The Audit Engagement Journey
This simulation walks you through the key phases of a financial statement audit, from initial acceptance to the final report. Click "Next Step" to see the responsibilities of management and the auditor at each stage.
Phase 1: Engagement Acceptance
Before an audit begins, both parties must agree on the terms and establish their respective roles.
Management Responsibilities
- Prepare and fairly present the financial statements in accordance with GAAP/IFRS.
- Design, implement, and maintain effective internal controls.
- Provide the auditor with access to all necessary information and personnel.
Auditor Responsibilities
- Ensure compliance with ethical requirements (e.g., independence).
- Establish the terms of the engagement in an engagement letter.
- Determine if the appropriate financial reporting framework is used.
Phase 2: Assess Risk & Plan Response
The auditor develops a strategy based on an understanding of the client's business and its risks.
Management Responsibilities
- Provide information about the entity, its environment, and internal controls.
- Make judgments and accounting estimates.
Auditor Responsibilities
- Develop an overall audit strategy and plan.
- Determine materiality for the financial statements.
- Perform risk assessment procedures to identify risks of material misstatement.
- Maintain professional skepticism throughout.
Phase 3: Perform Procedures & Obtain Evidence
This is the "fieldwork" stage, where the auditor executes the plan to gather evidence.
Management Responsibilities
- Provide supporting documents for transactions (e.g., invoices, contracts).
- Facilitate auditor access to personnel for inquiries.
Auditor Responsibilities
- Perform tests of controls (if applicable).
- Perform substantive procedures (tests of details and analytical procedures).
- Obtain sufficient and appropriate audit evidence to achieve reasonable assurance.
Phase 4: Form Conclusions & Report
The auditor evaluates the evidence and communicates the findings in the audit report.
Management Responsibilities
- Provide a written representation letter to the auditor.
- Assert that they have fulfilled their responsibilities for the financial statements.
Auditor Responsibilities
- Evaluate audit results and uncorrected misstatements.
- Consider subsequent events after the balance sheet date.
- Form an opinion on the financial statements.
- Issue the written auditor's report.
