Michael Osinde

2021/A/PhDBA/0804/W

Audit Procures on Income

Statements and Payroll
 Structure

A
1.0 Audit Procedures

1.1 Financial Statement Assertions

1.2 Types of Audit Procedures

2.0 Audit Procedures on the Income

Statement (IS)

3.0 Audit Procedures on Payroll

4.0 Audit Evidence

Audit Procures on Income Statements and Payroll

2
 1.0Audit Procedures

Processes and methods or techniques that auditors use to collect sufficient appropriate audit evidence in giving
professional judgments about the effectiveness of an organization’s internal controls. Audit procedures enable auditors
to conclude on the set audit objective and express opinions. It’s sometimes called an audit programme.

At the planning stage, audit procedures are designed to aid auditors in detecting all sorts of risks, ensuring that the
required audit evidence is appropriately and sufficiently obtained. The audit objectives are identified, with the scope,
approach, and audit risks at the planning stage.

The audit procedures vary from one client to another and from one period to another depending on the internal
controls on the financial reporting, controls change with time and therefore require a continuous update.

Internal controls are mechanisms and standards that business use to protect assets, sensitive data, and IT systems or
means for providing accountability on financial statements and accounting records.

The audit process, therefore, simplifies the auditor’s ability to understand business processes, internal controls, and the
effectiveness of established controls.

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 1.1 Financial Statement Assertions
The financial statement assertions are relevant to classes
of transactions and events for related discloses relating to
statements of financial performance, position, and payrolls.
These assertions are characteristics relevant to items in
financial statements that require carrying out the
confirmatory substantive test on them. The pieces of audit
evidence obtained are based on these assertions in
accordance to ISA 315 are (OCECAVCCPRU);

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 Financial Statement Assertions…
a) Occurrence – all transactions and events that took place during the period under
consideration relate to the entity and were for business purposes only.
b) Existence; employees paid by the entity during the period were available, balances
include only assets or liabilities that exist at the balance sheet date.

c) Completeness – all transactions and events that occurred during the period are
recorded in accounting systems and relevant information to Users are appropriately
disclosed.

d) Accuracy - all transactions and events are recorded at the proper amounts (revenues
and expenses allocated to the proper periods. Therefore, the transaction valuations that
occurred are recorded in the Financial Statements and are correct.

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 Financial Statement Assertions…
e) Valuation of all transactions, events that occurred and allocation of assets
are recorded at appropriate carrying values (compliance with ISAs, Company’s
Acts, consistent with accounting policies reflected in the financial statements.
f) Cut-off- transactions pertaining to a particular financial year/accounting
period are accounted for in their right periods.
g) Classification: Accounting items, transactions and events are properly are
correctly classified into the right Financial Statement elements according to the
major classes as non-current or current assets and liabilities, revenue and
expenses, , transfers, net equity and therefore accounting for their nature.

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 Financial Statement Assertions…
h) Presentation – coherent preparations and disclosures of financial
information in compliance with the recognized accounting standards,
GAAPs and regulations.
i) Rights and obligations; the unprocessed transactions and balances
include only assets or liabilities that pertain to the entity at the balance
sheet date.

j) Understandability: Financial statements should be prepared in a form

that lets their users understand the nature of transactions and accounts
balance. The nature of the transaction should sufficiently be disclosed.

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 Financial Statement Assertions…
The assertions on account balances and related disclosures at the period end include existence,
rights and obligations, completeness, accuracy/valuation, classification/disclosure and
presentation, measurement and reporting.

Audit procedures are applied in two stages, during the interim and final audit stages.

The procedures at the interim stage focus on the transactions that occurred in the reporting
periods in guiding the nature of tests of controls to conduct as well as necessary substantive
procedures.

At the final audit stage, the focus is on the financial statements and assertions about assets,
liabilities, and equity interests. This supports the design of substantive procedures to ensure
assurance gained over relevant assertions.

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 1.2 Types of Audit Procedures
i) Analytical procedure

Performing various analyses of the FS using a different process to establish trends, ratios,
unusual events, and relationships between information contained in the FS as well as non-
financial information.

Analytical procedures help to identify inconsistencies in the FS information that require

further investigations till concluding appropriate and satisfactory responses are obtained
from Management and those charged with governance. Comparisons of key rations to an
entity’s historical and industry data, and may consist of vertical or horizontal comparisons of
a single line item in FS, assessing the reasonableness of accounting policies applications,
and treatments.

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 1.2 Types of Audit Procedures…
ii) Confirmations

Auditors directly circulate documents to external parties to confirm their end-of-

period balances with the audited clients. These are written letters to clients’
external parties with permission but do not require clients’ input but are designed
to provide high-quality audit evidence in compliance with ISAs. These include
specific balances required by auditors for confirmation from banks, suppliers’ and
customers.

The received responses provide confirmation of evidence on the existence of

balances, and valuation but not accuracy.

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 1.2 Types of Audit Procedures…
iii) Inquiry

Seeking explanations from Management on items under audit including processes,

specific transactions, major controls, and account balances, proving verbal shreds of
evidence and gaining better understanding to further aid the designs and tests to be
performed.

