Professional Documents
Culture Documents
AUDIT PLANNING
For effective and efficient conduct of audit; audit planning is necessary. In fact planning should be
continuous throughout the course of audit assignment. Statement of Standard Auditing Practices (SAP) 1
renamed as Auditing and Assurance Standards (AAS-1) states that, “the auditor should plan his work to enable
him to conduct an effective audit in an efficient and timely manner”. The first steps in the audit planning has the
goals of:
(a) developing time budgets,
(b) assigning audit staff personnel,
(c) scheduling dates for interim and year end audit procedures.
AUDIT PROGRAMME
Proper implementation of any plan depends upon a good programme. Even a computer gives a
good situation, if it is provided with correct and sound programme.
Statement on Standard Auditing Practices—8 (SAP-8) issued by the Institute of Chartered
Accountant of India in April 1989, suggests that the auditor should prepare a written audit programme setting
forth the procedures that are needed to implement the audit plan. The programme may also contain the audit
objectives for each area and should have sufficient details to serve as a set of instructions to the assistants
involved in the audit as a means to control the proper execution of work. It should act as a guide in arranging
and distributing the work and in checking against the possibility of omissions.
It may be worth while to prepare a preliminary audit programme to begin with. Preliminary
programmes prepared for both compliance testing of the internal accounting systems and substantive testing of
accounting balance.
Compliance tests of the existing system of internal control on which auditor intends to rely are
required to determine the standard of work. A proper study and evaluation of internal control includes two types
of compliance tests. First is observations in which auditor observes control procedures that leave no trail of
documentation. Second is detailed tests of transactions. This involves examination of documents that indicate
performance of control procedures.
The evaluation of internal control can be done in four-step approach.
1. Consider the type of errors and irregularities that could occur.
2. Determine the accounting control procedures that prevent or detect such errors and irregularities.
3. Determine whether:
(a) the necessary procedures are prescribed (review phase)
(b) they are being followed satisfactorily (compliance testing phase.)
4. Evaluate weakness, if any : Decide what effect the absence or non-observance of control procedures
have on :
(a) the nature, timing, or extent of other auditing procedures, and
(b) suggestions to be made to the client.
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Definition:
Arnold W. Johnson defines that “Audit working papers are the written private material, which an
auditor papers for each audit. They describe the accounting information which he receives from his client, the
methods of examination used, his conclusions and the financial statements.”
Audit Markings
As the auditor performs his audit procedures, he uses a variety of distinctive, special ticks or symbols
to indicate that a particular has been done. Those are called tick marks, check marks and ‘audit markings’. They
may be in the form of alphabetic letters, numbers, geometric designs, etc.; He may adopt different types of tick
marks for different type of work such as postings, additions, carry forwards, contra entries, vouching and so on.
Following are the important points to be noted with regard to the use of audit markings.
(1) These tick marks should be small and distinctive.
(2) Different colors or inks should be used for different periods.
(3) There should be different types of markings for different types of work.
(4) Audit staff should be clearly instructed not to disclose the meaning of different ticks to the staff of the
client.
(5) The staff of the client should be asked not to make use of the tick marks which are used by the audit
staff.
Illustrative Audit Marking:
Dr. Cash Book ABC Ltd Cr.
Date Particulars Amount Date Particulars Amount
(Rs.) (Rs.)
30.3.07 To balance b/d 14500 30.3.07 By Wages 17,500
30.3.07 To Sales 30.3.07 By Purchases 26,800
(Cash Rec. No. 223) 30,000 By Rent 15,200
31.3.07 To Sale 31.3.07 By Stationery 2,100
(Cash Rec. No. 224) 34,000 By balance c/d 17,900
31.3.07 To Interest 1,400 31.3.07
79,900\ 79,900\
Illustrative Markings:
\ = Totals Checked
= Carry Forward of Balance checked
= Posting of the entries checked
(1) Audit markings help the auditor in establishing the extent of work performed by the audit staff.
(2) These markings help him in distinguishing entries in the books of account which are already examined
from those which have no been examined.
(3) Audit markings provide evidence of the work performed by him. He can defend himself in case any
charges of negligence are leveled against him.
(4) A transaction or a document which has already been examined by the auditor cannot be produced before
him in support of any other transaction.
