UNIT-2

AUDIT PROCEDURE

Written by
S. M. Amir Shah

Review by:
Jawaid Amin
 CONTENTS
Page
INTRODUCTION

OBJECTIVES
1. TYPES OF AUDIT
1.1 Audits Classified by Nature of work
1.1.1 Private Audits
1.1.2 Statutory Audits
1.1.3 Internal Audits
1.1.4 Government Audits
1.2 Audit Classified by Method or Approach
1.2.1 Final or Completed Audit
1.2.2 Continuous Audit
1.2.3 Interim Audit
1.2.4 Procedural Audit
1.2.5 Balance Sheet Audit
1.3 Self Assessment Questions-I
2. APPOINTMENT AS AN AUDITOR
2.1 Sole Proprietorship
2.2 Partnership
2.3 Joint stock Companies
2.4 Appointment letter
2.5 Engagement letter
2.6 Audit Planning
3. AUDIT PROGRAMME
3.1 Advantages
3.2 Disadvantages
3.3 Self Assessment Questions - II
4. AUDIT NOTEBOOK
4.1 Contents
4.2 Importance
4.3 Preservation
5. AUDIT WORKING PAPERS
5.1 Heading of Working Papers
5.2 Control of Working Papers
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 5.3 Preparation of working Papers for a Trial Balance by
an Auditor.
5.4 Adjusting Entries and Preparation of working Papers
5.5 Reclassification of Entries
5.6 Let us see the Learned Court Judgement on Lien and
Property of Working Papers
5.7 Filing of Working Papers
5.7.1 Permanent File
5.7.2 Current file
6. RECORDING THE PROGRESS OF AUDIT
6.1 Self Assessment Questions – III
7. SUMMARY OF THE UNIT
8. ANSWER TO SAQS.

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Introduction.
This unit relates mainly to the audit procedures used by the auditor in
performing his work of audit. He plans his work according to the nature and type
of audit and this plan is called an audit programme. The auditors entrusts each
portion of the programme to an audit clerk, keeping in view his experience and
capability. In the note-book, he keeps extracts of important topics such as
memorandum and articles of association, directors‟ minutes, shareholders‟
minutes etc. As the work progresses, the schedule of work is completed, journal
entries are suggested to the client, and various schedules prepared by the client
are checked and filed in a file called “audit working papers”. Furthermore, the
progress of the audit work is also recorded so that extent of work done by each
audit clerk and senior may be known at any time.

Objectives:
After the study of this unit you should be able to:
 Recognise and describe the various classifications of audit according to
the purpose.
 List the type of information necessary for conducting an audit.
 Verify that an audit programmes is a plan for audit work and contains the
necessary information.
 Identify and recall the information contained in the note–book.
 Explain how working papers of each year‟s audit are classified and
arranged in the working papers file and their importance to the auditor.
 Point out the contents of the record of progress of audit and explain its
usefulness in measuring the progress of an audit.

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 1. TYPES OF AUDIT
The types of audit, which may be undertaken, can be broadly classified in
the following two categories:
i) According to the nature of work.
ii) According to the method of work.

1.1 Audits Classified by Nature of Work

Under this class, the following basic types of audit can be grouped:
1.1.1 Private Audits
In such cases, the auditor will conduct an agreed limit of work. This does not
mean that the whole of his work is specifically stated before commencement, but
some broad agreement as to what work is required will have been laid down. The
auditor should obtain a statement in writing as to the nature and scope of the work
he is to undertake. Normally, the audit conducted for sole proprietorship and
partnership is called as private audit. For this type of audit, it is not compulsory
for an auditor to be a Chartered Accountant.

1.1.2 Statutory Audits

For this type of audit, it is compulsory for an auditor to be a Chartered
Accountant. The legal requirement (i.e., Company Ordinance 1984, Banking
Company Ordinance 1962 etc) will provide the necessary information as to the
nature of the certificate required. The auditor will, therefore, have to carry out the
work in whatever manner he considers necessary and no restriction may be put on
him. This type of audit is mandatory for public limited company audit.

