The process - modern audit practice and internal review procedures procedures

Experienced practitioners have offered general descriptions of audit review process during the interview. In general, practitioners claim that the audit process does not alter much in recent years, apart from the increasing reliance on the risk focused approach in audit planning. The audit review is an integral part of the audit programme. Together with the audit file building and processing, reviews on the initial decision maker‘s work by another person occur at various stages throughout the audit process. Information gathered is summarised and presented in this section.

During the audit planning stage, the audit team discusses and decides on the combination and sections of the work programme, The main risks and challenges of each section of section of the audit and how each will be tackled are specified, detailed plans are produced covering such matters as criterion of the sample selection and sources of evidence. The partner performs a final review of the audit planning to ensure that all necessary work has been properly planned and appropriate standards and regulations are complied with, as well as that the appropriate staff and the time is budgeted for the audit job. One of the interviewed audit manager described the audit planning stage as follow:

‗Initial stage … what we will do is complete planning, to get an understanding of what‘s happening in the business during the course of the year, what the expected results are and also, get to our risk assessment … where we think the key risk is going to be in the audit. So, we will go through that and assess all those and then we target our work on the area where we think with the highest risk and material misstatement in the audit … then … generates work programmes ... which (are) specified down.

The team will then go out and complete these work programmes.‘

The electronic audit work programme is generated from the planning stage, specifying all audit procedures planned. It is composed of a number of sections relating to items in the financial statement that the audit team will test during the field work. In order to deliver an efficient audit, the design of the audit work programme concentrates audit attention on those areas where risks are considered to be most significant. The audit work programme is risk focused. Auditors first get to understand the client‘s business and in particular, what has been happened during the course of the year before starting the audit field work. The partner and managers have a better knowledge of the client and such knowledge is often

passed to other team members during the briefing. The team members then perform risk assessments to identify the areas in the business with the highest risk.

After the generation of audit work programme, an audit team is sent to the client‘s premises to carry out audit field work. The aim is to gather evidence to aid the auditor‘s opinion formation at later stage. A senior auditor is usually put in charge of the field work when audit manager is not present. The whole set of planned audit procedure is divided and the fellow team members are assigned to work on different sections. For each section, auditor builds up working-papers documenting tests performed, details of testing (e.g., the list of sampled items), together with the initial conclusion – usually a brief summary of the result of the work performed. These working-papers are listed in related section in the programme and accessible for subsequent review.

The senior-in-charge is typically responsible for ensuring that each team member performs the planned procedures appropriately. Team members will consult with the senior in relation to any problems or concerns raised during the field work for guidance. After team member completes all procedures in a section, the senior-in-charge will typically perform the first review on the working-paper. This review by the senior-in-charge is to make sure the work done meets the required standards, especially in areas that are technically complicated. The senior checks the accuracy of the results obtained (e.g., to recalculate certain figures to ensure that the arithmetic is correct), whether the conclusion reached is adequately supported (e.g., to check the interpretation of the results/evidence obtained).

The review opinion of the senior-in-charger is often expressed to the team member orally, without leaving notes in the file. As then requested, field team members will perform additional works and correct mistakes until the in-charger becomes satisfied with the work completed. The senior leaves an electronic signature in completed section to indicate that the work has been reviewed and approved. These approved working-papers are then subject to the review by the manager.

The manager performs a second review on the working-papers generated. The manager‘s review focuses on the conclusion reached in each section and the audit procedures performed. For each section in the audit programme, the manager assesses whether addition work is required before ‗signing off‘ the section. The manager will check details such as compliance with the sampling criterion and appropriateness of supporting evidence for the conclusions reached. The manger then raises a review opinion, noted in the working-paper, in respect of additional work to follow up or more evidence to be

documented. The field team members respond to this review opinion and resubmit the working-paper for a further round of review. The process iterates until the manager becomes satisfied and ‗signs‘ for the section of work.

