The Audit Process: Planning, Reporting, and Opinions

Posted on Aug 21, 2024 in Law & Jurisprudence

The Planning Process

It was decided a priori to determine the audit procedures and techniques to be used, the tests to be performed, and the working papers to document the work and staff involved.

Phases of Planning

The plan covers all stages of developing an external audit. We will outline these stages, including the internal control procedures and the final phase.

A) Preliminary Phase:

The success of the audit work depends largely on good planning and proper documentation. The preliminary stage includes:

  • Customer Contact: This seeks answers to formal questions about the company, such as who requested the work, what kind of work is required, when the information is needed, the company structure, its activities, the size and type of administrative data system used.
  • Customer Research: Before accepting the assignment, the auditor should consider whether any ethical or technical reasons exist for not accepting it, such as the client’s reputation, results of previous audits, or litigation that may involve significant risks.
  • Audit Contract or Letter of Request: If no obstacles exist, the auditor enters into an agreement with the client through the acceptance of a Custom Charter or Audit Contract. According to the NTA, the auditor shall agree in writing with the client on the following: the objective and scope of the job, fees and criteria for calculation, the period of the audit, and the estimated number of hours required to perform the work.
  • Knowledge of the Client’s Business: The auditor should analyze aspects such as the type of business, product or service, production and distribution methods, relationships with other companies, commercial influence, organization, and relevant legislation.
  • Preliminary Analytical Review: These tests consist of substantive financial information. Analytical review aims to test the reasonableness of the financial statements and also serves as a fluency test of reasonableness.

B) Procedures on Internal Control:

  • Description, Verification, and Evaluation of Internal Control System: The auditor must determine if internal controls exist and conduct a comprehensive study of them, using standard operating procedures, organizational charts, performance standards, questionnaires for staff and directors of the company, and other tools.
  • Testing of the System of Internal Control and Evaluation of Reliability: If controls exist and are functioning, the auditor will extend the testing to all transactions during the period under audit, applying sampling. If confidence in the system is minimal, the 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 accounts must be examined from the date of the prior phase to the date of the audit.

The Relevant Areas

The auditor, when planning how to carry out the work, must identify the relevant areas that require more attention during the audit program preparation. These areas can be subdivided into:

  • Critical Areas: Those that require special attention by the auditor, as they are particularly susceptible to errors due to their importance. Examples: loans to directors, significant foreign currency balances, etc.
  • Significant Areas: These are important for their value, such as purchasing, inventory, sales, or assets.
  • Additional Areas: Those that are of high interest to the company (affecting provisions of the statutory rate).

Roles of Job

A) Definition of Working Papers (WP):

Working papers are records prepared by the auditor to document the work performed, the information collected, and the methods, procedures, and tests used, along with the conclusions reached.

B) Characteristics of WP:

Working papers must be:

  • Complete: They are considered complete when they include the work done, the scope of the assignment, the auditors responsible, the dates of execution, the conclusions, and the origin of the information provided.
  • Clear: Working papers must allow an auditor who is not performing the work to understand them and draw valid conclusions.
  • Concise: The development of working papers must be guided by economic criteria, containing the essential information and eliminating superfluous details.

Organization of Working Papers

A) 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.

B) Ownership and Custody of Working Papers:

The ownership of the working papers belongs to the auditor, who has the duty to preserve and safeguard them, as well as maintain professional secrecy. The working papers will not be shown to others unless authorized by the client or in cases provided by the LAC, by which the following parties could access the documentation:

  • The ICAC for the purpose of exercising technical control.
  • Those appointed by court order.
  • Those authorized by law.

Working papers must not be destroyed before five years have passed. This deadline may be extended in the event of any claim, suit, or proceeding in which the working papers constitute evidence until the end of the process.

Audit Report

The audit report is the result of the auditor’s work, expressing an opinion on the financial statements of a company, aimed at people who do not necessarily have to know accounting terminology. The report must be:

  • Clear: The auditor expresses a clear and accurate opinion without using sophisticated terminology that limits understanding for users with little accounting knowledge.
  • Objective: The report must be supported by the working papers and the auditor must be independent of the interests of the recipients.
  • Concise: The report should evaluate the audited annual accounts as succinctly as possible, without obscuring necessary nuances.
  • Timely: It must express an opinion on the financial statements based on facts that occurred after the closing of the annual accounts.

Structure of the Audit Report

Technical standards issued by the ICAC 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 whom it is addressed, normally shareholders or partners when the audit is mandatory. If the 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 should include the following: identification of the audited entity, identification of the annual accounts and the period they belong to (the balance sheet at 31/12 of the appropriate year and the Profit & Loss account and report for the year ended on that date), a synthetic referral to the Generally Accepted Auditing Standards (GAAS) applied in the work, and a report on procedures that could not be implemented due to limitations on the scope of the audit.
  • D) Comparison Paragraph: According to Spanish company law, the annual accounts of an exercise should include, for comparative purposes, the figures for the balance sheet, Profit & Loss account, and financial table for the previous year.
  • E) Emphasis Paragraph: If the auditor has highlighted any important issues.
  • F) Qualifications Paragraph: When the auditor expresses a qualified opinion, the reasons justifying it should be stated in detail.
  • G) Opinion Paragraph: The auditor shall express an opinion on whether the financial statements, in all material respects, express a “true and fair view” of the company’s financial position, results of operations, and the funds obtained and applied during the year, all in accordance with GAAP and the uniform application of accounting principles and standards compared to the previous year.
  • H) Paragraph on the Management Report: This consists of verifying that the accounting information contained in the management report is consistent with the accounting data of the entity that has been the basis for preparing the audited annual accounts.
  • I) Name, Address, and Registration Details of the Auditor.
  • J) Date of Issuance of the Report.
  • K) Auditor’s Signature.

Motion Adjustments and Reclassifications

Adjustments have a quantitative impact on the estate or results, as they reflect facts that were omitted or improperly counted. Reclassifications have a qualitative impact on the estate, such as intangible assets posted as materials.

Favorable Opinion or Positive Opinion

This indicates that the information included in the report 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. A report that meets these conditions is called a clean report.

Qualified Opinion

When the auditor concludes that there are significant circumstances that prevent the annual accounts from representing a true and fair view, a qualified opinion, with reservations or exceptions, is issued. This may be due to scope limitations, errors or breaches of GAAP, uncertainty, and changes in the accounting principles and standards applied.

  • Scope Limitation: This may come from the institution itself, when it refuses to surrender certain information or allow the auditor to practice certain procedures, such as letters of circularization of accounts receivable. It may also be imposed by the accidental destruction of documents or records, or the inability to attend the physical count by appointment after closing.
  • Error or Breach of Generally Accepted Standards: This includes the use of accounting methods other than GAAP, errors in the preparation of annual accounts, failure to contain all necessary and sufficient information for interpretation and comprehension, and post-balance sheet events whose effect has not been remedied in the annual accounts or broken down in the report.
  • Uncertainty: This refers to the supposed impossibility of estimating due to the unpredictable occurrence of future events. Examples of uncertainties are: claims, lawsuits, judgments, etc.

Unfavorable Opinion

This indicates that the financial statements do not fairly present the assets, liabilities, financial position, results of operations, or changes in the 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

This is issued if the evidence obtained by the auditor is not sufficient to form an opinion on the financial statements taken as a whole. 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 used to ensure transparency on the part of management, preventing the concealment of facts that are very difficult for the auditor to verify, such as bank account discrepancies, double counting, etc.