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1.1.3 Internal Audits
These differ fundamentally from the types of audit mentioned above. The above-
mentioned audits are undertaken by an independent auditor, who is not an
employee of the organization, whose books he is auditing. For this reason, he is
often referred to as an external auditor. The internal audit, on the other hand, is an
employee of the business organization, whose books he is auditing. Internal audit
is actually the preparation for external audit. This duty is assigned to any
responsible officer / manager from within the organization, who was not involved
in the preparation of accounts record to review/audit the operations of the
business and books of accounts. Internal auditor points out the irregularities and
deficiencies for making the record fairly complete before the conduct of external
audit in order to avoid observations from the external auditors.

1.1.4 Government Audits

Government allocates funds to its departments for specific purposes. These funds,
being public money, are subject to audit. The Auditor General is authorized to
conduct the audit of funds allocated from the national exchequer. Government has
certain Rules in the light of which books of accounts are prepared and audited.
These rules are Treasury Rules, General Financial Rules, Fundamentals Rules,
and SROs etc.
1.2 Audit Classified by Method / Approach
Under this class, the following basic types of audit can be grouped:
1.2.1 Final or Completed Audit
This type of audit begins, when the books of accounts have been closed at the end
of the financial period and is carried through to completion in one continuous
session. It is a more satisfactory form of audit and is employed wherever possible.
This type of audit is very convenient to the auditor, in as much as he can trace the

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items completely from their sources to their final stages and sometimes the effect
of such items. Furthermore, the work, being fresh in the minds of those who are
performing the audit, facilitate the expression of their opinion on the accounts.
1.2.2 Continuous Audit
A continuous audit is the one where an auditor audits the accounts of a company
throughout the year or at intervals, which may be regular or irregular. This audit is
adopted where the volume of work is very large. It is carried out where fraud is
suspected or considered probable and where it is desired that the audited final
accounts should be ready soon after the end of the financial year. It is also used
where interim final accounts are required.
The advantages of continuous audit are as under:
i) More detailed audit is possible.
ii) The chances of fraud and defalcations decrease as suitable action may be
taken promptly before they reach an advanced stage.
iii) Audit can be performed more quickly and the final accounts are audited
soon after the close of the financial year.
iv) Presence of the auditor throughout the year, at regular or irregular
intervals, exerts check on staff.
v) Accounting staff remains alert and maintains the work up-to-date. Hence,
it brings about increased efficiency, accuracy, and neatness in the
accounts.
vi) Continuous association of the auditor enables him to render valuable
service by way of suggestions for improvements.
Following are the disadvantages of continuous audit:
i) Figures may be innocently or fraudulently altered after they have been
checked by the auditor. This may lead to concealment of fraud or
disagreement of trial balance.
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ii) Since there are intervals in the audit work, persons performing it may lose
thread of their work and might not be able to follow up such transactions
as may have been left open at the date of the last visit.
iii) The frequent visits of the audit staff may cause inconvenience to the
accounting staff of the client. Audit staff may also do the work
mechanically, i.e., exercising due care, skill, and judgment in the work.
iv) Frequent mixing of the audit staff with the accounting staff may bring
them together on friendly terms. This may have adverse effect on the
quality of the audit.
In order to safeguard against above-mentioned defects or to minimize the ill
effects, the following precautions may be adopted:
i) Using a secret code of ticks for all erasures or alterations. This will enable
to locate where any erasures or alteration have been made after the audit.
ii) Checking of one book must be completed in one visit and the checking of
impersonal accounts may be done when all the books are available to the
auditor.
iii) As far as possible, same staff should be deputed to perform the audit from
period to period.
iv) All queries and points raised and how they were cleared must be noted in
the audit notebooks. Any delay in disposal of any query should be avoided
at all costs.

1.2.3 Interim Audit

Object of interim audit is to have periodic (it may be monthly, quarterly or half-
yearly) check upon the income and financial position of a business. This audit is
needed by a new business organization or for payment of interim dividends. It
differs from continuous audit in a way that interim audit has fixed internal that is

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monthly, quarterly or half yearly but in a continuous audit their may not be fixed
intervals. Its advantages and disadvantages are the same as those of continuous
audit.

