Accounting and Finance Foundations

Unit 13

Accounting and Finance Foundations Unit 13: Auditing 992

Auditing

Chapter 30

Student Guide

Lesson 30.2 The Audit Process—Planning

Although the length of time required to conduct an external audit can vary greatly depending on the com-

plexity and size of the company, most external audits—especially external financial statement audits—typi-

cally consist of four stages. These stages include planning; testing internal controls; conducting analytical

procedures (also known as substantive procedures); and issuing the audit report.

Stage 1: Planning

During the planning and design stage of an audit, the auditor and company management meet to identify

their responsibilities as well as the objectives of the audit. The general objectives of a financial statement

audit, for instance, are usually to determine if the company’s financial statements are fair, relevant, and

accurate; to determine if the company’s accounts comply to GAAP and other accounting standards; and to

determine if the company’s internal controls are effective. (More about internal controls later.)

Then, the auditor conducts thorough research to become familiar with the company that s/he is auditing,

its issues, and the overall business environment in which it operates. Auditors gather this information by

meeting with company management, reading through company records, and accessing data about the

company from outside sources.

Auditors also spend time during the first stage determining which of the business’s financial transac-

tions to examine during the audit. After all, examining every one of the company’s financial transactions

occurring in the past year would be extremely time-consuming. So, instead, auditors typically test just a

sample—a small portion—of these financial transactions. Keep in mind, though, that they must examine

enough transactions to draw definitive conclusions about the company’s financial data as a whole.