Audit, Auditing and Auditor (Part 2)
Audit, Auditing and Auditor (Part 2)
Audit, Auditing and Auditor (Part 2)
An auditor must ensure that he fully understands the enterprise with which he is dealing
before he determines his basic approach to an audit. He must familiarise himself with its
organisation and visit the location at which it operates. He should have a detailed knowledge
of its products or services. He must ensure that he has fully grasped any technicalities
peculiar to the business. Only then he will be in a position to fully comprehend and identify
the transactions which are being recorded in the accounting records, in relation to which the
internal controls will be operating. The auditor should follow the appropriate audit procedure
and adopt different techniques of auditing. He should maintain the principles of auditing in
conducting audit of an organisation in order to meet the following requirement:
i. Ascertain and record the accounting system and internal controls, assess the adequacy
of the accounting system and evaluate the controls on which the auditor wishes to
place reliance.
ii. Test the accounting records and perform compliance tests on the operation of those
internal controls on which the auditor wishes to place reliance.
iii. Compare the financial statements with the accounting records and perform substantive
tests to see that they are in agreement.
iv. Carry out a review of the financial statements.
v. Report on the financial statements as required by the terms of auditor's appointment,
and in compliance with any relevant statutory obligation.
On the basis of his assessment of the accounting system and evaluation of the internal
controls, the auditor will draw up an audit programme specifically designed for that particular
audit.
For this purpose, the auditor should take the following steps:
The auditor is usually appointed by the shareholders in the annual general meeting and shall
hold office till the conclusion of the next annual general meeting. The auditor should receive
the appointment letter before starting his audit work as he has to conduct his audit work on
the basis of terms of references as given in the appointment letter. This appointment letter is
formally called Audit Engagement Letter. Auditing and Assurance Standard (AAS-26)
describes the purposes, applicability and contents of Audit Engagement Letter.
Before accepting the work of a new audit, in the case of a continuing business, it is
established professional etiquette for the proposed auditor to communicate with the previous
auditor to see whether he has any objections to raise. This is also an official requirement as
per the Institute of Chartered Accountants Act, 1949 and has to be adhered to by the
practicing chartered accountants.
3. Acceptance of appointment
If the auditor is satisfied with the reasons for not appointing the previous auditor, he can then
accept the appointment. The auditor should confirm his acceptance to the concerned
organisation through a letter of acceptance.
After accepting his appointment, he should ascertain the precise nature and scope of his audit
work. In case of statutory audit, the scope and the nature of audit work can be ascertained by
referring to the statute. In case of other types of audit, the auditor should discuss with the
client about his area of auditing work.
Before the auditor can determine his basic approach to an audit, he must ensure that he fully
understands the enterprise. He must comprehend the nature of the business and have a
detailed knowledge of its activities. He must familiarise himself with the organisation and
visit the location at which it operates. This will enable him to understand the nature of
transactions, which are recorded in the books of accounts. AAS-20 describes how the
knowledge of business is relevant to the auditors and how the auditors will obtain and use the
knowledge of the business in their audit work.
The auditor should obtain a list of all books maintained by the organisation for recording its
accounting transactions along with the information relating to the existing accounting system.
He should also acquire complete information about the internal control system of the
organisation. In fact, the extent of his work is greatly influenced by the reliability of internal
control system and appropriateness of accounting system adopted.
The auditor should also obtain a list of the principal officers of the organisation. He should
also acquire knowledge about the area and extent of authority of each one of them. This will
help the auditor to have appropriate clarification from the concerned officer.
The auditor must ensure that he has fully grasped the technicalities peculiar to the business.
Only then, he will be in a position to identify the transactions of the accounting records and
relate the accounting system with the internal control system adopted.
The auditor should go through the previous auditor's report as well as the final accounts of
the previous year. This will help him to understand the nature of accounts, important areas for
which detailed checkings are required and the techniques to be used to conduct his audit work
effectively.
After completing the above-mentioned steps, the auditor should issue clear instructions to his
client that the accounts should be finalised and kept ready for audit and the necessary
schedules required to support the final accounts be prepared and made available to him.
Audit Planning
Audit planning is the process of deciding in advance what is to be done, who is to do it, how
it is to be done and when it is to be done by the auditor in order to have an effective and
efficient completion of audit.
According to AAS-8, "Audit planning refers to planning by the auditor made to enable him to
conduct an effective audit in an efficient and timely manner, and includes planning about
area, scope, depth of transactions to be audited, time to be devoted, persons to be deployed
for audit etc."