1.2.4 Procedural Audit

It is an examination and review of the internal procedures and records of an
organization in order to ascertain their reliability as a basis for the compilation of
the final accounts and balance sheet. The greater importance now attached to
investigating the effectiveness of the internal control of a business has caused a
natural development of the procedural audit. It is not, in effect, a peculiar type of
audit, but will most usually form part of the whole audit. Particular attention is
focused on such matters as:
i) Assessing the adequacy of the internal control system.
ii) Ensuring that procedures laid down by management are being
followed.
iii) Ascertaining whether any changes have been made in the internal
control system of which the auditors have not been notified.
iv) Establishing whether the records are sufficiently reliable for the
preparation of the final accounts.

In depth, tests may be applied, whereby certain transactions are traced from their
origin to their completion to ensure compliance with procedures established to
maintain adequate internal control.

1.2.5 Balance Sheet Audit

In this case, the auditor starts his work from the balance sheet and works back to
the books of prime entry and their documentary evidence. It is essential to ensure,

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however, that there is a reliable system of internal check and control in operation;
and if it is so, the following broad scheme of operation may be suitable:
i) Examine the minus book of the organization, taking notes on any
matters of importance, affecting accounts and balance sheet items.
ii) Compare the revenue account of the year of audit with that of the
pervious year, ascertaining the reasons for any material
differences.
iii) Compare the increase or decrease of variable expenses in
conjunction with the variation in turnover. Unit quantities are
important with regard to turnover, and adjustment and allowance
should be made of price or other variations.
iv) Carefully investigate any changes in gross profit rates and stock
values. Various sales lines should be separated for this purpose.
v) Items of non-recurring nature should be examined such as losses,
or profit incurred on fixed assets sales. Depreciation charges
should be carefully checked for each type of fixed asset.
vi) The effect of the profit or loss for the period in varying the balance
sheet should be explained. Schedules such as sources and
applications of funds statement may be usefully applied.
vii) The variation in fixed assets holdings should be examined by
means of schedules showing movements since the last balance
sheet date.
viii) Examine the variation in current assets as compared with the
previous year. Accounting ratios may be most useful together with
the credit control schedules.
ix) Lists of pre-payments and accruals should be scrutinized and any
material alterations should be investigated.
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1.3 Self Assessment Questions-I

(a) Fill in the blanks:

(i) The auditor prepares a_____________for his audit work according
to the nature and type of audit.
(ii) The schedule of work completed, the suggested journal entries, the
schedules and statements prepared by the client, and the progress
of the auditor work are filed in a file called_____________.
(iii) The scope of audit of a ____________is determined by an
agreement.
(iv) The scope of audit of partnership is determined
by_____________.
(v) The auditor of a firm should consider each___________as his
client and protect the ____________of each.
(vi) The scope of audit of an autonomous body is determined by
an____________or____________governing that body.
(vii) The scope of audit of public limited companies is governed by the
____________.
(b) Which of the following are false or true:
(i) The auditor may side with any partner.
(ii) In continuous audit, the accounting staff remains alert and
maintains the work upto date.
(iii) Statutory audit is the final audit.
(c) Is the audit of a limited company‟s accounts necessary by statute?
(d) Explain continuous audit. What precautions would you suggest to
overcome its disadvantages?

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(e) (i) If an auditor of partnership discovers an irregularity, to whom
should he report?
(ii) If a company auditor discovers an irregularity, to whom should be
report?
(f) The audit under Companies ordinance1984 is called: Tick one item out of
the four you consider correct.
(i) Continuous audit.
(ii) Statutory.
(iii) Non-statutory.
(iv) Detailed audit.

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 2. APPOINTMENT AS AN AUDITOR
An auditor may be appointed to audit the accounts of a sole proprietorship,
partnership or a limited company. Important points to be considered at the time of
appointment in each case are given below: -
2.1 Sole Proprietorship # In this case, an auditor is appointed by the
proprietor. The rights, liabilities, responsibilities, duties and remuneration etc. are
determined by the agreement between the auditor and the proprietor. The scope of
the audit is also determined by the agreement. Where, however, the scope has not
been defined, the auditor should perform all the audit works that are normally
required of a professional auditor, as the law does not place any limitation or
obligation on him. The auditor should settle the scope of his audit in order to
avoid any misunderstanding in future. He should obtain his letter of appointment,
which should state the scope of audit. He should also mention the scope in his
report.
2.2 Partnership In this case, his appointment should not be against the deed
of partnership. The terms of appointment, etc. are determined in the same way as
have been mentioned above in case of a sole proprietorship. It is the duty of the
auditor to consider each partner as his client and to protect the interests of each.
He should not take side of any partner. If he discovers any irregularity, he should
report it to all the partners.
2.3 Joint stock Companies In this case, the Companies Ordinance 1984
provides the rights, duties and responsibilities of an auditor. The auditor should
not be a director, an employee or a debtor of that company. He should have no
interest in the company, whose accounts he is to audit. The object of these
restrictions is to ensure that the auditor is not under direct or indirect control of
the directors. The first auditor of a limited company is appointed by the directors