An audit manager interviewed has asserted that review is not to re-perform the work done by the subordinates:

‗I just purely look at the work‘s been done and assume that the work has been documented in the file has been done.‘

It is more the senior-in-charge‘s responsibility to check the accuracy of the work. Thus, the review by senior tends to be more concerned with the details of the work, whereas the manager performs a more general review of all work performed.

The partner performs an elevated review on the work reviewed and approved by the manager. This review is to ensure that the overall audit work is at appropriate level and all necessary work has been done and documented to support the auditor‘s conclusion and opinion statement.

‗So once the partner has been satisfied that all the appropriate work has been done has been reviewed, meets the required level, and all documents‘ on the file, so that means that they will sign the audit opinion.‘

The partner will go through all sections in the audit programme, perform a general review, and assesses the conclusions reached. Partners will also attended to the audit procedures performed and the documentation, much of partner‘s review work is designed to produce confidence that all necessary work has been done.

One interviewee alluded to a further stage of internal review. There is a internal file review department in the interviewee‘s firm that sends out a team to ‗go around the offices and review stored files to ensure that audit quality is at appropriate level, to make sure that we‘re not giving incorrect audit opinions‘.

All interviewees have mentioned the external review by the Quality Review Team, formerly named as the AIU (Audit Inspection Union) and the QAD (Quality Assurance Directive) during the interviews. One interviewed manager talked about his past

experience in inspection of an audit by the former Quality Review Team:

‗… they will review all of the sections of files; challenge all of the conclusions we‘ve made. And they will assess whether we have met audit quality and whether the audit was lacking in any of the area that would then needs to be addressed. They will then also review the financial statements as well, and if they don‘t think the financial statements have been prepared appropriately, they would then report those to the Financial Reporting Review Panel and they will then potentially challenge any accounting treatments in the accounts as well.‘

Audits on public interest entities were subject to the inspection by AIU. Public interest entities include, for example, all FTSE listed companies, listed companies with more than a billion pounds turnover, and those private companies having a turnover over excess 500 million and big amounts of net long-term debt. The inspectors visit audit firms and pick a sample of audits that meet the criterion for inspection. The Big Four and most large medium firms (like Grant Thornton, BDO, PKF and Baker Tilley, etc.) were all subject to the inspection by AIU as these firms audit most of the public interests entities. There was another external review body, the Quality Assurance Directive, which was in charge of review of all other audits exempt from AIU‘s inspection. It monitored audits by smaller audit firms.

Early descriptive studies claimed that the review process is fundamentally different from the audit process itself. Audit procedures focus on the validity of financial statement assertions, that is, to uncover financial statement errors; whereas review procedures focus on the adequacy of the audit procedures performed, to uncover auditor errors (Bamber et al., 1988). The review process is thus the ‗audit‘ of the audit work completed at each stage.

Nonetheless, in practice, review activities are not clearly distinguished from normal audit procedures and often perceived by practitioners as merely a part of the audit work. Indeed, audit is a fluid and dynamic process that integrates audit procedures and review activities.

A summary of the dynamic process is shown in Figure 3.1 on next page. The general audit process and the review procedures are displayed in separate columns for a clean illustration.

Figure 3.1 A diagram of general audit process and review procedures

Audit procedures REVIEWER Review procedures

Planning stage Identify the risks and generate the

work programme MANAGER The combination of the work programme

Field work Audit team complete the work SENIOR (IN-CHARGER)

Details of work (including procedures taken and calculations)

Technically complicated areas Opinion

Formation

Field team member‘s initial opinion

SENIOR (IN-CHARGER)

Review opinion Sign off the schedule

Senior‘s approved opinion

MANAGER

Review work procedures Review opinion Check documentation

Sign off the schedule or Request additional work

Manager form an opinion

PARTNER

Review opinion Check documentation

Sign off the schedule or Request additional work

Partner form an opinion REVIEW PARTNER Review audit opinion

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