Audit planning is necessary for efficient and effective conduct of an audit. It should be
continuously followed throughout the course of audit assignment. As per AAS-8, audit
planning facilitates the following:
It is important that audit should be carefully planned to ensure that correct number of staff of
the appropriate level of seniority are available when they are required. In addition to that, in
case of large audits, the work must be planned so that maximum work is done on an interim
basis during the year. This has the double advantage of employing staff effectively
throughout the year and ensuring that the only audit work that is remaining at the year end is
the work that could not be performed earlier. To enable this planning to be carried out
efficiently, the auditor will need to liaison with the chief financial officer / accountant of the
organisation and ensure that the audit firm is fully aware of the exact proposed timing of the
client's own accounting procedures.
In the light of the expected scope of the assignment, the auditor should prepare his audit plan
after taking into consideration the following factors:
Audit Programme
Before starting an audit, a programme of work is usually drawn up. This is known as the
'audit programme'. It is a detailed plan of work, prepared by the auditor, for carrying out an
audit. It comprises a set of techniques and procedures, which the auditor plans to apply to the
given audit for forming an opinion about the statement of account of an organisation.
Prof. Meigs defined audit programme as "a detailed plan of the auditing work to be
performed, specifying the procedure to be followed in verification of each item in the
financial statements and giving the estimated time required."
So, audit programme may be defined as a careful flexibly written layout of the work to be
done by the auditor and his staff in the conduct of an audit. The preparation of audit
programme involves the following considerations:
Area or extent of work
Allocation of work
Time duration for the completion of the work
Responsibility of the persons, who have been assigned the work for its' timely
completion
There is no denying the fact that audit programme not only serves as the plan of action to be
taken for the completion of assigned audit work efficiently and effectively, but the progress
of the audit work may also be ascertained by it. However, different purposes of audit
programme are given as follows:
1. Predetermined audit programme: In this audit programme, all the procedures of audit
must be outlined in general, even though all procedures may not be relevant in a
particular type of audit. The purpose of this type of audit programme is to offer either
procedural guideline or to serve as a 'check off list'. For this reason, this predetermined
audit programme is also known as. tailor-made audit programme.
Whatever may be the nature of audit programme, usually the following benefits are
derived from an audit programme:
1. Assurance of completion of work: It ensures that all necessary work has been
done and nothing has been omitted.
3. Uniformity of work: A uniformity of the work can be attained as the same pro-
gramme will be followed at subsequent audits.
5. Guidance to the staff: It is a kind of guidance to the audit clerk for the work
he has to perform.
6. Defence against charge of negligence: The auditor can defend himself in case
of a charge of negligence on the basis of the audit programme.
8. Final review of work: An audit programme facilitates the final review of work
before the report is signed.
9. Helpful to the new employees: For a new employee, the audit programme is a
guide to his duty.
10. Basis of future programmes: It is a useful basis for preparing the programme
for the subsequent years.
1.Loss of initiative: An efficient clerk loses his initiative because he has to follow the
programme which has been fixed in advance.
2.Want of flexibility: Even if the audit programme is well drawn up, it may not cover
everything that might come up during the course of audit.
3.Rigidity in programme: Each business may have a separate problem of its own and
hence a rigid programme cannot be laid down for each type of business.
4.Unsuitable for small concerns: Drawing up of an audit programme may be
unnecessary for a small concern.
5.No scope of changes: The audit programme may be followed mechanically year after
year though some changes might have been introduced by the client.
6.Concealment of incapacity of staff: Inefficient audit assistants may also take shelters
behind the programme.
Obtaining up-to-date information and encouraging audit assistants to inform the deviations
from the standard and the audit programme can avoid the aforesaid shortcomings and
accordingly the principal may modify the programme.
In fact the disadvantages of written audit programme arise due to misunderstanding of its
purpose. It should be taken as only a guide to audit and should not be treated as rigid and
inflexible document. For this purpose, the auditor should take the following steps:
1. Educating the audit staff: The audit staff should be made known about the purpose of
audit programme. They must be clearly stated that they may go beyond the audit
programme if the situation so warrants. The opinion of the audit staff may also be taken
while drafting the audit programmes.
3. Rotation of work: The duty of audit staff should be rotated so that no staff does the same
job year after year. This will help in reducing the monotony of work.
4. Overall supervision: Proper supervision and review of work is also useful for overcoming
the disadvantages of predetermined audit programme.