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and in subsequent years, he is appointed by the shareholders in the annual general
meetings.

2.4 Appointment Letter Appointment letter is written by the Management of

the organization to the appointed auditor, informing him about his appointment in
the organization as auditor for particular period of time. Issuance of appointment
in case of sole proprietorship and partnership as discussed above is a simple
process but in case of companies the auditor may also be appointed by different
ways as mentioned under section 252 of the Companies Ordinance 1984. The
appointment letter may be issued in any of the following cases: -
 When the first auditors of a company shall be appointed by the directors
within sixty days of the incorporation of the company.
 When the directors fill any casual vacancy in the office of an auditor.
 When the directors fail to appoint the auditors in the above cases, the
Security and Exchange Commission appoint a person to fill the vacancy.

2.5 Engagement Letter Once the appointment letter is received by the

Auditor from the company regarding his appointment as auditor, the engagement
letter is written by an auditor to that company (client) in response to the
appointment letter before commencement of audit. The auditor wants to make the
responsibilities of auditor and management clear in order to avoid any
misunderstanding between the both. The exact scope of the auditor‟s duties is
ascertained. In the engagement, the auditor describes the statutorily and
professional duties of the auditor according to the Internal Accounting Standards.
The auditor also explains in the engagement letter the management responsibility
regarding the maintenance of books of accounts. IAS2 (International Audit
Standard No.2) deals with the engagement letter.
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2.6 AUDIT PLANNING When the scopes of the audit responsibilities are
agreed by the auditor and the management of the company, next step is the audit
planning. Planning in any field of life is considered as the best policy. The auditor
should also formulate an overall plan. Keeping in view the scope of audit to be
conducted, planning helps the auditor to complete the audit program timely and in
an efficient manner. Proper planning provides an opportunity to the auditor to
concentrate on important areas. In order to formulate an effective plan, the auditor
should: -
 Ascertain the organization‟s system of accounting and internal control.
 Review that system to find out to what extent it has been designed to
ensure, as far as possible, the accuracy and reliability of the records and to
safeguard the assets.
 Prepare an audit programme to test the operations of the system.
The best system from audit point of view is one, which incorporates proper
control in the books and minimizes the risk of errors and frauds. If the auditor
finds that the system incorporates satisfactory control procedures, his test of the
day-to-day transactions can be kept to the minimum. Where the system is
deficient in controls, the auditor must form a view of the shortcomings and
detailed test of books and records with the supporting vouchers, and other
evidences will be necessary in order to satisfy himself that the transactions have
been recorded correctly.
The system of accounting and internal control in force in the client‟s office,
therefore, forms the foundation for the preparation of the audit programme. Based
on his assessment of the system, the auditor will prepare an appropriate
programme of audit tests to enable himself to form an opinion as to whether the

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company has kept proper books of account, which properly record all its
transactions.
3. AUDIT PROGRAMME
Audit programme is part of the audit planning. Its means a written programme of
audit tests to be applied by the auditor. An audit programme guides the audit
personnel, in work of audit, to be done. On completion of an audit, it serves the
purpose of audit record, which may be useful for future reference.

