Audit Procedure

• Audit Procedures are steps performed by auditors to get all the information regarding
the quality of the financials provided by the company, which enable them to form an
opinion on financial statement whether they reflect the true and fair view of
organization financial position. They are identified and applied at the planning stage of
the audit after determining audit objective, scope, approach, and risk involved.

• Audit procedures are the methods that auditors use for obtaining audit evidence to
form a basis for their opinion on financial statements. Likewise, audit procedures are
performed in order to test various audit assertions related to different class of
transactions and account balances.
 Types of Audit Procedure
Inquiry
• Inquiry is the process of asking the clients for an explanation of the process or transactions related to financial
statements. This type of audit procedure usually involves collecting verbal evidence. Likewise, auditors use
inquiry procedure for a wide range in the audit process. For example, auditors may inquire clients to understand
the business and control environment; or they may inquire about transactions or balances of financial statement
line items.
Confirmation
• Confirmation is similar to the inquiry as it is also the procedure of asking for the information. However,
confirmation is usually done by asking the third party, instead of the client, to confirm transactions and
balances. This type of audit procedures is usually done through formal written letters. Auditors usually perform
the confirmation procedure for testing account balances such as accounts receivable, accounts payable, and bank
balances etc.
 Types of Audit Procedure Continued….
Inspection of Records
• Inspection of records or documents is the process of gathering evidence by examining the records or
documents. This type of audit procedures may be done by vouching the transaction records to the
supporting documents or tracing the supporting documents to transaction records. For example, auditor
may use the inspection procedure to test the occurrence assertion of expense transactions by vouching them
to receiving reports, supplier’s invoice and purchase orders.
Inspection of Intangible assets
• Inspection of tangible assets is the process of physical examination of the company’s tangible assets
such as property, plant and equipment. This type of audit procedures can provide the evidence of
tangible assets’ existence. For example, auditors may test the existence assertion of fixed assets by
performing physical inspection of assets that are recorded in the fixed assets register.
 Types of Audit Procedure Continued….
Observation
Observation is the process that the auditors perform by looking at the procedures being performed by the
client. This type of audit procedures provides evidence that the client’s procedures actually take place at
the time the auditors perform the observation. For example, the auditor may perform an observation
procedure by witnessing the counting of inventories by the client. This observation procedure is to test the
existence of the client’s inventories counting procedures, not the accuracy of the client’s inventory.

Recalculation
Recalculation is the process of re-compute the work that the client has already done to see if there are
different results between auditor’s work and the client’s work. This type of audit procedures is
usually used to test the valuation and allocation assertion of the financial statements. For example,
auditors may perform recalculation on the depreciation of fixed assets to test their valuation assertion.
 Types of Audit Procedure Continued….
Re-performance
Re-Performance is the process that auditors independently perform the control procedures that were
originally done as part of the internal control system by the client. This type of audit procedures is used
to test the client’s control procedures. For example, auditors may use a re-performance audit procedure
in the test of controls on the bank reconciliation procedure that the client already has done.

Analytical procedures
Analytical procedures are the processes of evaluating financial information through analysis of trend,
ratio or relationship between data including both financial and non-financial data. Auditors usually
perform this type of audit procedures by building their expectations about typical transactions or
account balances and comparing them to the client’s record. For example, auditor may perform the
analytical procedure on interest expense account by multiplying the average interest rate with the
 Compliance procedure
• Compliance Procedures are tests designed to obtain reasonable assurance that those internal

controls on which audit reliance is to be placed are in effect ·The auditor needs to ensure

that internal control exist and that the internal control is operating effectively and being operating

continuously throughout the period under audit to ensure that they can be relied upon.

·
 Substantive Procedure

• Obtain evidence to ensure the completeness, accuracy and validity of the data produced by the

accounting system.

• Classified into two (2) types:

(a) Tests of details of transaction and balances and

(b) Analysis of significant ratios and trends which also include the investigation of any unusual

fluctuation and items whether in the Income Statement or Balance Sheet

 Purpose of Substantive Procedures
Enable an auditor to be assured of the following:

(a) Existence

That an asset/liability exists at a given date

(b) Rights & Obligations: ·

That an asset is a right of the entity and a liability is an obligation of the entity at a given date

© Occurrence ·

That a transaction or event took place which pertains to the entity during the relevant period

(d) Completeness ·

That there are no unrecorded assets, liabilities or transactions

 Purpose of Substantive Procedures
(e) Valuation ·

That an asset/liability is recorded at an appropriate carrying value

(f) Measurement ·

That a transaction is recorded in the proper amount and revenue or expense is allocated to the
proper period

(g) Presentation ·

An item is disclosed, classified and described in accordance with recognized accounting, policies
and practices and relevant statutory requirements if any.
 Analytical Procedure
• Analytical procedures are a type of evidence used during an audit. These
procedures can indicate possible problems with the financial records of a client,
which can then be investigated more thoroughly. Analytical procedures involve
comparisons of different sets of financial and operational information, to see if
historical relationships are continuing forward into the period under review. In
most cases, these relationships should remain consistent over time. If not, it can
imply that the client’s financial records are incorrect, possibly due to errors or

fraudulent reporting activity.

 Examples of analytical procedures
• Compare the days sales outstanding metric to the amount for prior years. This relationship between
receivables and sales should remain about the same over time, unless there have been changes in the customer
base, the credit policy of the organization, or its collection practices. This is a form of ratio analysis.

• Review the current ratio over several reporting periods. This comparison of current assets to current liabilities
should be about the same over time, unless the entity has altered its policies related to accounts receivable,
inventory, or accounts payable. This is a form of ratio analysis.

• Compare the ending balances in the compensation expense account for several years. This amount should rise
somewhat with inflation. Unusual spikes may indicate that fraudulent payments are being made to fake
employees through the payroll system. This is a form of trend analysis.

• Examine a trend line of bad debt expenses. This amount should vary in relation to sales. If not, management
may not be correctly recognizing bad debts in a timely manner. This is a form of trend analysis.

• Multiply the number of employees by average pay to estimate the total annual compensation, and then
compare the result to the actual total compensation expense for the period. The client must explain any
material difference from this amount, such as bonus payments or employee leave without pay. This is a form