External Audit Planning and Reporting: A Comprehensive Guide
The Planning Process. It was decided a priori what audit procedures and techniques would be used, the tests to be performed, and the working papers that would document the work and staff involved. Phases of Planning. The plan covers all stages of developing an external audit. We realize these stages and, proudly, phase in internal control procedures and a final phase.
A) Preliminary Phase: From a good planning and proper documentation depends, to a large extent, the success of the audit work. The preliminary stage includes:
- Customer Contact: This seeks answers to formal questions about the company, such as who is calling for the work, what kind of work is needed, when the information is required, what is the company structure, in which activity is the company engaged, what data sources are available, and what size system comes from administrative data.
- Customer Research: The NT on the execution of the work states that before accepting the assignment, the auditor should consider whether any ethical or technical reason exists why they should not accept it. Factors such as prestige, results of previous audits, or litigation that may involve risks of some importance should be evaluated.
- Audit Contract or Letter of Request: With no obstacles, the auditor enters into an agreement with the client through the acceptance of the Custom Charter or Audit Contract. According to the NTA, the auditor shall agree in writing to his client: “The objective and scope of the job, fees and criteria for appointment, calculation, period, and number of estimated hours to perform the work.”
- Knowledge of Business Client: The auditor should analyze aspects such as type of business, product or service, production and distribution methods, relationships with other companies, commercial influence, organization, and other relevant legislation.
- Analytical Review: Preliminary tests consist of substantive financial information. Analytical review aims to test the reasonableness of the financial statements and there is also a fluent test of reasonableness.
B) Procedure on Internal Control.
- Description, Verification, and Evaluation of Internal Control System: The auditor has to find out if internal control exists and conduct a comprehensive study of it, through standard operating procedures, organizational charts, performance standards, written questionnaires to staff and directors of the company, and other tools.
- Testing of the System of Internal Control and Evaluation of Reliability: If there is control work, the auditor will extend the testing to all transactions during the period under audit, applying sampling. If confidence in the system is minimal, substantive tests scheduled later will be more extensive and comprehensive.
C) Final Phase: After completing the tests on internal control and assessing its reliability, the auditor must examine the accounts from the date of the prior phase to the date of the audit. Relevant Areas. The auditor, when planning how to carry out the work, must identify the relevant areas to which they must pay more attention when preparing the audit program. These can be subdivided into:
- Critical Areas: Those that require special attention by the auditor, are particularly susceptible to making mistakes, because of their importance. Examples: loans to directors, many of the foreign currency balances, etc.
- Significant Areas: These are important for their value, such as purchasing, inventory, sales, or assets.
- Additional Areas: Those which have a high interest to the company (affecting provisions of the statutory rate).
Roles of Working Papers (PT)
- Definition of PT: The PT are records prepared by the auditor and she records the work done, the information collected, and the methods, procedures, and tests together with the conclusions obtained.
- Characteristics of PT: The PT must be:
- Full: They are considered complete when the work done, the scope of the assignment, auditors responsible, dates of execution, the conclusions, and the origin of the information provided are included.
- Clear: The PT must allow an auditor who is not doing the work to understand and draw valid conclusions.
- Concise: The development of the PT must be guided by economic criteria containing the essential and eliminating superfluous information.
Organization of PT
- Permanent and Comprehensive Archive:
- The permanent record of Working Papers is a coherent set of documents containing information of permanent interest, which may have an impact on subsequent audits.
- The general file of working papers is a coherent set of documents containing information relating to the audited financial statements for the year in question.
- Property, Custody of the PT:
- The property of the PT is the auditor, who has the duty to preserve and safeguard them, as well as maintain professional secrecy.
- The PT will not be shown to others, unless authorized by the customer or in cases provided by the LAC, by which they could access the documentation:
- The ICAC purposes to exercise technical control for.
- Those appointed to by court order.
- Those who are authorized by law.
- The PT may not be destroyed before five years have passed, and this deadline may be extended for any claim, suit, or proceedings in which the PT constitute evidence until the end of the process.
Audit Report. The report is the result of the auditor’s work and expresses an opinion on the financial statements of a company, aimed at people who do not necessarily have to know the accounting language. The report must be clear:
- Clear: The auditor expressed a clear and accurate opinion without using sophisticated terminology that limits understanding to users with little preparation.