An audit programme normally comprises the following: -

1. Detailed instructions, hints, and guidance to the audit personnel for
producing work of high standard and reliability.
2. Instructions on how to audit the various books and their accounts.
3. Instructions regarding the extent of checks to be carried out and various
grades of persons employed and how to record the audit queries.
4. To fix the responsibility for the work done, instructions should be laid
down so that the clerk, who has done a certain audit work, should append
his initials.
5. The period of the work checked should be indicated so that another clerk
may continue the work without duplication.
6. The details showing the full scope of the work performed and the progress
of the audit.
3.1 Advantages
i) The principal (or partner) of the audit firm may know the work performed
and the general progress of the audit. It facilitates supervision and control
over audit work.
ii) It enables the senior Incharge of the audit to distribute the work according
to the abilities of the clerks and to coordinate their work.
iii) Uniformity in the work is maintained.
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iv) In case the clerk is unable to continue the work, his work may be assigned
to another, who will proceed further with the work without any dislocation
or duplication.
v) The duties and responsibilities are clearly defined.
vi) A written programme shows the work performed and yet to be performed
and extent of work performed. Hence, it is good a evidence that may be
used if the auditor is accused of negligence.
3.2 Disadvantages
i) A written programme looses its flexibility. It becomes so rigid as to kill
initiative of capable persons.
ii) The programme may be followed mechanically year by year, overlooking
other important aspects like internal control.
iii) At the conclusion of audit, the auditors may have covered the whole field
but it cannot be said with certainly that all the necessary works have been
completed, or whether the closely associated accounts have been
intelligently examined.
The remedy in such situations is that the programme should be considered as the
basis of audit work and it should not limit the actual audit work. It must always be
open to amendments and improvements. A specimen audit programme for
purchases and purchases returns is shown on next page.

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 SPECIMEN AUDIT PROGRAMME
PURCHASE AND PURCAHSE RETURNS
Details of Work Months Signatures
checked
1. Verify that the invoices are supported by
copy requisitions, copy orders and copy
goods received notes.

2. Test to ensure that authorities for

requisitions, orders and passing of
payments, are within agreed limits.

3. Verify that credit notes have proper

supporting documents, e.g., copy goods
returned notes.

4. Check extensions and additions of

invoices.

5. Ascertain that purchases other than those

for resale are properly allocated to nominal
accounts.

6. Test the numerical sequence of goods

received and returned and enquire as to the
missing numbers.

7. Inspect goods received or returned notes

whether matched to invoices or credit
notes, and enquire as to any outstanding for
an undue length of time.

8. Check costs and cross-costs of purchases

daybook, and ensure that prelists are
prepared for control accounts prior to
passing to ledger clerks or cashiers
department for payment.
9. Check postings to nominal ledger.

10. Check control accounts.

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3.3 Self-Assessment Questions No. 2
a) Reply in yes or no against the following: -
i) Audit programme does not guide audit staff in their work.
ii) Audit programme is a written programme of audit tests to
be applied.
iii) Auditor should sign the programme, as any work is
complete.
iv) Audit programme does not clearly define the duties and
responsibilities.
v) Audit programme is a good evidence, if an auditor is
accused of negligence.

b) Fill in the blanks in the following: -

i) A written programme may ________________ is
flexibility.
ii) Audit programme facilitates _________ and control over
audit ________.
iii) Audit programme contains ___________ on how to
______________ the various books and their
_________________.
c) Give briefly the advantages of having an audit programme.
d) What are the remedies to overcome the disadvantages of audit
programmes?

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 4. AUDIT NOTEBOOK
During the audit, certain important points may arise which need to be discussed
with the management or important for future reference. These points are noted in
a notebook (bound or loose leaf). This notebook is prepared so that the Incharge
of an audit remains perfectly familiar with the work performed on each audit. In
the event of the clerk responsible for a particular work being away or leaving the
firm, no difficulty will be experienced in carrying out that particular matter
through the help of audit notebook. This book contains definite record of the work
performed on each audit. Separate audit notebook (bound or loose leaf) should be
kept for each audit and notes should be taken of all-important matters, affecting
the audit.
4.1 Contents
When conducting the audit of a business, it is not necessary to make notes of
unimportant matters. These should be settled as they arise. But the important
matters must be noted. The following are, however, the usual contents/points of
an audit notebook.
i) Information of permanent nature relating to the business such as important
provisions of the various legal documents of a limited company or the
partnership deed of a firm.
ii) A record of the exact work done on the audit, a copy of the audit
programme itself being sometimes inserted in the audit note book.
iii) A record of all the missing vouchers, invoices etc, duplicates of which
may have to be obtained.
iv) Note of all the difficulties and queries, which have not been cleared.
v) Notes of queries arising out of any matters of principle, which would be
useful at subsequent audits.
vi) A brief record of those matters, which will affect the next audit.
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 4.2 Importance
Following are the main points of importance of maintaining an audit notebook: -
i. The notes recorded in it enable the auditor to ascertain whether all the
work, that should have been done on a particular audit, has actually been
done and that nothing important has been omitted.
ii. Such records are also necessary for the sake of future reference. Should
the auditor be accused for negligence, he would be in a position to put up a
good defence by producing his audit note book, showing the exact work
done by him on the audit in question, the queries raised, and the
explanations obtained. Under such circumstances, if proper records have
not been kept, he may find himself in a position of great difficulty.
4.3 Preservation
When an audit is completed, the audit note book, the audit programme, any other
audit papers such as certificates obtained in the course of the audit, copies of the
accounts and the audit report should be carefully filed and preserved, as these may
be required for reference at a future date.

