Unit-2

Unit 2: Audit Process

 What is Audit Documentation?
 Audit documentation is the record of procedures performed, evidence obtained, and conclusions reached as
part of an audit. The proper preparation of audit documentation is critical for several reasons, including the
following:

 It can be used as a defense if the auditor is ever accused of negligence.

 It is easier for a reviewer to examine.

 It represents a better level of quality control over an audit.

 It shows auditors in later years how the audit was conducted.

 It can be used as a training tool for junior auditors.

 The types of audit documentation that should be assembled include the following:

 Analyses conducted

 Audit plans

 Checklists

 Confirmation letters

 Memoranda and correspondence regarding issues found

 Representation letters

 Summaries of significant findings

 Definition:
 Audit documentation refers to the records or documentation of procedures that auditors
performed, the audit evidence that they obtained and the conclusion that makes by them based
on the evidence obtained. Audit documentation is sometimes called audit working paper or
working paper.
 Internal control documents that auditor prepare in Ms words, Ms excel or other application is the
example of audit documentation.
 Another best example that describes audit documentation would be the working paper that
auditor prepares to document and test depreciation expenses.
 The following is the key information that should have in the audit documentation:

 The nature of information or data that being prepare or documents

 Timing including the audit period that covers, and the date prepare
 Name of the auditor who prepares audit working papers
 The extent of the audit procedures performed to comply with the ISAs and applicable legal and
regulatory requirements.
 The evidence that auditor obtains, the procedures that they use for testing and the result of
testing should properly and clearly document in the audit working papers. This is to ensure that
the reviewer could easily perform the quality review and to prove that the relevant standards
are implementing.
 During an audit, the auditor might found the significant mater related to financial statements,
their ethics, as well as their process. The auditor should clearly document these things.
 Some testing or sampling require auditor use their professional judgment and its importance to
documents those judgments.
Audit Working Papers: Definition, Form, Content,
Example, and Importance

 definition:
 Audit working papers refer to the documents prepared by or use by auditors
as part of their works. Those documents include summarizing the client’s
nature of the business, business process flow, audit program or procedure,
documents or information obtained from the client, and audit testing
documents.
 Audit working papers are sometimes referred to as audit documents that are
a very imported part of audit works. These documents are evidence that
supports auditors to make their conclusion on the financial statements.
 For example, the auditor has an engagement with the client to audit the 
financial statements. Before signing the audit engagement letter, the auditor
must obtain some information about the client, do the client’s due diligence,
and assess whether they should reject or accept the engagement. In this
case, if the engagement is readily signed, that means the assessment is
already done and accepted
 Form and Content of Working Papers:
 Audit working papers vary depending on many factors include:
 The size and complexity: The size and complexity of the entity can be so much different
from one client to another. If the complexity of the entity nature of business is different,
then the form is also different. For example, more samples are selected for a large entity
since those entities have alot of transactions, and different information is obtained for the
complex nature of business.
 The nature of the audit procedures to be performed: For example, some testing is very
straightforward and some testing is very complicated.
 The identified risks of material misstatement. For example, if the risks of material
misstatements found to be significant, the extent of audit works should be large.
 The significance of the audit evidence obtained.
 The nature and extent of exceptions
Internal Check

 What is Internal Check?

