What is an Audit Engagement?

Audit Engagement

An audit engagement is a professional arrangement between an organization (the client) and an independent auditor or audit firm. The purpose of this engagement is to conduct an audit of the organization’s financial statements to provide an independent and objective opinion on their accuracy, completeness, and compliance with the applicable financial reporting framework and accounting standards.

During an audit engagement, the auditor assesses the organization’s internal controls, accounting policies, and financial transactions. The auditor then tests these items to gather sufficient and appropriate evidence to support their opinion on the financial statements. The ultimate goal of an audit engagement is to enhance the credibility of the financial statements by providing reasonable assurance that they are free from material misstatement, whether due to error or fraud.

The audit engagement typically includes the following stages:

1. Pre-engagement activities: Before accepting an audit engagement, the auditor evaluates the client’s integrity, potential conflicts of interest, and the auditor’s ability to perform the audit competently and independently.
2. Engagement planning: The auditor develops an audit plan, which includes understanding the client’s business, identifying significant accounts and disclosures, assessing risks of material misstatement, and determining materiality levels.
3. Performing audit procedures: The auditor carries out various audit procedures, such as inspection, observation, inquiry, confirmation, recalculation, reperformance, and analytical procedures, to gather sufficient and appropriate audit evidence.
4. Evaluating audit evidence and forming an audit opinion: Based on the audit evidence collected, the auditor evaluates the financial statements and forms an opinion on whether they are fairly presented in accordance with the applicable financial reporting framework.
5. Communicating audit findings: The auditor communicates their findings to the client, which may include discussing identified misstatements, internal control deficiencies, or other significant matters.
6. Issuing the audit report: The auditor issues an audit report that includes their opinion on the financial statements, along with any other required information or disclosures.
7. Post-engagement activities: After completing the audit, the auditor may be involved in additional activities, such as attending the client’s annual general meeting, responding to regulatory inquiries, or providing other assurance services.

An audit engagement is typically conducted annually, but the frequency may vary depending on the client’s size, industry, and regulatory requirements.

Example of an Audit Engagement

Let’s consider a fictional example of an audit engagement:

Company ABC is a publicly traded manufacturing company that needs to have its annual financial statements audited to comply with regulatory requirements and provide assurance to its shareholders, lenders, and other stakeholders. Company ABC engages XYZ Audit Firm to perform the audit for the fiscal year ended December 31, 2023.

• Pre-engagement activities: XYZ Audit Firm evaluates Company ABC’s management integrity, assesses potential conflicts of interest, and confirms its ability to perform the audit independently and competently.
• Engagement planning: XYZ Audit Firm develops an audit plan, which includes understanding Company ABC’s manufacturing operations, identifying significant accounts like inventory, accounts receivable, and property, plant, and equipment, and assessing risks of material misstatement.
• Performing audit procedures: XYZ Audit Firm carries out various audit procedures, such as observing the physical inventory count, confirming accounts receivable balances with customers, and inspecting invoices and contracts for significant transactions.
• Evaluating audit evidence and forming an audit opinion: Based on the audit evidence collected, XYZ Audit Firm concludes that Company ABC’s financial statements are fairly presented in accordance with the applicable financial reporting framework (e.g., Generally Accepted Accounting Principles or International Financial Reporting Standards).
• Communicating audit findings: XYZ Audit Firm communicates its findings to Company ABC’s management and audit committee, discussing any identified misstatements or control deficiencies.
• Issuing the audit report: XYZ Audit Firm issues an unqualified (clean) audit report, indicating that Company ABC’s financial statements are fairly presented and free from material misstatement.
• Post-engagement activities: After completing the audit, XYZ Audit Firm attends Company ABC’s annual general meeting, responds to any regulatory inquiries, and provides other assurance services, as needed.

In this example, Company ABC’s financial statements have been audited by XYZ Audit Firm through an audit engagement, providing reasonable assurance to stakeholders that the financial statements are reliable and accurate.