5 AUDIT WORKING PAPERS

Working papers are the papers, prepared or collected by an auditor from the
client‟s record while conducting audit. These consist of schedules, analysis
statements, summaries of data, trial balance, adjusting entries, and copies of
important documents etc. which are essential for the preparation of final accounts
and for formation of the auditor‟s opinion on them. Although these working
papers are prepared from clients‟ records, the working papers are the property of
the auditor. These papers should be preserved carefully so that it is easy to locate
and refer when needed. It is the professional duty of the audit. It is the
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professional obligation of the auditor to maintain confidentiality in respect of
information contained in working papers.
5.1 Headings of Working Papers
Each working paper should be given a proper heading so that it may be filed
properly and located when needed. Each working paper should have at least the
following information:
i). Name of the client.
ii). Title of the schedule.
iii). Date, when the statement was prepared.
v). Date, when it was examined.
5.2 Control of Working Papers
No unauthorised person should have access to them. They should be kept under
lock and key. The two most important reasons for such strict security measures
are:
i). The clients‟ staff will not be able to alter figures in the working papers,
and
ii). They will not be able to know certain important methods and procedures
adopted by the auditor, e.g., the method of sampling certain items, which
are given due importance this year.
5.3 Preparation of working Papers for a Trial Balance by an Auditor
The trial balance is prepared direct form the ledger and contains all the balances
after year-end adjustments. The object of this trial balance is to ascertain that the
ledger is in balance. In case the trial balance is out of balance, the auditor should
ask the clients‟ staff to locate the error. When the error is located by the auditor,
he should be compensated for the accounting work.
The trial balance in the working papers should show the previous years‟ balances
for comparative and reference purposes, and also full details of all the figures.
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5.4 Adjusting Entries and preparation of working papers
Some times, some transactions may be left out of the book of accounts by the
accountant, or there are chances of incorrect entries during the normal accounting
period, or some transactions need apportionment at the end of the period. If the
auditor notice something like that, he will ask the client to do the needful as this is
not an auditing work. When the amounts involved are very small, the client may
object to it on the ground that such entries involve a large volume of work, whose
net effect on income is very insignificant. The auditor should explain to the client
that the accounts should be free from the errors of omission, commission etc.
Some clients do not like their un-audited figures, to differ from the audited figures
as they have already sent the un-audited figures to their customers and clients. In
this case also, the auditor should insist on passing the required journal entries. If
the client does not agree, the auditor should qualify his report. The adjustments
accepted and recorded will be entered by the auditor in the working papers.
Even when the client may have closed the books and ruled off the accounts, the
adjusting entries will have to be recorded. If the client has made the journal
entries in the succeeding year, such entries will have to be reversed. The adjusting
entries will be made during the year for which the accounts are being audited.
They will, therefore, affect the balances of accounts of this year.
5.5 Reclassification of Entries
Proper classification is one of the basic duties of an accountant. It is very essential
for preparing the proper profit and loss account, and the balance sheet. The
classification should be done on a consistent basis.
While auditing, the auditor may reclassify the entries and the journal entries,
reflecting the reclassification should be passed. Such journal entries should also
be filed under a distinct head in the working papers‟ file. In case, where a journal
entry has been recorded in the working papers file but later on it was decided that
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it should not be journalised, auditor should write in the working papers that it has
not been journalised and he should put his initials with the date.