 In the opinion of Spicer and Pegler, “A system of internal check is an
arrangement of staff duties, whereby no one person is allowed to carry
through and to record every aspect of a transaction so that without collusion
between two or more persons, fraud is activated and at the same time the
possibilities of errors are reduced to the minimum.”
 L.R. Dicksee defines an internal check as “such an arrangement of book-
keeping routine that errors and frauds are likely to be prevented or
discovered by the very operation of the book-keeping itself.”
 Internal check means practically a continuous internal audit carried on by the
staff itself, using which other members of the staff independently check the
work of each individual.
 An internal check has been defined by The Institute of Chartered Accountants
of England and Wales (ICAEW) as; “the checks on -a day to day transactions
which operate continuously as part of the routine system, where the work of
one person is proved independently or in complementary to the work of
another, the object is the prevention or early detection of errors or frauds.”
Essential Characteristics of Internal Check
System
Certain qualities are needed to make an internal
check system more effective and efficient. Such
qualities are known as features of internal check
system, which are as follows:
 Division of Work
 No one should be allowed to have the right to perform the work from origin to end.
 For example – a transaction of sale may have to be split into a display of article by staff, the
preparation of invoice by another, the receipt of cash against the invoice by a third clerk, the
delivery of article against the proof of receipted invoice by another clerk, checking of outward
movement of an article against delivery order by a clerk and so on.
 In big business houses, such specialized tasks increase the speed of work and automatically
introduce internal checks.
 Provision of Check
 An organization should set up such provisions so that work can be checked by
another staff. An officer can check the work of one staff by transferring to
the staff and again
 Use of Devices
 In this modem world, various devices can be used to do various functions like
the use of time record machines, wage determination machines, etc. An
organization should use machines that help to make work of internal check
easier.
 Self-balancing System
 An organization can use self-balancing ledger accounts, which help to make
the work of internal check easier. Its effectiveness depends on its
management.
 Job Rotation
 No individual clerk should be allowed to occupy a particular area of operation
for long. Familiarity with and exclusiveness in a position offer a person
greater flexibility to attempt manipulation with the system.
 Specialization
 Every staff may not have such specialized knowledge to maintain accounts
properly. So, an organization should give the training to increase their skills
so that internal checks can be made more effective.
 Control
 There is more chance of frauds where there is direct contact between
consumers or the public. So, a manager can keep eyes in those works so that
the internal check system can be made more effective.
 Authority Level
 There must be clear cut authority levels according to sanctions to various
transactions. Commensurate to the authority vested, responsibility must be
extracted. The existence of authority levels results in a review of the
operations of subordinates.
 Objectives of Internal Check
 There are several objectives of the internal check. They are given below:

 To minimize the possibility of error, fraud, and irregularity.

 To prevent the misappropriation of cash and goods.
 To allocate duties and responsibilities to every clerk in the organization.
 To ensure an accurate recording of all business transactions.
 To enhance the efficiency of the clerk in the organization.
 To exercise moral influence over the staff member.
 To prepare a final account with ease and efficiency.
 Advantages of Internal Check
 The main advantages of an internal check are listed below:

 Moral Influence on Employees

 The system of internal check puts a morale check on members of staff and
enables them to learn honesty, hard work, and straightforwardness.

 Determination of Employees Liability

 The system of the internal check determines the responsibilities of employees.
The member of the staff may be held responsible for any irregularity carried on
by him.
 Less Possibility of Frauds
 There is less possibility of fraud under the system of the internal check because
errors and frauds can be detected at an early stage.

 Increase in Efficiency
 The system of internal check ensures greater .efficiency and speed because the
arrangement of internal check is based on a division of labor.

 Auditing Made Easy

 The system of internal check facilitates the work of auditors to a great extent by
enabling him to relay on test checking.
 Final Accounts Can Be Prepared
 In an internal check system, the ‘Profit and Loss Account’ and Balance Sheet
is prepared without any loss of time.

 Correct and Complete Records of all the Transactions

 The system of an internal check may also result in correct and complete
records of all the transactions on each balancing of the books of accounts.
 Detection of Dishonesty or Irregularity
 Any dishonesty or irregularity in the concern by the members of staff can be
detected before they assume any complication.

 Test Checking Possible

 Suppose the auditor finds the system of internal cheek satisfactory. Then by
taking into mind, it defects or weak points he can take the help of test
checking.
 Disadvantages of Internal Check
 The defects or weak points of the system of an internal check are listed
below:
 Expensive
 The system of Internal Check is more expensive and time-consuming.
 Slackness in the Work
 This is also a serious defect of the system of internal check. The auditor may
show slackness at work. He may rely on the system of internal check
blindfold, which may affect the quality of audit work adversely.
 Not Suitable for Small Concern
 The system of internal check is not suitable for small concern as it may be
uneconomical in small concern.
 Grouping among Employees
 If the employees of the concern join hand, they may keep the employer in the
dark and may cause many irregularities defying any-detection thereof.
 This groupism amongst the employees may not be healthy.
How to Prepare for an Audit