This procedure does not obtain strong audit evidence, therefore, must be paired with
other procedures for the best possible results. The inquiry however is an important audit
procedure that can be conducted at various stages of an audit. Obtaining information on
the internal processes may also require seeking clients’ experiences in accessing services
from the audit client and also inspecting the written policies on these processes.

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 1.2 Types of Audit Procedures…
iv) Inspection of records

Detailed examinations/verification of supporting documents,

processes, and plans in preparation of FS (vouching) form an
important part of the test of controls and details of the company.
Over 60% of audit work is performing inspection procedures.
Inspection of documents confirms the occurrence, accuracy,
completeness, and cut-off assertions while non-financial documents
confirm some aspects of FS.

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 1.2 Types of Audit Procedures…
v) Inspecting Assets
Assets from the signification part of the FS and inspections
confirm the existence and physical status guided by Assets
Register and inventory records. Determination of the need
for impairment, revaluation, and identifying defects hence,
gauging the valuation assertions.

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 1.2 Types of Audit Procedures…
vi) Observation

The procedure requires careful observation/notice/surveillance of the client processes and procedures in
normal operations to identify any weaknesses. The presence and observations of auditors’ though will
influence the operation of the controls. It, therefore, needs to be applied with other audit procedures for
the best results.

Used to understand and gather audit evidence on the client’s real process or specific business processes.
The procedure only confirms the known process, to be used for audit projections and compare with
clients’ reported figures.

Very important at the end of year valuations (inventory and cash, fixed assets), the auditor’s presence is
vital to obtain evidence of effective procedure application by the client and confirmation of the
occurrences of the event.

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 1.2 Types of Audit Procedures…
vii) Recalculation/computation

Recomputation is a normal process of confirming the accuracy of the account balances and
transaction amounts. This confirms no variations between expected and actual amounts
included in FS. Recalculations test the valuations and allocations, in addition to accuracy
assertions.

viii) Reperformance

The auditor independently reperforms control procedures as part of the test of controls in the
audit process. Repeating the procedures, and recalculations to test the internal controls
confirms the effectiveness of internal controls.

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 1.2 Types of Audit Procedures…
Conclusion
Audit procedures constitute techniques, methods, and processes that auditors
utilize to obtain sufficient appropriate evidence in support of the audit opinions
on the FS. They form part of the audit process depending on the nature of the
audit client. The above-identified procedures may be used in combination to
support obtaining audit evidence (analytical procedures, confirmation, re-
calculation, reperformance, observation, inspection of documents and assets, and
inquiry).

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 2.0Audit Procedures on the Income Statement (IS)

The audit procedures used in the Income statement/statement of

financial performance are on classes of transactions and events that
occurred during the period and provide audit evidence as a basis for
an audit opinion.

Audit of IS majorly requires testing of transactions and events that

occurred in the reporting period. The recommended audit procedure
applicable include;

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 2.0 Audit Procedures on the IS…
2.1 Analytical procedures
A number of analyses can be carried out to identify discrepancies in
the income statement that include trend over time, ratio, revenue,
and expenditure comparative analysis. Both financial and non-
financial information is analyzed to establish collaboration. All these
will provide useful results that will guide further audit investigations.

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 2.0 Audit Procedures on the IS…
2.2 The substantive procedure involving Inspection of records – vouching for
records
As a key audit procedure, reviewing documents helps Auditors to identify
transactions and events with the reported information in verifying accuracy in the
valuation of transactions, legitimacy, confirming transaction and events occurrence,
cut-off periods, and examining proper presentations of financial information in the
income statements. This involves both vouching (verifying records) and validations
of transactions (connection to source)

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 2.0 Audit Procedures on the IS…
2.3 Confirmations
Engaging both internal (Management) and external parties particularly payables
and receivables to confirm balances in examining the accuracy of recording of all
expenses and sales in their respective classes as reported in the income statement.
2.4 Inquiry
By engaging with Management both formally and informally, the Auditor is able to
corroborate facts obtained from the reported transactions and income statement
presentations. The procedure is conducted alongside observations and
confirmations for a better understanding of given transactions and events.

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 2.0 Audit Procedures on the IS…
2.5 Observations
Physical observation of the entity’s business process provides a better view confirming the
reported events and transactions in the income statement. It confirms the existence of
procedures (controls) and events that further guide on the nature of tests to conduct or
review.
2.6 Reperformance
Requires the Auditor to repeat the procedures and controls as performed and designed by
the entity in order to obtain the same reported information in the income statement. This
may involve confirmation of existing transactions with the third party and physically inspect
to assess the valuations and rebuild the income statements.

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 2.0 Audit Procedures on the IS…
2.7 Computation
After performance and reconciliations, Recompilation of the income
statement from the trial balance will confirm the completeness and
accuracy of presentations made in the statement.