5.6 Let us see the Learned Court Judgment for Lien and Property of
Working Papers
Audit notebook and the working papers are the property of the auditor. In case of
Sockockinsky Vs Bright Grahams and Company, 1935 (England), it was decided
that auditors have a right to retain working papers even after the payment of the
audit fee. The case presented before the court was that whether the auditors had a
right to retain the working papers even if the payment of audit fee had been made
to them. The court had given the judgment in favour of the auditors that they have
lieu on the working papers even after the payment of audit fee had been made to
them.
5.7 Filing of working Papers
Audit working papers may be classified in two separate classes i.e. permanent
record and current record. In order to maintain proper record, for easy future
reference, two separate types of files are maintained.
i) Permanent Files
ii) Current Files
This classification of working papers is on the basis of their importance. If the
working paper is of a continuing importance, it is filed in permanent file and if the
papers relate to the current period financial statements, on the basis of which the
auditor has to prepare the audit report, it is filed in the current files.
5.7.1 Permanent File
We may same papers relating to matters of permanent or continuing importance.
Permanent files contain papers, which pertain to the company‟s rules, regulations,
policies etc. In other words, these papers should be kept in a permanent file,
suitably indexed, and these should normally include the following:
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i) Memorandum and articles of association and other appropriate statutory or
legal regulations.
ii) Copies of other documents and minutes of continuing importance.
iii) A short description of the type of business carried on and the place of
business with addresses and telephone numbers etc.
iv) Lists of accounting records and responsible officials and plan of
organisation.
v) Statements also showing a note of any accounting matters of importance
such as a history of reserves and bases of accounting adopted, e.g., for the
valuation of stocks and work-in-progress, depreciation and the carrying
forward and writing off of expenditure ultimately chargeable to revenue.
vi) The client‟s internal accounting instructions and internal audit instructions
including, where appropriate, stocktaking instructions.
5.7.2 Current File
Current files contain the papers, which directly support the preparation of audit
report. In other words, we may say that these papers are concerned with the
accounts being audited, and normally contains the following: -
i) A copy of accounts or statements on which the auditors are reporting,
authenticated by directors‟ signatures or otherwise.
ii) Internal control questionnaires and standard audit programmes duly
referenced to one another, plus any flow charts.
iii) A schedule for each item in the balance sheet and profit and loss account
preferably including comparative figures for the previous year, showing its
make-up and how its existence, ownership and value or liability have been
verified. These schedules should be cross-referenced to documents, arising
from external verification, such as bank certificates and the results of
circulation of debtors and creditors and attendance at physical stocktaking.
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iv) A checklist concerning compliance with the statutory and international
accounting standards disclosure provisions.
v) A record showing queries raised during the audit and their disposal, with
notes, where appropriate, for attention in the following year. Queries not
cleared at the time should be entered into another schedule for attention of
the person reviewing the audit and for reference to the client if necessary.
Material queried, which cannot be settled satisfactorily by immediate
reference to the client, may require a qualification of the auditor‟s report,
and should be fully documented and supported by a note of all discussions
with the client and any explanations given.
vi) A schedule of important statistics of working ratios, comparative figures
being included, where appropriate.
vii) Extracts of relevant minuets of directors or shareholders‟ meetings cross-
referenced to working schedules.
viii) Letters of representation, i.e., written confirmation by the client of
information and opinions expressed in respect of matters such as stock
values and amounts of current and contingent liabilities.

