Understanding the Evolution and Phases of Auditing
Unit #1: Evolution of Auditing Concepts
Phases of Auditing
First Phase
During the early Industrial Revolution, businesses were small, and transactions were limited. The auditor’s primary role was to detect fraud.
Second Phase
As businesses grew, ownership and management became separate entities. Auditors, in addition to fraud detection, began verifying the accuracy of financial information presented by management.
Third Phase
The introduction of computers and new technologies led to a significant increase in transaction volume. Auditors started reviewing accounting systems and internal controls to ensure the reliability of financial information.
Fourth Stage
Auditors expanded their responsibilities to include evaluating the effectiveness of internal controls and providing recommendations for improvement.
Administrative Audit
A systematic review and assessment of an entity’s progress to determine its operational efficiency. This includes evaluating objectives, plans, programs, organizational structure, and functions.
Audit of Operations
A technique for evaluating a unit or function against company policies using specialized personnel to ensure objectives are met and identify areas for improvement.
Internal and External Audits
Internal Audit: An independent assessment within an organization to review accounting and other operations, providing constructive service to management.
External Audit: An examination conducted by individuals outside the business to ensure impartial results.
Continuous and Periodic Audits
Continuous Audit: Performed consistently at short or irregular intervals as operations occur.
Periodic Audit: Conducted on specific dates.
Unit #2: Audit Functions and Departments
Study Areas
Legal status, performance criteria, administrative style, administrative processes, industry, field of operation, number of employees, technological coordination, communication and information systems, level of functioning, client treatment (internal and external), environment, products or services, quality systems.
Specific Functions of Audit Teams
Develop audit plans, organize audit teams, schedule audits, support auditor participation, provide technical assistance, examine and approve planning reports.
Departments
Advise and assist the Director in supervising, controlling, and evaluating service actions, providing assistance in technical, administrative, financial, and property matters.
Divisions
Assist the CEO and Program Managers in achieving organizational objectives by providing objective reviews of program implementation and operation.
Unit #3: Audit Planning and Acceptance
Prerequisites for Planning
a) Clear understanding of the service engagement.
b) Awareness of potential issues.
Acceptance of Work
Implies the auditor’s responsibility to complete the work and meet client expectations. Two conditions are crucial:
a) Independence of mind from clients, including adherence to professional ethics.
b) Ability to solve the specific problem based on the firm’s characteristics and expertise.
Planning
Deciding in advance the procedures, evidence extent, timing, working papers, and staff allocation for the audit.
Planning Phases
Phase I: Investigation of General and Particular Aspects
Studying the company’s unique characteristics to determine specific areas for audit planning. This includes:
- Legal characteristics
- Tax situation
- Commercial characteristics
- Financial characteristics
- Accounting practices
- Warehouse management
- Labor situation
- General aspects (cash handling, bank accounts, previous audit reports, etc.)
Phase II: Study and Evaluation of Internal Control
Understanding the company’s methods and routines for operation and administration. Internal control aims to:
a) Obtain accurate, reliable, and timely financial information.
b) Protect company assets.
c) Promote operational efficiency.
Internal control ensures the proper collection of financial information and streamlines operations to support decision-making and future planning.