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 2.0 Audit Procedures on the IS…
While auditing income statements, the finance statement assertions below are confirmed to provide audit evidence
necessary for determining audit opinion.

a) Occurrence – transactions and events that took place during the period under consideration relate to the entity
and for business-related purposes only.
b) Completeness – all transactions and events that occurred during the period are recorded in accounting systems.
c) Accuracy - all transactions and events are recorded at the proper amounts (revenues and expenses allocated to
the proper periods. Therefore, the transaction valuations that occurred are recorded in the FS and are correct.
d) Cut-off- transactions pertaining to a particular financial year/accounting period are accounted for in their right
periods.

e) Classifications – transactions and events are properly and correctly classified into the right FS elements that
include income, expenses, transfers, etc to avoid overstatement.

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 3.0 Audit Procedures on Payroll

3.1 Introduction
Audit of payroll is the verification of payroll process and operations to
ensure that employees of an entity are accurately, and timely rewarded
in compliance with the current legal and regulatory frameworks.

The audit procedures identified below will help to obtain relevant,

sufficient, and appropriate evidence on the maintenance of proper
employee records by an entity.

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 3.0 Audit Procedures on Payroll
The conduct of payroll shall involve both tests of controls and compliance.

a) Inspection of records. This is to aid confirmation of occurrence by obtaining an

entity’s schedule of employees with their related pay rates and working hours.
This shall guide on the staff to be traced the payroll. Further, confirm records
of any changes during the period are to be supported by clear documentation
and approvals.
b) Reperformance to confirm valuations - Confirmation of the pay rates and
working hours in the personal files that document the staff contracts and
appointment letters and matching with payroll rates.

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 3.0 Audit Procedures on Payroll
c) Review classifications of staff expenses - All payroll transactions should be clearly
identified as staff wage and expenses. Where payments are made to employees based
on outputs, review the authorization of such payments that include, bonuses,
gratuity, premiums, profit-sharing, and commissions.
d) Analytical procedures to evaluate Cut-off assertions- Identify the payroll cycle and
ensure the number of processed payroll match the budgeted numbers and amounts
as approved by the governing council.
e) Computation to ensure completeness - Conduct a payroll reconciliation between
the payroll records and the postings in the general ledger account to ensure the
accuracy and completeness of the transactions.

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 3.0 Audit Procedures on Payroll
f) Recalculation to ensure Accuracy - Reconciliation of the statutory
returns with the payroll records for accuracy in valuations and
deductions. On a monthly basis, statutory returns are may for the social
security fund (NSSF) and tax (PAYE). These returns provide records for
reconciliations and confirmation of compliance with legal requirements
of filing on time and right amounts.
g) Review of records of any unpaid employees by establishing the
outstanding to staff as well as the regulatory bodies and local
government to have been reported and appropriately disclosed.

Presentation title 27
 3.0 Audit Procedures on Payroll
h) Through Inquiry, identify areas of improvement in attendance and timesheet
processing, authorization of variable payments, appropriate segregation of duties,
probations and exit procedures, and access to and proper records management of the
payroll, routine reporting, and providing recommendations for best practices.
i) By observing the processes, the auditor is to further ensure that the payroll staff
understand the payroll processes, and risks, communicate with staff on their
employment and legal statuses and are up-to-date with the current human resources
trends.
j) Confirmation of compliance with employment laws, statutory regulations and
guidance, public standing orders, human resources manual, and any other regulations.

Presentation title 28
 4.0ISA 500 Audit Evidence
By executing the audit procedures identified above in confirming the financial statement
assertions, Auditor will be able to obtain audit evidence to support audit opinion.

Audit evidence is the information used by the auditors in arriving at the conclusions on
which the Auditors’ opinion is based. It included information contained in the accounting
records, underlying the financial statement, and other information.

Audit Evidence is necessary to ascertain the accuracy and correctness of the account
balances reflected in the financial statements. The preparations of financial statements
are based on underlying assertions/ assumptions which the auditor verifies these
assertions on assets and liabilities and equity interests.

Presentation title 29
 4.0 ISA 500 Audit Evidence…
4.1 Appropriateness
Appropriateness is the measure of the quality of the audit evidence, and how relevant and reliable in providing
support for the conclusions on which the auditor’s opinion is based. The audit evidence that supports FS assertions
(existence, rights, and obligations, valuation, completeness, occurrences and measurement)

 Documentary Vs Oral evidence

 Internal Vs External evidence
 Entity records where accounting and internal controls operate effectively
 Auditor-generated evidence (physical inspections and analysis)
 Original Vs photocopied documents

Documentary evidence is least reliable if created by the entity than by a third party and more so held by the Auditor.

Presentation title 30
 4.0 ISA 500 Audit Evidence…
4.2 Sufficiency
Sufficiency, a measure of the quantity of the audit evidence, is needed and effected by the auditor’s
assessment of the risks of material misstatement and also by the quality of such audit evidence. Factors
to consider;

 Knowledge of entity and its industry, financial position of the entity

 Acceptable level of audit risk
 Inherent risk assessment at FS, account balances and transaction class levels
 Nature of accounting system, internal controls and assessment of control risks
 Experience during prior year audit on the reliability of manage, staff and records
 Materiality of audited items

Presentation title 31
Thank you Michael Osinde,
2021aphdba0804w@kab.ac.ug