CHAPTER-2

AUDIT PLANNING
AND INTERNAL
CONTROL
AUDIT PROCESS

∙ Audit process is a set of actions and

procedures to control an
organization. They aim to test and
prove that processes are being
conducted effectively and follow due
control mechanisms. They also aim to
detect opportunities for improvement
in the audit process
OBJECTIVES OFAUDIT
PROCESS

∙ Every organization has strategic objectives to achieve. One of the objectives of the
audit process is to verify that all company processes are aligned with this strategic
vision and that they deliver the value that internal customers need and external ones
want.
 Evaluate the operational efficiency of processes
 Verify that the process chain provides protection for company
assets
 Find out if your company information and data is secure and
reliable
 Evaluate processes to determine if they’re reliable
 Check for incorrect procedures during processes
 Report detected failures and non-conformities
 Provide recommendations for appropriate corrections
STAGES OF
AUDIT
PROCESS
STAGES OF AUDIT PROCESS
1. Planning:

∙ During the planning phase, contact with audit clients is

initiated and relevant background information is gathered
to gain an understanding of the audited area’s size,
responsibilities, and procedures in place. Also in this
phase, audit objectives are defined and audit methodology
is determined through the creation of an audit program,
which is the blueprint for conducting the audit and
accomplishing the audit objectives. In most cases, a risk
assessment of the department and/or function will be
performed to help ensure appropriate areas are included.
a. Notification Letter – With few exceptions, audit clients are notified in writing when
their area is selected for an audit; however, due to the nature of some audit work, little
or no advance notice may be given.
b. Entrance Meeting – Depending on the type of audit and the amount of audit work
planned, an entrance meeting may be scheduled with the head of the unit and any
administrative staff that may be involved in the audit. In-person meetings are preferred,
but this may be accomplished via telephone or other ways if necessary.
STAGES OF AUDIT
PROCESS

∙ 2. Fieldwork: The evaluation phase of the audit is

referred to as fieldwork. This phase includes assessing the
adequacy of internal controls and compliance, testing of
transactions, records, and resources, and performing other
procedures necessary to accomplish the objectives of the
audit.
∙ It may be necessary for the audit team to conduct interviews with
departmental personnel and to review departmental records and
practices; however, efforts will be made to minimize disruptions and
cooperate with audit clients to make the audit process as smooth as
possible.
∙ The duration of an audit varies depending upon its scope; limited
scope audits may take only a week or two while broad scope audits
may take several months. In addition, access to personnel and
records and the timeliness of responses to audit requests may also
affect the duration of the audit.
3. Reporting

Reporting: The final result of every audit is a written report that details the audit
scope and objectives, results, recommendations for improvement, and the audit
client’s responses and corrective action plans.
a. Draft Report – Audit reports are typically prepared in draft form and
distribution is initially limited to the immediate manager of the area so
it can be reviewed prior to further distribution of the audit report.
∙ If recommendations are made, written responses detailing the following are
requested of the audit client:
 A corrective action plan to resolve the problem and its root cause,
 The person responsible for implementing the corrective action, and
 An expected implementation dates.
∙ Final Audit Report – The final audit report is addressed to the University President and
copies are provided to appropriate levels of management, the Board of Regents, the UT
System Audit Office, and required state agencies.
∙ Exit Meeting – If necessary, an exit meeting will be held to provide an opportunity to resolve
any questions or concerns the audit client may have about the audit results and to resolve any
other issues before the final audit report is released. Those attending usually include the audit
team, management of the audited entity such as the Dean, Chairperson, and Director, as well
as others that the audit client wishes to invite
4. Follow-up:

Follow-up: There will be occasions when corrective actions to resolve an audit issue will not
be accomplished until after the audit report has been finalized. In these cases, follow- up will be
performed on the previously reported recommendations to determine whether corrective action
plans have been effectively implemented and that expected results are being achieved.
Depending on the severity of the audit issue, follow-up activities could include interviewing
staff, reviewing updated procedures or documentation, or re-auditing the processes that
originally led to the audit issue.
AUDIT PROGRAMME

∙ An audit programme is a detailed, written statement designed by the auditor indicating the
work to be performed by the audit assistants, specifying the time limit for completion of
work, instructions and guidance to the audit staff. In short, it is a tool for planning, directing
and controlling the audit work.
∙Prof. Meigs defines an audit programme as, “an audit programme is a detailed plan of the
auditing work to be performed, specifying the procedures to be followed in verification of
each item and the financial statements and giving the estimated time required.”
FEATURES OF AN AUDIT PROGRAMME