Routine Checking: Routine checking involves checking of such common records and books which is carried
on by the auditor as a matter of routine. The functions included in routine checking are:-
(a) Checking of casts, sub casts, carry forwards and other calculations in the book of original entry.
(b) Checking of postings in the ledgers.
(c) Checking of balances in the ledgers and
(d) Checking of transfer of balances from ledger to the trial balance.
Routine checking helps the auditor in finding out certain errors and frauds. However, it can disclose only
clerical errors and some simple frauds. Only occasionally it may help in detecting the errors of principle. For
detecting clever frauds and errors of principles an auditor has to go beyond routine checking.
Disadvantages
It suffers from following disadvantages:
(i) It can reveal only arithmetical and clerical mistakes or simple frauds.
(ii) Errors of principle are hardly detected in routine checking.
(iii) Compensating errors are also unlikely to be detected.
(iv) It is too mechanical and monotonous.
(v) In self-balancing system of account its utility is further reduced.
However, these disadvantages can not minimize the importance of routine checking in the work of an
auditor.
Test Checking: The main objective of audit is to formulate an overall opinion on the accounts and financial
statements so as to enable an auditor to give a report that books of accounts give a true and fair view regarding
the profit, assets and liabilities of the business. In large organizations the numbers of transactions which are the
subject matter of an audit are too many to handle. It is virtually impossible for an auditor to physically verify all
these entries. The usual practice is that a representative number of entries of each class is selected and checked
and, if they are found correct, the remaining entries are also taken to be correct. Test checking is an accepted
substitute of detailed checking, which in most of the cases from the economic point of view is unwarranted. The
justification for accepting test results in lieu of complete verification of each item lies in the theory of
probability. If the “sample” is truly representative of the “population” the test checking will give reliable results.
The reliability of test checking will greatly depend upon the efficiency and reliability of internal control
system. In test checking the detection of error demands further investigations only if the auditor is satisfied that
the mistake was unintentional and chance of repetition is nil, he can proceed with the test audit. If further
investigation indicates fraud, matter must be taken up with requisite seriousness. In addition to the above
following points need special attention of the auditor-----
1. Test checking should be used in such a fashion that the staff of the client can not understand it. Frequent
changes in the pattern of test checking can ensure this.
2. The test checking applied during one year should be kept in mind while preparing the audit programme
of the next year. The effort should be to cover the different block of period over a period of 3 to 4 years.
3. Over the years each section and period must be covered under this kind of scrutiny.
4. There cannot be a pre-decided sample in forms of size. It should be decided after taking into
consideration of requirement of the assignment and reliability of internal control system in operation.
5. The materiality concept may be applied in deciding the sample i.e., larger number or items of higher
account, smaller number of transactions from transactions involving smaller amounts.
6. The relative risk of error of fraud is another consideration. The areas where the risk of fraud is higher
definitely deserve greater attention.
7. In case of lower reliability of the evidence produced for the decided sample, the sample size for test
check should be increased.
Internal Control:
Definition: “Internal Control comprises the whole system of controls, financial and
otherwise, establish by the management in the conduct of the business.” It includes
internal check, internal audit and various other forms of control. The fundamental
objective of internal control is to safeguards the assets of the company against losses
avoid frauds, errors, wastes and eliminate inefficiency. It helps the management in
measuring the implementation of business policies as well as ensuring maximum
accuracy of all data and statements.
Internal control system is the whole management control system meant to
safeguard the assets of the organization and to ensure efficient and effective routing
operations of the ---------- price. The term internal control has been defined as the whole
system of controls financial or otherwise, establish by the management in order to carry
on the business of the company in an orderly manner, safeguards its assets and secure
as per as the accuracy and reliability of its records internal control means accounting
and operational controls. Operational control means quality control, budgetary control,
internal checks, internal audit etc. It means a number of controls and checks on various
activities of business. There are 2 types of internal controls:
a) Accounting Control: - The plan of organization and the procedure and the records
that is concerned with and directly related to the safeguarding of assets and
reliability of financial records. Accounting and financial controls includes standard
costing, control accounts, bank reconciliation, self balancing ledgers and internal
auditing. Such control ensures accuracy reliability of financial records, prescribed
managerial policies and safe custody over assets.
b) Administrative Control: - This control is concerned with operational efficiency. They
may include time and motion studies, quality control through inspection,
performance reports and statistical analysis. An auditor has to make a careful
review of accounting controls in order to ensure accuracy, adequacy and
authenticity of financial statement. He may not be expected sometimes to review
the administrative control because they only have a remote relationship with
financial records. Thus in audit an auditor is more concerned with financial control
than administration control.
