HOW TO COMPLETE AN AUDIT?

Audit Procedures: Definition | Types | Example |

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Audit, Audit Procedures
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Definition:
Audit procedures are the processes, technique, and methods that auditors
perform to obtain audit evidence which enables them to make a conclusion on
the set audit objective and express their opinion. Sometimes we call audit
procedures as audit programs.
These two terms are referring to the same thing.
Auditors normally prepare audit procedures at the planning stages once they
identified audit objectives, audit scope, audit approach, and audit risks.
Auditors design audit procedures to detect all kinds of risks that they identified
and ensuring that the required audit evidence is obtained sufficiently and
appropriately.
Normally, audit partners need to approve on audit plan and audit procedures
before the audit team could perform their testing. This is to make sure that all
concerns or risks are address in the procedures.
Audit procedures might be different from client to client, and period to period.
This is because internal control over financial reporting is different from one
client to another and the control might be change from time to time.
The auditor might need to update audit procedures from time to time event
thought current financial statements had been audited by its firm or team.
Typically, there are five audit procedures that normally use by auditors to
obtain audit evidence. Those five audit procedures include Analytical review,
inquiry, observation, inspection, and recalculation.
List of Five Types of Procedures:
1) Analytical Review:
Analytical review is not the procedure that uses to obtain audit evidence, but it
is the procedure used to assess the unusual transactions or events as the
principle or basic to perform other procedures.
For example, when auditor found there is unusual transactions or event as the
result of using analytical review, then the auditor will use other procedures that
are applicable to obtain evidence.
The analytical procedure could be used for the types of transactions or events
that occur regularly or have a connection with others’ transactions or events.
For example, we can use the analytical procedure to assess the reasonableness
of depreciation that records in the financial statements. The main reason is that
depreciation expenses are calculated systematically and occur regularly.
2) Inquiry:
Auditors inquire accountant and related management to gather information and
obtain an explanation on the mater that found by auditors.
Sometimes auditors inquire about management about the business process and
the ways how financial transactions are recording as well as the major control
on business transactions.
The inquiry is also one of the most important audit procedures and it could be
used in different stages.
For example, the auditor might inquire management at the planning stage and
the auditor could also inquire management to confirm the consignment
liabilities at the end of the audit work.
Audit inquiry is sometimes used by the auditor to obtain the audit evidence and
sometimes is used to obtain an understanding of some nature of business or
accounting transactions in order to gain enough knowledge to design and
perform testing.
However, information from inquiry sometimes hard to be used as audit
evidence.
The audit evidence that you found as the result of your testing after an inquiry in
strongly to be used as audit evidence rather than information from inquiry itself.
3) Observation:
Observation is one of the audit procedures that auditors use to obtain an
understanding and gather audit evidence mainly to the real process or the ways
how clients have done some specific business process.
This kind of audit procedure is mainly to confirm the process that the client told,
physical confirmation, or some time used to obtain audit evidence in order to
make their own projection which will be used for comparison with the client
figure.
For example, auditor joins client stock take at the year-end and observe whether
the way that they count are in the correct procedures or not.
In this procedure, the audit is not confirmed whether the client counts their
inventories correct or not, but it confirms whether clients counting procedure is
correct or not is one thing.
Another thing is the auditor tries to confirm whether the counting has really
existed.
However, in practice, sometimes the auditor is not only observed how the client
counts but they also jointly perform counting inventories.
Sometimes auditors using observation are not only for observing in counting
fixed assets or inventories but also using to test the reasonableness of revenue.
Here is how,
For example, the auditor performs the reasonableness testing of revenue
recording in the restaurant and based on the accounting record fact check with
their understanding, the revenue seems not completely records.
In this case, the auditor might perform one week or two weeks observe in the
restaurant and then make their own estimate whether or not the revenue is
reasonable.
4) Inspection:
Inspection refers to verification or vouching documents. This is one of the most
important and it can be 60% of audit work involve with the inspection of
documents.
