • Assess impact on audit strategy

5. Evidence Gathering and Documentation

• Select appropriate audit procedures

  • Inspection of records or documents
  • Observation of processes
  • Inquiry of knowledgeable persons
  • Confirmation with third parties
  • Recalculation of computations
  • Reperformance of procedures
  • Analytical procedures

• Perform sampling

  • Select appropriate sampling method
  • Determine sample size
  • Identify sampling units
  • Evaluate sample results and project to population

• Document evidence

  • Maintain audit trail of procedures performed
  • Record conclusions drawn from evidence
  • Organize working papers logically
  • Cross-reference audit documentation

• Evaluate evidence sufficiency

  • Determine if evidence is sufficient
  • Assess reliability and relevance of evidence
  • Identify areas requiring additional evidence

6. Testing and Substantive Procedures

• Perform substantive analytical procedures

  • Compare financial information with expectations
  • Investigate significant variances
  • Evaluate reasonableness of account balances

• Conduct tests of details

  • Verify transactions and balances
  • Trace samples from source documents to accounting records
  • Vouch samples from accounting records to supporting documentation
  • Perform physical examination of assets

• Execute specialized tests

  • Confirm accounts receivable/payable with third parties
  • Verify inventory through observation and testing
  • Test revenue and expense cutoff
  • Review subsequent events

• Perform computer-assisted audit techniques (CAATs)

  • Data extraction and analysis
  • Run test of entire populations
  • Identify anomalies or exceptions
  • Perform complex calculations

7. Evaluating Audit Results

• Summarize identified misstatements

  • Compile all detected errors
  • Classify misstatements (factual, judgmental, or projected)
  • Quantify impact on financial statements

• Evaluate misstatements

  • Compare misstatements to materiality thresholds
  • Consider qualitative aspects of misstatements
  • Evaluate effect on specific assertions
  • Determine if misstatements indicate fraud

• Assess uncorrected misstatements

  • Evaluate management’s reasons for not correcting
  • Determine impact on audit opinion
  • Consider effect on specific disclosures

• Review overall presentation

  • Evaluate financial statement format and classification
  • Review adequacy of disclosures
  • Assess overall fairness of presentation

8. Audit Conclusions and Reporting

• Form audit opinion

  • Unmodified opinion
  • Modified opinion (qualified, adverse, or disclaimer)
  • Determine basis for modification if applicable

• Draft audit report

  • Prepare report according to applicable standards
  • Include appropriate emphasis of matter paragraphs if needed
  • Document basis for conclusions

• Develop findings and recommendations

  • Document identified issues
  • Develop practical recommendations
  • Link findings to root causes

• Conduct exit meeting

  • Discuss findings with management
  • Obtain management responses
  • Address disagreements

• Issue final report

  • Distribute report to appropriate stakeholders
  • Include management responses
  • Document report distribution

9. Follow-up and Monitoring

• Create action plan for findings

  • Establish remediation timeline
  • Assign responsibility for corrective actions
  • Determine implementation approach

• Monitor implementation

  • Track progress against timeline
  • Verify effectiveness of corrective actions
  • Report status to appropriate stakeholders

• Conduct follow-up audits

  • Verify implementation of recommendations
  • Test effectiveness of new controls
  • Assess if findings have been properly addressed

• Document closure

  • Record status of findings
  • Maintain evidence of corrective actions
  • Update audit tracking system

Audit Documentation Requirements

• Working Paper Standards

  • Clear, complete, and concise
  • Proper indexing and cross-referencing
  • Logical organization
  • Professional appearance

• Essential Documentation

  • Audit planning memorandum
  • Risk assessment documentation
  • Testing worksheets and results
  • Sampling methodology and results
  • Evidence of supervisory review
  • Audit findings and recommendations
  • Management responses

• Documentation Retention

  • Establish retention period (typically 5-7 years)
  • Secure storage of confidential information
  • Proper archiving procedures
  • Access controls for audit files

Audit Quality Control

• Supervision and review

  • Proper supervision of audit staff
  • Timely review of work performed
  • Multi-level review process
  • Documentation of review notes and resolution

• Quality assurance

  • Compliance with professional standards
  • Adherence to firm methodology
  • Consistency across audit engagements
  • Peer review or external quality assessment

• Continuous improvement

  • Post-audit evaluation
  • Lessons learned documentation
  • Process refinement
  • Professional development of audit staff

Professional Standards and Ethics

• Independence and objectivity

  • Maintain professional independence
  • Avoid conflicts of interest
  • Preserve intellectual honesty
  • Document independence considerations

• Due professional care

  • Exercise reasonable care and diligence
  • Maintain professional skepticism
  • Apply professional judgment
  • Consider risk of material misstatement

• Confidentiality

  • Protect client/organizational information
  • Limit access to authorized individuals
  • Secure handling of sensitive data
  • Appropriate disposal of confidential materials

• Professional standards

  • Follow applicable auditing standards
  • Adhere to code of ethics
  • Maintain professional competence
  • Comply with continuing education requirements

Key Success Factors for Effective Audits

• Clear communication throughout audit process
• Risk-based approach to maximize efficiency
• Strong documentation to support conclusions
• Professional skepticism in evaluating evidence
• Objective and fact-based findings
• Practical and actionable recommendations
• Timely completion and reporting
• Effective follow-up on identified issues
• Collaboration with auditee while maintaining independence
• Continuous professional development of audit staff