Objectives
The objectives of internal control are determined by the management
keeping in view the specific requirements of an enterprise such as nature and size of the
organization, scale of its operations and degree of ------- of management etc. The SAP
[Standard Auditing Practices (6)] states the following objectives of internal controls
relating to accounting system:
1) The transactions are executed in accordance with the management authorization.
2) All transactions are promptly recorded in an appropriate manner to permit the
preparation of financial information and to maintained accountability for assets.
3) Assets are safeguarded from unauthorized use or-------
4) Assets are verified as reasonable intervals and appropriate action is taken with
regard to the differences in amounts.
2) From the auditor points of view: The study and evaluation of the client system of
internal control is important to auditors. The auditor must have a thorough
understanding of the system. There is a difference between the systems that is
supposed to be in operation and the one actually being used. Simply by asking certain
questions reviewing the organization chart and studying few procedure manuals to
obtain an understanding of the system is not sufficient. To obtain the adequate
understanding the system must also be tested. There are two ways to study the system.
a) To determine whether an audit is possible; if possible, then
b) To determine the scope of audit.
Principles of internal control
a) Competent and trustworthy personnel: Personnel are the most important element of
any system of internal control. If employees are competent and trustworthy then reliable
financial statements can still result.
b) Records, financial and other organization plans: Documents perform the function of
transmitting information throughout the client organization and between different
organizations. The document must be adequate to provide reasonable assurance that all
assets are properly controlled and all transactions are correctly recorded.
c) Segregation of duties: For the prevention of both intentional and unintentional errors
following types of segregation of duties should be taken care of.
(i) Separation of operational responsibility from record-keeping responsibility: If each
department or division in an organization is responsible for preparing its own records and
reports, there would be a tendency to change the results to improve its reported
performance. So in order to ensure unbiased information, record keeping is sometimes
includes in a separate department under the controllership function.
(ii) Separation of custody of assets from accounting: To protect the firm against frauds, it
is required that the custody of assets and their accounting should be done by separate
persons. When one person performs both functions, there is a risk of his disposing of the
asset for personal gain and adjusting the records to relieve him of responsibility for the
asset.
d) Supervision: Directors should review the company’s financial operations and positions
at regular and frequent intervals. Comparison with result for previous periods indicates
differences that calls for further examinations where budgetary controls is used attention
will be drawn to material variances and explanation require for time to time special
reviews are particular items such as stock, wages department, etc., should be
undertaken.
e) Authorization- written: If the control is to be satisfactory, every transaction must be
properly authorized. Authorization can be of two types. 1. General 2. Specific. Example of
the General authorization is the issue of fixed price list for the sale of product. Example
of the Specific Authorization is sale transaction by the sales manager for the car of a
company.
f) Sound practices: Sound practices of administration require establish procedures,
policies and delegations of responsibility that helps in avoiding questions, unsatisfied
performance etc.
g) Internal audit: Internal audit is a part of the whole system of internal control. It is the
examination of accounts of a business concern by its employees specially appointed for
the purpose. It is an independent appraisal of activity within an organization for the
review of accounting, financial and other business practices.
h) Arithmetic and accounting controls: Charts of accounts that is balance sheet and
income statement is an important control because it provides the frame work for
determining the information presented to management and other financial statement
users. Charts of accounts and financial statements should be prepared in accordance
with the generally accepted accounting principle.
Limitations:
Standard Auditing Practices 6 issued by the Institute of Chartered
Accounting of India highlights certain limitations of internal control these include the
following:
1) Operation of internal control system involves expenditure of time and money.
Management consideration that a control should be cost effective weakens the
effectiveness of the internal control system.
2) Internal controls are concerned more with the transactions of a routine nature,
unusually and irregular transactions may be over look by the internal control
system.
3) The possibility for human error may weaken the internal control system.
4) Persons operating the internal control and the employees of the client enterprises
or outside parties may render the control ineffective.
5) The possibility that a person responsible for exercising control could abuse
(misuse) his authority.
6) The possibility that changes in conditions may render the procedures ineffective
and inadequate compliance with the procedure may bring down the system.
7) Manipulation by the management may defeat the objectives of internal control.
