Audit Cycle: Definition, Steps, Example, Types

An audit involves the examination of a subject matter based on suitable criteria. In most cases, the subject matter is the financial statements prepared by a client. On the other hand, the suitable criteria may come from auditing standards or regulatory frameworks. Usually, each of these elements comes from auditing standards. These standards also dictate the auditing process as a whole.

Under auditing standards, auditors must follow a specific process during the audit process. This process includes various stages, which fall under the audit cycle.

What is an Audit Cycle?

An audit cycle is a sequence of procedures, processes, or methods auditors follow during an audit engagement. Usually, this cycle includes the same steps for every audit with some exceptions. As stated above, the audit cycle comes from auditing standards. Therefore, this cycle is a standardized way of conducting audits to ensure they meet the requirements set forth by these standards.

Following an audit cycle allows auditors to ensure an audit engagement goes through the necessary steps to comply with standards. On top of that, it also provides a sequence for completing audits. Usually, every stage passes information to the next. Therefore, following the audit cycle is crucial in ensuring the audit engagement is complete.

What are the stages of an Audit Cycle?

An audit cycle usually comprises the following stages or components.


Planning is the first and most crucial component of an audit cycle. It is the stage where auditors conduct research about clients and set the audit scope. However, it isn’t a single step. Planning also involves various processes, some of which include the following.

  • Assessing the client and the nature of business.
  • Identifying the accounting areas relevant to the audit.
  • Establishing the methods to collect audit evidence.
  • Setting the audit materiality and performance materiality.
  • Establishing the audit risks involved in the engagement.


Once auditors complete the planning stage, they move on to the fieldwork. It is the stage where most of the practical work occurs. Usually, it differs from one audit engagement to another. However, fieldwork may involve common steps, including the ones listed below.

  • Assessing the test of controls.
  • Collecting audit samples based on audit materiality.
  • Conducting substantive procedures, including tests of detail and analytical procedures.
  • Using audit procedures to collect audit evidence.
  • Identifying discrepancies in the subject matter and discussing them with the client.

Draft report

Once auditors complete their fieldwork, they will prepare a draft report. This report contains a conclusion regarding the findings during the prior stage. Similarly, it will include other areas, such as key audit matters or the issues faced during the audit. However, this report is only a draft at this stage.

Communication with client

The auditors will seek to resolve any pending matters with the client before finalizing the report. It may include pending items from the client or issues faced during the audit. At this stage, the auditors seek to ensure there is no misunderstanding in the collected audit findings.

Audit report

Once auditors are content with their work and no further unresolved matters remain, they will issue an audit report. It will be the same as the draft report. However, it will include modifications for any issues resolved during the previous stage.


Audits follow a defined process that falls under the audit cycle. This cycle involves the sequential steps auditors use to conduct and complete an audit engagement. Usually, it starts from the planning stage. From there, auditors begin their fieldwork and draft an audit report. After resolving pending issues with the client, they will issue the final audit report to the client.

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