INTRODUCTION:

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.

PREPARATORY STEPS BEFORE COMMENCEMENT OF AUDIT:

Effective execution of any audit work requires appropriate planning and a well-designed
audit programme. For effective audit planning and for designing appropriate audit pro-
gramme, the auditor should prepare himself before the commencement of his audit work.

For this purpose, the auditor should take the following steps:

1. Receiving appointment letter

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.

2. Communication with the existing auditor

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.

4. Ascertaining the scope of audit

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.

5. Knowledge about the organisation

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.

6. Knowledge of the accounting system

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.

7. Complete list of principal officers

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.

8. Knowledge of technical details

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.

9. Observation of the previous auditor's report

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.

10. Instructions to the client

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.

PREPARATION BY THE AUDITOR

Modern techniques require a new approach to the practical aspects of the auditor's work.
Detailed checking and vouching no longer constitute the main aspect of the operations
involved; the ascertainment of the internal control system, the investigation of its working
and the verification of assets and liabilities in order to ensure the presentation of the true and
fair view of the financial statements, now prevail. The attitude that an audit is mainly useful
for the discovery or prevention of fraud is no longer accepted. It is now more generally
appreciated that an audit not only ensures the true and fair presentation of the affairs of the
organisation, but also that it can be of real benefit in bringing about the establishment and
maintenance of efficient business methods. So, in order to conduct the work of audit
smoothly and efficiently, at present, the auditor should prepare himself for the following
aspects of audit.

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:

 Appropriate attention devoted to important areas of the audit

 Prompt identification of potential problems.
 Timely completion of work
 Proper utilisation of assistants
 Coordination of work done by other auditors and experts
The main objectives of audit planning are to ensure the following:

o That the auditing work is conducted efficiently and profitably

o That high standards of audit works are maintained, so that the risk of litigation against
the practice for negligence is minimised.

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:

1. Statutory requirement under the assignment

2. Terms and conditions of engagement

3. Nature and timings of reporting

4. Significant audit areas

5. Applicable legal provisions

6. Reliability of accounting and internal control system

7. Existing accounting practices followed

8. Areas requiring special attentions

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

The specimen of an audit programme is given here.

Purposes of audit programme

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.Co-ordinating the procedures of audit

2.Ascertaining the progress of audit-work
3.Recording the work done during the process of auditing. Such records can act as
evidence of work done.
4.Assigning responsibilities to the audit staff for the completion of audit work within the
time limit.

Types of audit programme

An audit programme can be of the following two types:

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.

2. Progressive audit programme: The progressive form of audit programme is known as

'skeleton' form of audit programme. It sets forth briefly general scope, character and
 limitations of audit work. This type of programme is suitable in those cases where the
condition of the business changes year after year.

Advantages of 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.

2. Information about work-progress: The auditor is in a position to know about

the progress of the work done by his assistants.

3. Uniformity of work: A uniformity of the work can be attained as the same pro-
gramme will be followed at subsequent audits.

4. Simplification of work allocation: It simplifies the allocation of work to

various grades of articled and audit clerks.

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.

7. Division of responsibility: Work of the audit can be divided amongst the

different juniors who will be held responsible for their work.

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.

Disadvantages of audit programme

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.

Steps to be taken to overcome the disadvantages of written audit 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.

2. Revision of audit programme: It should be the responsibility of the audit manager to

constantly review the existing audit programme and modify it in the light of experience of
the previous year's audit and according to the changing circumstances. The audit staff
should also be encouraged to give their suggestions in this regard.

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.

Basis for Audit Plan Audit Programme

Comparison
Meaning Audit plan refers to the strategies or Audit programme is the list of steps,
guidelines which are followed by the that are to be followed by audit staff to
auditor for conducting audit. obtain sufficient audit evidence.
What Is It? Basic principle of audit. Series of examination and verification
steps.
Step First Second

Key Differences Between Audit Plan and 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 may be in two parts:

 For keeping a record of general information as regards the audit as a whole

 For recording special points which have been observed during the course of audit of the
accounts of different years

Objectives of audit notebook

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.

Value of audit notebook

The audit notebook is of great value to an auditor at the time of preparing the report to be
submitted to the shareholders. In case a charge of negligence is filed against the auditor, a
notebook may prove to be good evidence.
From this notebook, an auditor may know the exact volume of work performed by his
assistants. It also helps for future reference and guidance. This can serve as a guide also in
framing the audit programme in future, so far as the points recorded in the notebook indicate
the weaknesses in the system of the accounting of the client, which requires to be looked into.

Contents of audit note book

Some of the important points which are noted down in an audit notebook are given below:

1.A list of books of accounts maintained by the clients

2.The names of the principal officers, their powers, duties and responsibilities
3.The technical terms used in the business
4.The points which require further explanations
5.The particulars of missing vouchers, the duplicate of which have to be obtained
6.The mistakes and errors discovered
7.Total or balances of certain books of accounts, bank reconciliation statement etc.
8.Notes and queries which might be required at a subsequent audit
9.The points which have to be incorporated in the audit report
10. Any matter which requires discussions with the senior officials or with the auditor
11. Accounting method followed in the business
12. Date of commencement and completion of audit
13. Provisions in the Articles and Memorandum of Association affecting the accounts and
audit
14. Abstracts from minutes, contracts etc. having a bearing upon account.
15. Particulars of accounting and financial policies followed.

Advantages of audit notebook

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.

Audit Working Papers

Audit working papers are written records kept by the auditor of the evidence accumulated
during the course of the audit, the methods and procedures followed and the conclusions
reached. They should include all the information that the auditor considers necessary to
adequately conduct his examination and provide support for his audit report.
In short audit working papers are those papers which contain essential facts about accounts
that are under audit.

Purpose of working papers

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.

Contents of working papers

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.