For example, the auditor examines the sales invoices that record in financial
reports.
The auditor might examine whether the invoice issued by the client is really
based on the goods that receive. And the goods that received is actually the one
the company makes an order.
The auditor might also examine the payment voucher against the authority that
approves the payment vouchers.
The auditor might also inspect the supporting documents recording the
inventory’s movement during the year. This is including the documents related
to purchasing raw material.
5) Recalculation:
Recalculation is the type of audit procedure that normally done by re-
performing the works performed by the client in the purpose of assessing if
there any difference between the audit’s work and the client’s work.
For example, the auditor might re-perform depreciation calculation and assess if
there any difference between auditor calculation and its client’s calculation.
The auditor might also perform the recalculation on monthly salary expenses
that prepare by the payroll and finance department to ensure that the net salaries
that paid to the employee are correct.
Recalculation is the procedure that use to confirm the accuracy of transaction
that involves calculation.
 Financial Assertion and Audit Procedures:
Audit procedures above normally designed to confirm the financial assertion of
transactions or events in the financial statements.
For example, the auditor may test the occurrence of sales revenues that records
in the income statement for the period. This test is to confirm whether those
transactions have really occurred or not.
The auditor might also test whether the sales revenues that recording is
completely records or not by testing the completeness.
Understand financial statements assertion could help the auditor to not only
tailor actionable and effective audit procedures but also help to perform their
testing more efficiently.
This will also help them to redesign audit procedures when the existing
procedures are not practical.
The following is the list of the financial assertions that auditors normally test:
Transactions and events: ( in P&L)
 Occurrence
 Completeness
 Accuracy
 Cutoff
 Classification
Account balances (BS items)
 Existence
 Rights and obligations
 Completeness
 Valuation and allocation
Presentation and disclosure
 Occurrence
 Rights and obligations
 Completeness
 Classification and
 Understand-ability
 Accuracy and valuation
How to design the audit procedure?
Audit procedure normally design by auditors based on the characteristic of
target transactions or event’s risks that associate with and the approach that
auditor responds to those risks.
 Risk assessment contributes significantly to auditors to design the right audit
procedures.
Right audit procedures do not only help the auditor to perform their work more
effectively but also contribute to the auditor in minimizing audit risks (detection
risk).
When designing the audit procedure, the auditor must make sure that all of that
procedure contain and address three important things.
 The assertion that auditor want to confirm
 Procedure to test that assertion
 Reason to perform the procedure
After performing a risk assessment, the auditor will be identified that risks that
they think might happen to financial statements.
For example, the auditor might things the inventories that reporting in the
financial statement might not exist. In this case, existence is the assertion that
the auditor wants to test.
Therefore, inventories observation is the procedure that should be included in
the inventories’ audit procedure.
The way how to perform, the number of inventories to be observed needs to be
stated clearly to make sure that the auditor in charge of this cycle could
understand.
Can audit procedures be revised during the substantive
testing?
Audit procedures are initially prepared at the planning stage based on the risks
assessed according to the internal controls environment as well as internal
control over financial reporting.
The auditor’s understanding of the client internal control over financial
reporting or the information that they obtained at the time of planning might not
be corrected as well as insufficient.
Therefore, if during the substantive testing, the auditor notes that the audit
procedures are not addressing the possible risks of the procedures are not
sufficient to address the risks, then auditor procedures could be revised. The
revision might need to get approval from the audit partner.
Auditors can also assess if the procedures that perform in the substantive testing
is correct or sufficient or not while they are in the conclusion stage.
If the procedures are not sufficient or incorrect, then the procedures are needed
to be revised and then additional works are needed to be done.
 Before the execution of audit procedures, auditors need to get those procedures
approved by audit partners first. The revision of audit procedures in all stages:
planning, substantive as well as conclusion are also need to be approved by
audit partners.
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