- Purpose: Must be supported by the PT and be independent of the auditor’s interests of the recipients of the same.
- Concise: You must evaluate the audited annual accounts as soon as possible, but without obscuring nuances needed.
- Timely: It must express an opinion on the financial statements on the facts occurred after closing annual accounts.
Structure of the Audit Report. In Technical standards issued by the ICAC, reports detail the basic elements to be included in the audit report.
- A) Title or Identification of the Report. The report should identify itself as “independent audit report of annual accounts.”
- B) Recipients or People Who Made the Request. Indicating the person or persons to which it is addressed, normally shareholders or partners when the audit is mandatory. If recipients do not coincide with the shareholders or partners, also include: … “on behalf of” …
- C) Scope Paragraph of the Audit. This is the first paragraph of the report and shall include the following:
- Identification of the audited entity.
- Identification of the annual accounts and the period to which they belong, the balance sheet at 31/12 of the year, and the P&L account and report for the year ended on that date.
- Synthetic referral and application of the NTA in the work.
- Report of procedures that have not been able to be implemented because of limitations on the scope of the auditor.
- D) Paragraph of Comparison. According to Spanish company law, the annual accounts of an exercise included for comparative purposes the figures for the balance sheet, P&L, and financial table for the previous year.
- E) Paragraph of Emphasis. If the auditor has highlighted some important issues.
- F) Paragraph of Qualifications. When the auditor expresses a qualified opinion, they should state the reasons justifying it in detail.
- G) The Opinion Paragraph. The auditor shall express its opinion about whether the financial statements in all material respects express “a true and fair picture of the company’s financial position, results of operations, and the funds obtained and applied during the year, all in accordance with standards and GAAP.”
- Uniform application of accounting principles and standards regarding the previous year.
- H) Paragraph on the Management Report. Consists of verifying that the accounting information contained in the report is consistent with the accounting data of the entity that have been the basis for preparing the annual audited accounts.
- I) Name, Address, and Registration Details of the Auditor.
- J) The Date of Issuance of the Report.
- K) Auditor’s Signature.
Motion Adjustments and Reclassifications. The settings are a quantitative impact of the estate or of the results, as they reflect facts omitted or improperly counted. The reclassifications are a qualitative impact on the heritage, intangible assets such as materials posted.
Favorable Opinion or Positive.
- The information included in the memory is necessary and sufficient for proper interpretation and comprehension.
- Together they represent the company’s business in accordance with the information available to the auditor.
- If the report meets these conditions, it is called a clean report.
Qualified Opinion. When the auditor concludes there are significant circumstances that prevent the annual accounts from representing a true and fair picture, a qualified opinion is issued, with reservations or exceptions. This must have been due to:
- Scope limitation, error, or breach of rules and GAAP.
- Uncertainty and changes in accounting principles and standards applied.
A) Scope Limitation. This may come from the institution itself, when it states its refusal to surrender certain information or let us practice certain procedures, such as letters of circularization of accounts receivable, or it may be imposed by the accidental destruction of documents or records, making it impossible to attend the physical count by appointment after closing.
B) Error or Breach of Generally Accepted Standards.
- Use of accounting other than generally accepted.
- Errors in the preparation of annual accounts.
- The annual accounts do not contain all information necessary and sufficient for interpretation and comprehension.
- Post-closing events whose effect has not been remedied in the annual accounts or broken down in the memory.
C) Uncertainty. The impossibility of estimating, because it is unpredictable, the occurrence of future events. Examples of uncertainties are: claims, lawsuits, judgments, etc.
Unfavorable Opinion. This is issued when the financial statements are not presented fairly, reflecting the assets, liabilities, financial position, results of operations, or changes in financial position of the entity. To conclude this opinion, the auditor should have identified errors and breaches of accounting rules and principles with very significant effects on the financial statements.
Opinion Denied: Disclaimer of Opinion. If the evidence obtained by the auditor is not enough to form an opinion on the financial statements taken as a whole, a disclaimer of opinion is issued. The denial of opinion may arise from limitations on the scope and highly significant uncertainties.
The Letter for Expression of Address and Other Information. This is a document that is to ensure transparency on the part of management, not hiding facts that are very difficult for the auditor to verify, for example, a bank account, double counting, etc.
double counting, etc.