Stakeholders require information from a company to make various decisions. These decisions concern the relationship between them and the underlying company. Usually, companies use their annual reports to convey information.
These reports also include the financial statements that play a significant role in meeting stakeholders’ needs. Usually, companies prepare four primary financial statements with notes.
Financial statements play a crucial role in providing details of a company’s finances. For most stakeholders, the balance sheet and income statement are vital.
However, the cash flow statement and statement of changes in equity are also a part of financial statements. Most companies prepare these statements annually or quarterly. Then, they distribute it to stakeholders for their informational needs.
The financial statements provide crucial information. However, stakeholders may not trust those statements. One of the critical contributing factors to this issue is that companies prepare these statements internally.
Some stakeholders may question their integrity. Consequently, they will require a third-party view of whether those statements present a true and fair view. This process falls within auditing.
Auditing engagements have become prevalent and are essential to business. For public companies, these are mandatory. However, other companies and businesses may also audit their financial statements. Audit engagements have a defined scope. Before discussing that scope, one must understand what an audit engagement is.
What is an Audit Engagement?
Auditing standards use the term audit engagement in many places. However, they do not define what it means. Usually, an audit engagement is any process that auditors perform during their work. It includes the audit process that companies and auditors go through and complete.
During this process, auditors can use various procedures and techniques. One of the primary objectives of an audit engagement is to gather evidence and provide an opinion.
An audit engagement refers to an audit that auditors perform during their work. It encompasses all the steps, methods, and procedures they complete during that work.
Essentially, an audit engagement involves the auditing process as a whole. In some cases, it may also refer to the audit engagement letter. However, audit engagement usually covers the former definition rather than the latter.
Essentially, an audit engagement defines the arrangement between an auditor and a client. This deal includes the work the former performs. On the other hand, it requires the client to provide a subject matter.
In most cases, it consists of the financial statements prepared by the latter. Audit engagements cover all assurance arrangements between clients and auditors. These engagements can be external or internal.
An audit engagement usually covers the external audit of financial statements performed by auditors. For most public companies, this process is mandatory.
Consequently, the primary role of the auditor is to provide reasonable assurance. It boosts the confidence that stakeholders can put on the underlying subject matter. In most cases, these engagements seek to meet two objectives.
These objectives include gathering evidence and providing an opinion about the underlying subject matter. This opinion covers two areas. Firstly, it ensures users that the underlying subject matter gives a true and fair view.
Secondly, it assures them that the subject matter meets the requirements set by an applicable financial reporting framework. There are several types of audit engagements.
What Are the Types of Audit Engagement?
Audit engagements can have many types. These types include a similar process. Usually, they involve an appraisal activity performed by an independent auditor. The primary objective for these types is to assure an intended user.
Similarly, it checks the underlying subject matter against as given criteria or framework. Some of the most prevalent types of audit engagements include the following.
The external audit is one of the most prevalent types of audit engagements. This type involves an independent auditor examining a client’s financial statements. Usually, this process is mandatory for public companies. However, other entities may also choose audits voluntarily.
External audits seek to provide stakeholders assurance about the underlying subject matter. For these audits, the subject matter is the client’s financial statements.
Besides external audits, internal audits are also a prevalent type of audit engagement. However, it does not involve using independent auditors from the outside.
Usually, it covers conducting audits through internal auditors. On top of that, these auditors do not focus on assuring stakeholders. Instead, internal audits cover internal controls, risks, and other similar issues. It also concerns the financial statements but with limited scope.
Forensic audits have become common in various industries. It involves applying auditing techniques to situations involving legal implications. Usually, forensic auditing involves a limited scope and has a specific objective.
Unlike other audits, it does not cover a broad range of activities. Nonetheless, these audits are crucial in helping in legal matters.
Tax audits aim to assess the accuracy of the tax returns filed by a company. Usually, they help establish the amount of any over or under assessment of tax liability. Tax audits come from a tax authority, a central body within a country. For example, these audits fall under the scope of the IRS in the US. In some cases, tax audits can be mandatory based on the taxpayer’s size.
Compliance audits also have a specific scope compared to external and internal audits. However, they do not involve looking at financial information or similar matters. Instead, compliance audits consider if a company conforms to the applicable laws and regulations.
Compliance audits are crucial in helping companies identify and apply those laws. In some cases, these audits are mandatory. However, most companies perform them voluntarily.
What is the Scope of an Audit Engagement?
The scope of an audit engagement refers to the time and documents involved in the process. On top of that, it also covers the areas where auditors must perform their work.
If something is outside this scope, auditors must not spend time ensuring to cover those areas. Overall, audit scope establishes how deeply auditors perform their work. It can range from simple tasks to more complex procedures.
The scope of an audit engagement comes from the underlying agreement with the client. Usually, this scope is a part of the audit engagement letter signed by both parties.
Once they define the scope for the audit engagement, it will apply throughout the process. Auditing standards also provide some guidance on how auditors should set them. However, it may vary based on different circumstances.
A crucial aspect of defining the scope of an audit engagement is its type. Usually, this scope differs based on the type of the underlying audit engagement.
For example, for external auditors, it may vary from what auditors perform in forensic audits. The scope of an audit engagement also considers the needs of the client.
Overall, the scope of audit engagement refers to how much work auditors put into an audit process. On top of that, it defines the areas where the auditors’ responsibilities extend.
However, there is no single scope for every audit engagement. This scope may differ based on various factors. One of the most crucial factors includes the type of audit engagement. Besides that, other variables also impact the scope of an audit engagement.
An audit engagement refers to any process where auditors perform their tasks. There are various types of audit engagements. Usually, these types differ based on the parties involved and the work.
The scope of the audit engagement varies based on those types as well. It defines the work that auditors must perform and the areas to cover.