What is The Audit Cycle? A Step by Step Explanation


To know about the audit cycle in detail, we need to have a brief concept of what audit is.

An audit is an arranged process without any bias, conflict of interest or external pressure that checks or review the books, financial statements, legislation and other authority’s guidelines, and critical disclosures which are important to be known by the owners of the company.

An audit is, therefore, a review or examine of the company’s accounts, financial report, or financial statements that will check if it will present a true and fair view and compliant with applicable law and regulations.

An audit cycle is a process followed by the auditors to approach the audit of financial statements. The audit cycle is following a methodology that will help the auditor to conduct the audit efficiently so it can give a reached output to the auditors.

These steps are followed to make ensure that the financial statements are accurate and free of errors either due to fraud or error. This is a continuous process that is followed as below:

The planning phase of the audit:

Auditors conduct planning of the upcoming audit engagement in which the auditors outline the main areas which are exposed to higher audit risk.

In this phase of engagement, auditors try to know the nature and business of the client and what risks can they face that may stop their operations from going concern.

The resource is also one of the most important factors that need to be considered. For example, if they have enough headcount with experiences on the company to be audited or not.

Related article  Management Responsibilities Related to Fraud - Main Responsibilities You Should Know

If there is not enough headcount or the staff that auditors have don’t have enough experiences then the engagement should not accept.

Understanding the environment of company:

In this stage of the audit process, the auditor looks at the internal controls system of the client. The understanding is starting from the control environment deep dive into the control activities of each control.

Auditors also need to understand the internal control over the financial report so that they could assess if the current control could have any negative impact on the financial statements to be audit or not.

This is the stage in which the auditor decides the approach of the audit to conduct. Weak internal controls can result in a more skeptical approach to the audit.

Risks of misstatement:

During this stage of the audit, auditors point out some areas on the basis of judging the controls of the system of the client.

Auditor decides which areas could give a raise to material misstatement. Auditors find the probability of the process going wrong here.

Risk assessment procedures:

Auditors focus on the risks that may occur within the business. These may be due to different reasons.

There are two different types of risks such as inherent risk and control risks. Control risks arise as a result of weak controls in the operations of the company. Inherent risks are directly associated with the nature of the company.

Assessing test of controls:

While the auditor decides about the approach of the audit about a company, they conduct a test of controls before starting the actual audit.

Related article  Audit Procedures for Fixed Assets: Assertion, Risks and More

The observe the procedures followed while posting entries in the system. The auditor can, therefore, rely on further processes if the tests of controls are strong.

Stage of substantive procedures:

Certain areas of the financial statements require the auditor to conduct substantive procedures.

Substantive procedures are the procedures implement to check the post position of balances after the year-end. One example of this is to verify the movement of the balance after the year-end.

Finalization level of audit:

In this stage of the audit, the auditor finalizes the audit engagement by having a final overview of the invoices and other important documents. In this stage of the engagement, the final financial statements presentation is prepared.

Issuance of the audit report to the management:

This is the level in which the auditors issue a report on the overall experience and practice during the engagement.

Management of the company is presented with a descriptive report of any discrepancies in the financial statements of the company. This report is issued according to some standard principles.

Summarizing the audit:

In this phase, the auditors maintain the necessary documentation for their own purpose. The audited financial statements are signed by the management of the company.