 Types of Audit
 Three different types of audits can be performed:
 External audits are performed by an external third party. External parties
provide more unbiased opinions since they are not subject to conflicts of
interest.
 Internal audits are performed by internal employees of a company or
organization. They are not usually distributed outside the company, and
therefore are mostly for internal use.
 Government audits are performed by government entities to ensure that the
prepared financial records do not misrepresent taxable income. The audits are
conducted by tax collectors, such as the Internal Revenue Service (IRS) in the
U.S. and the Canada Revenue Agency (CRA) in Canada.
 Preparing for an Audit
 Preparing for an audit is crucial in ensuring that the company receives an
unqualified or clean opinion. The opinions essentially mean that the auditor
stamps its approval that the financial records are not materially misstated.
 Steps to ensure a successful audit include:
 1. Planning for the audit
 Planning is crucial, and additional time needs to be taken to adequately
prepare for an audit. It may be a few months or a few weeks, depending on
the complexity of financial records.
 Time is required leading up to the audit, and additional resources should be
allocated for final preparations to plan and set expectations for the audit.
 Throughout the fiscal year, records should be kept up to date, which can
reduce the pressure near the time of the audit.
 2. Keeping up with accounting standards
 Accounting standards and legal and regulatory requirements are updated
every year. Therefore, it is important to familiarize the finance team with
new accounting developments instituted by regulatory bodies.
 By staying up-to-date, it reduces the time needed to track data and make
changes to comply with regulations.
 3. Assess organizational changes
 If the company’s been audited before, the changes in its financial situation from the last audit
should be taken into consideration. Material changes may affect the auditing process, such as
new projects being invested in or government support and grants given.
 Non-financial changes should be considered as well, such as if internal control systems and
management accounting standards have been altered.
 4. Learn from the past
 Review previous years’ audit notes and recommendations. Improve by adapting and ensuring
past mistakes are not repeated.
 5. Develop a timeline and assign responsibilities
 Review the list of requirements from the auditors and assign each item to a
capable and responsible person, with a due date. Plan the completion of
schedules with the auditors to maximize efficiency.
 . Organize data
 All working papers and schedules should be organized and prepared to be submitted:
 General ledger
 Fiscal year budgets
 Invoices and bills
 Transaction records
 Financial statements
 Audit Programme
 An audit program is a set of directions that the auditor and its team members
need to follow for the proper execution of the audit. After preparing an audit
plan, the auditor allocates the work and prepares a program which contains
steps that the audit team needs to follow while conducting an audit. Thus, an
auditor prepares a program that contains detailed information about various
steps and audit procedures to be followed by the audit.
 Advantages of the Audit Programme
 An audit program helps in ensuring that all-important areas are considered while conducting the
audit.
 An audit program helps an auditor in the allocation of work among its team members according to
their skills and competency.
 It enhances the accountability of audit team members towards work performed by them
 An audit program also reduces the scope for misunderstanding among team members regarding
the performance of audit work.
 It helps the auditor in checking the status of audit work, its progress, how much it is left for
performance while conducting the audit.
 Auditor prepares audit working papers which contains a record of various audit procedure applied
which serves as evidence against the charge of negligence.
 Audit program enables the auditor to keep a record of useful information specifically for future
audit and references
 The two main types of audit programs are:
 Fixed Audit Program
 Flexible Audit Program
 Fixed Audit Program
 A fixed audit program is a set of standardized instructions that need to be followed by the auditor while
conducting the audit. It includes all possible audit procedures to be followed during the audit although all of
them may not be applicable in a situation. A fixed audit program aims to take care of every possible audit
situation that may arise during an audit.
 The disadvantage of the fixed audit program is that it is very rigid and nothing is left to the discretion of the
audit team. Also, it is difficult to follow the same audit program even in the same organization over the
years, as the conditions in the organization are likely to change.
 Flexible Audit Program
 A flexible audit program is one that does not prescribe the exact audit procedure to be followed by the
auditors while conducting an audit. It simply gives an outline of the scope, nature and limitations of the
audit assignment to be conducted. Also, the nature of work to be performed by each person of the audit
staff is not predetermined under it. The auditors decide most of the things as the work proceeds and the
reliability of procedures and internal control system become known to the auditor.
 Disadvantages of Audit Programme
 Rigidity: There is no set standard audit program that can be applied in the case of
every entity. However, programs differ for different types of entities. Every entity
has its own problems. Therefore, we cannot apply for a single audit program in the
case of all business entities.
 Reduces the Initiative of Efficient Staff: – A program reduces the initiatives of
efficient and competent staff. Thus, staff members cannot make changes to the 
audit plan and cannot make suggestions for it.
 Audit Work becomes Mechanical: The program becomes mechanical when it
ignores other aspects like internal control.
 Overlooking New Areas: A program may overlook the new areas. With the change in
time and technology, new problems may arise that an audit program may not
consider.