6. RECORDING THE PROGRESS OF AUDIT

For proper control and timing of audit work, it is essential to maintain proper
record to show the progress of each audit. This record should contain the
following informations.
i) Staff engaged: Names of the persons engaged in the audit, viz. senior
auditor and junior auditor etc.
ii) Timetable of Audit: To show the date of start, each day spent by every
member of the audit team on each audit, etc.
iii) Colour Used: Colours used in the audit ticks should be indicated.
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iv) Progress of Audit Work: These should show the following:
a) Date, when clients‟ request for commencements of audit was received.
b) Acknowledgement date.
c) Date, when interim audit started.
d) Date, when interim audit ended.
e) List of queries sent to the client.
f) Date, when the final audit started.
g) Examination of memorandum, articles, and the previous year‟s working
papers.
h) Draft accounts prepared / checked.
i) Accounts approved by the partners.
j) Accounts submitted to client and approved by him.
k) Closing entries passed.
l) Client advised in writing of weakness in internal control.
m) Taxation notes prepared and checked with certified accounts.

6.1 Self –Assessment Questions No. 3

a) Write „yes‟ or „no‟ against each of the following: -
i) Audit programme is a guide in audit work.
ii) For each audit, there is a separate audit notebook.
iii) The audit notebook is the property of the client.
iv) Audit working papers are the property of the auditor.
v) Books of account are the property of the client.
b) Is it correct to say that correct reclassification is one of the basic duties of
an auditor?

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c) Fill in the blanks.
i) Audit ___________ book contains definite record of
________________ work performed on each
________________.
ii) The working ___________ of an audit are prepared during
the _____________of an _______________.
iii) No unauthorised ____________ should have access to
_______________ working papers.
iv) Permanent file should be ______________ up to date at the
_________ time.
v) Tick ____________ of various _____________ and
______________ are used in __________________.

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 7. SUMMARY OF THE UNIT
The rights and duties of an auditor depend upon whether he is auditing a sole
proprietorship, a partnership, or a Joint stock company. In case of audit of
autonomous bodies and public limited companies, his duties and liabilities are
defined by law. Auditors may be appointed to conduct audit of sole
proprietorships and partnerships, autonomous bodies, companies, and charitable
organisations etc. Audits may be classified into final audit, continuous audit,
interim audit, procedural audit, and balance sheet audit according to the
classification or method of approach. Under classification by nature of work,
however, they can be divided between the private audits, statutory audits, and
internal audits.
For the proper conduct of an audit, the auditor should study the system of
accounting and internal control, ascertain its weakness and the extent to which it
can be relied upon, and then to prepare an audit programme with the aim of
testing the operation of that system in practice. An audit programme should
contain detailed instructions on the audit work to be performed, fix duties and
responsibilities of the work among the audit staff, and the scope and progress of
the audit. The written programme should be considered as a guide; rigid
adherence to the programme will make audit mechanical and will not serve the
purpose of audit, which is forming a professional opinion on the financial position
of a company during a period.
A separate notebook is maintained for each audit. A notebook is divided into
certain parts. Each part of the work is given to a particular member of staff. It
contains, information of a permanent nature; the matters and points of importance,
which the auditor comes across during the course of audit; full notes of errors
discovered, queries and their answers and any change in the accounting system or

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internal controls; any other matter, which is important, e.g. list of missing
vouchers.
Working papers should be prepared for each audit. These working papers should
consist of schedules, analysis of statements necessary to prepare profit and loss
account, and balance sheet of a year. These papers are preserved carefully. They
may be used as future records and as evidence in a court of law, showing that the
auditor had not been negligent in auditing. The working paper should be carefully
arranged and properly indexed, so that an information needed in future may be
traced without least difficulty. Papers relating to matters of continuing importance
affecting the audit should be kept in a separate file, known as permanent file, and
those relating to the accounts being audited of a particular year in another file
known as the current file. The work done by the staff of the auditing firm is also
noted in the working papers so that the progress of the work done can be watched.

8. ANSWERS TO SELF-ASSESSMENT QUESTIONS

SAQ-1.
(a) (i) Programme.
(ii) Audit working papers.
(iii) Sole proprietorship.
(iv) Letter of Appointment.
(v) Partner, rights.
(vi) Ordinance, act.
(vii) Companies Ordinance, 1984
(b) (i) No. (ii) Yes.
(iii) No.
(c) Yes (See section ) 1.2.2
(d) See section 1.2.2
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 (e) (i) All the partners.
(ii) Shareholders at the annual general meeting.
(f) Statutory audit.
SAQ-2.
(a) (i) No. (ii) Yes.
(iii) Yes. (iv) No.
(v) Yes.
(b) (i) loose (ii) Supervision, work
(iii) instructions, audit, accounts
(c) See section 3.1
(d) See last para of Section 3.2
SAQ-3.
(a) (i) Yes. (ii) Yes.
(iii) No. (iv) Yes.
(v) Yes.
(b) See reclassification of entries in section .
(c) (i) Note, the, audit.
(ii) papers, course, audit.
(iii) Person, audit.
(iv) Brought Appropriate.
(v) Marks, kind, colours, audit.

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