∙ The features of an audit programme may be of the following:

1. It is a set of procedures to be adopted to conduct the audit more efficiently.
2. It is a written scheme designed by the auditor.
3. It is a blue print of the audit work.
4. It facilitates delegation of work, based on the capabilities of audit staff.
5. It acts as evidence in future for the audit work being performed.
6. It specifies the work to be done by the audit staff, the manner and time limit for
completion of the work.
OBJECTIVES OF AUDIT PROGRAMME

∙ The following are the objectives of audit programme:

1. To provide clear instructions to the audit assistants specifying the nature of work to be performed
and fixing the time span for completion of each work.
2.

To facilitate coordination among various parts of audit work.

3. To ensure uniformity in the performance of audit work and to avoid duplication and repetition of
work.
4. To attain a fair allocation of work among audit team.
5. To fix responsibility and accountability of each audit assistant.
6. To serve as a guide for planning the audit work in future.
7. To serve as evidence in future showing the date of completion of audit work, methods or procedures
undertaken, persons involved in completion of audit work etc.
ADVANTAGES OF THE AUDIT PROGRAMME

1. An audit program helps in ensuring that all-important areas are considered while conducting the audit.
2. An audit program helps an auditor in the allocation of work among its team members according to
their skills and competency.
3. It enhances the accountability of audit team members towards work performed by them
4. An audit program also reduces the scope for misunderstanding among team members regarding the
performance of audit work.
5. It helps the auditor in checking the status of audit work, its progress, how much it is left for
performance while conducting the audit.
6. Auditor prepares audit working papers which contains a record of various audit procedure applied
which serves as evidence against the charge of negligence.
7. Audit program enables the auditor to keep a record of useful information specifically for future audit
and references.
DISADVANTAGES OF AUDIT PROGRAMME

1. 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.
2. Reduces the Initiative of Efficient Staff: – A program reduces the initiatives of efficient
and competent staff. Thus, staff members cannot make changes in the audit plan and cannot
make suggestions to it.
3. Audit Work becomes Mechanical: The program becomes mechanical when it ignores other
aspects like internal control.
4. Overlooking New Areas: A program may overlook the new areas. With the change in time
and technology, new problems may arise which an audit program may not consider.
Question: Write a program
for the audit of cash.

∙ Ans. A program for cash involves the following:–

 Checking of the opening balance
 The checking of petty cash

The checking cash book
 Checking cash receipt and payment voucher
 Authorization for cash payments
 Comparison with the bank statement
 Surprise check of cash balance
 Cash summary
AUDIT NOTEBOOK

∙ Audit Note Book is a register maintained by the audit staff to

record important points observed, errors, doubtful queries, explanations
and clarifications to be received from the clients. It also contains definite
information regarding the day-to-day work performed by the audit
clerks. In short, audit note book is usually a bound note book in which a
large variety of matters observed during the course of audit are recorded.
The note book should be maintained clearly, completely and
systematically. It serves as authentic evidence in support of work done to
protect the auditor against any legal charge initiated against him for
negligence. It is of immense help to the auditor in preparing audit report.
It also acts as a valuable guide for conducting audit for future years.
Contents of Audit Note Book

∙ The following matters should have been incorporated in an Audit Note Book:
1. A list of the account books normally used and maintained.
2. Names of the principal officers, their duties and responsibilities.
3. Nature of business carried on and important documents relating to the constitution of business like
Memorandum of Association, Articles of Association, Partnership deed etc.,
4. Extracts of minutes and contracts affecting the accounts.
5. Extracts of correspondence with statutory authorities.
6. Copy of audit programme.
7. Accounting methods, internal control and internal check system in operation.
8. Routine queries like missing receipts and vouchers etc.
9. Details of errors and frauds discovered during the course of audit.
10. Points to be included in audit report.
11. Details of all important information to be used as reference for future audits.

∙ Date of commencement and completion of audit.

Question: State whether the working papers are the property of the client or auditor.
Whether the client can demand custody of such working papers?

∙ Answer: – Working papers are the record of various audit procedures performed, audit
evidence obtained, allocation of work between audit team members etc. Audit working papers
are the documents and evidence that an auditor collects and retains with himself during the
audit. Thus, the audit working papers are the property of auditor and not of the client. No,
client cannot demand custody of such working papers. The auditor may on his discretion
make portions of or extracts of working papers available to his client. But the client cannot
ask the auditor for the custody of working papers