The person in charge of each section will sign for the respective section.
The overall questionnaire will then be signed by the partner in charge of the audit.
And finally it should be filed in the permanent file along with other important working
papers.
The following are the points must be kept in mind while preparing I.C.Q.
(i) The I.C.Q should always be revised from time to time in order to keep
questionnaires up-to-date.
(ii) The I.C.Q should be completed in all respects. Any changes should be made
regularly.
(iii) The questions should be designed with care and in a manner that they replies
may fulfill the desired objective.
(iv) The replies to ICQ should be obtained properly and these should be test checked.
(v) Appropriate suggestions should be made to the client on the weakness brought
out by the I.C.Q.
Internal Check:
Internal check is a valuable part of internal control. The entire system of
accounting needs to be organized in such a manner that it may ensure some sort of
check without incurring additional financial burden. Method of internal check has been
devised to meet this requirement. It is an arrangement of the duties of members of staff
in such a manner that the work performed by one person is automatically and
independently checked by the other. Each employee operates independently but it does
not involve duplicating the work of other. Frauds, errors or irregularities are prevented
there is a collusion among them.
Internal check means the check imposed on day-to-day transactions. It ensures
accuracy. Internal check includes matters such as allocation of authorities, division of
work and proper methods of recording transactions etc. It is a part of overall internal
control system and operates as a built in device so far as staff organization and job
allocation aspects of control system are concerned.
Definition: Internal check means practically a continuous internal audit carried on by the
staff itself, by means of which the work of each individual is independently checked by
other members of the staff.
2. Enquiry: Purchases department makes an enquiry about the terms and conditions of
purchases from suppliers. For this purpose tenders are generally invited from different
suppliers. These tenders must be opened and approved by senior officer.
3. Purchase Order: After deciding the approved supplier, the purchase department will
prepare four copies of purchase orders. One copy will send to the vendor, second to the
stores, third to the accounting department and fourth will be with the purchase
department itself. The purchase order should be carefully written, must be approved and
authorized by the head of the purchase department or any officer authorized to do the
concerned work.
5. Making the Payments: The purchase department should thoroughly check the
suppliers invoice and then they should send to the accounting department for payment.
The accounting department should compare the invoice with the authorized purchase
order and should also verify the calculations. The accounting department should
compare the invoice with the incoming inspection report and it should enter the invoice
in the purchase book. Only responsible officer should draw a cheque for the payment of
invoice. At the time of signing a signing authority must verify the correct payment is
made.
If some portion of the goods is returned to the suppliers, a proper entry must
be made in the purchase return book. A credit note to that effect must be obtained from
the supplier and the accounts section must adjust the payments accordingly.
A good system of internal check with regard to purchases will prevent certain
types of irregularities, errors and frauds such as fictitious payment, double payment,
artificial increase and decrease in profits.
Objectives
1. To avoid inclusions of dummy workers in the list.
2. To avoid incorrect time or piece work records.
3. To avoid fraudulent manipulation of wage-sheets and misappropriation of money
etc.
Cash Sales
In a big trading house the transaction of cash sales enlarged in number. They
may consist of sales over the counter, postal sales and sales by traveling agents.
1. Sales over the Counter:
a. For cash counter the separate salesman should be appointed to look after his
counter.
b. Each salesman is given a separate sales memo book, such books are of
different color for different counters.
c. The salesman should prepared four copies of the cash memo.
d. These copies of cash memo should be checked by another officer before
they are handed over to the customers. One copy should be returned for
preparing sales summary at the end of the day.
e. Payment should be made at the cash counter. The cashier after receiving the
price of goods from the customers should have one copy stamped as “cash
paid” to the customer, two copies must be retained by the cashier.
f. The cashier should record the day’s total sales in cash sales register to know
the total cash received at the end of the day.
g. Every salesman should also prepare a summary sheet to know the total sales
of the counter.
h. Copies of the sales summary sheet of different counters and the total cash
received should be sent to the officer’s in-charge of the trading house.
2. Postal Sales:
a. A separate register should be maintained in which all details for sales made
must be recorded.
b. The goods returned should be recorded in a separate register.
c. The total receipts on these accounts should be entered in the register.
d. Any advance receipt by the customer should also be entered in this register.
e. The register should be thoroughly checked by some senior officer and the
goods return and the goods for which paid has not been received should be
carefully examined.