The difference between audit plan and audit programme can be drawn clearly on the following
grounds:
1. Audit plan is defined as the scheme or design prepared by the auditor for conducting an
audit, in an effective manner. On the other hand, audit programme refers to an exhaustive
plan which comprises of a list of verification steps, to be implemented, to the final
accounts of the organization, to collect sufficient facts and evidence, so as to facilitate the
auditor for expressing the opinion.
Audit Notebook
An audit notebook is usually a bound book in which a large variety of matters observed
during the course of audit are recorded. It is thus a part of the record of the auditor available
for reference later on, if required. The matters may be observed during the course of audit for
which no satisfactory answer have been given by the client or those which require to be
incorporated in the audit report. It is a kind of permanent record available to the auditor.
The audit notebook is an important document of audit. It serves the following purposes:
1. Facilitates future audit: The audit notebook of current year helps the auditor while he
starts audit in the next year. He can easily understand which areas of the organisation
should deserve his special attention.
2. Documentary evidence: The audit notebook provides an evidence about the extent of
work done and degree of skill and care exercised by the auditor in conducting audit. By
producing audit notebook in the court he can defend himself against charge of negligence.
3. Helps in preparing audit report: It is not possible for the auditor to keep in memory all
important matters and audit findings that are required to be considered in preparing the
audit report. So, maintenance of audit notebook recording all such important matters
provides him a lot of assistance in preparation of audit report.
4. Settlement of audit queries: The accounting staff of the client may feel disturbed if the
auditor puts audit queries before them every now and then in the course of audit. So, for
the sake of convenience of the client's staff, audit queries should be recorded in the
notebook as and when they crop up and placed at a time before the staff of the client for
their explanations.
5. Evaluation of work: The auditor, by going through the audit notebook, can understand
the progress of audit work and the level of efficiency of his staff in audit work.
Some of the important points which are noted down in an audit notebook are given below:
1.From the audit note book, an auditor may know the exact volume of work performed by
his assistants.
2.It helps for future reference and guidance. This can serve as a guide in framing the audit
programme in future.
3.It facilitates the preparation of the audit report.
4.In case of change of audit assistants, no difficulty is faced by the new assistant
continuing the incomplete work.
5.It ensures that the audit programme has been sincerely followed.
6.It is a reliable evidence in the eye of law, if an auditor has to defend him
7.The responsibility of errors undetected can be fixed on the assistant con
8.The important matters relating to the audit work may be easily recalle.
Working papers are actually the compilation of all evidences which are collected by the
auditor in the course of his audit. They serve the following purposes:
1. They show the extent of adherence to accounting principles and auditing standards.
2. They are useful as evidence against the charge of negligence.
3. They assist the auditor in co-ordinating and organising the work of audit assistants.
4. They ensure the possibility of quick preparation of audit report.
5. Through the working papers, the auditor can know the distribution and
accomplishment of work.
6. Measurement of the efficiency of the assistants can be done with the help of working
papers.
7. They can be used as permanent record for future references.
8. They can act as a means to give training to the audit clerk.
9. They provide a means to control the ongoing audit work.
10. Working papers assist the auditor in forming an opinion on the financial statements.
Audit working papers should include a summary of all significant matters identified which
may require the exercise of judgment, together with the auditor's conclusion thereon. If
difficult questions of principle or of judgment arise during the course of the audit, the auditor
should record the relevant information received and summarise both the management
viewpoints and his conclusions.
AAS-3 issued by the Institute of Chartered Accountants of India makes the following
suggestions regarding the form and contents of working papers.
1. The working papers should record the audit plan, the nature, timing and extent of auditing
procedures performed and the conclusions drawn from the evidence obtained.
2. The exact form and content of working papers are affected by various matters such as
given below:
– The nature of the engagement
– The form of the audit report
– The nature and complexity of client's business
– The nature and conditions of the client's records and degree of reliance on internal
controls
– The need in particular circumstances for direction, supervision and review of work
performed by assistants
3. Working papers should be designed and properly organised to meet the circumstances of
each audit and the auditor's need in respect thereof.
4. Working papers should be sufficiently complete and detailed for an auditor to obtain an
overall understanding of the audit.
5. All significant matters which require the judgement, together with the auditor's
conclusion thereon, should be included in the auditor's working papers.
6. To improve audit efficiency, the auditor normally obtains and utilises schedules, analysis
and other working papers prepared by the client such as analysis of important revenue
accounts receivables etc.
7. In case of recurring audits, some working papers may be classified as permanent audit
files as distinct from current audit files relating primarily to the audit of a single period.