Techniques of Auditing

8/2/2019 Techniques of Auditing

http://slidepdf.com/reader/full/techniques-of-auditing 1/35

Techniques of auditing

an auditor employs various techniques while conducting his auditing work. Thesetechniques are useful guides to obtain a reliable evidence and then express an

opinion in his report. There are many techniques in the audit work . Some of thetechniques are already laid down while the others are developing techniques in the

field of audit work.

CA R.MURALI



Inspection.

this consists of examining records, documents or tangible assets.

Four different categories of documentary evidence which providedifferent degrees of reliability to the auditor are the following :

(1) documentary evidences originating from the third parties and heldby third parties.

(2) documentary evidences originating from the third party and heldby the entity.

(3) documentary evidence originating from the entity and held by theentity.

Inspection of tangible assets is to obtain reliable evidence as to their

existence.



Observation.

Counting of inventories by the client.

Counting of stamps by the client.

Voucher entries made by the operators. Counting of cash by the cashier.

This is normally resorted to by the auditor in

places where there are no audit trailsavailable to him.



Inquiry and confirmation

Inquiry consists of seeking appropriateinformation from a person inside or outside thebusiness.

This is very important in the practical sense

because proper response from the other personis very important in the conductance of the auditwork.

Good inquiry also improves communication

ability of the auditor. Confirmation is linked to inquiry since the

evidence obtained in the inquiry results instrengthening it.



Computation.

This is the quantitative ability of the auditor in calculating in a sequentialmanner.

The example of computation being the computation of gratuity,computation of depreciation, etc.

This is done by the auditor to check the computation done by the staff of

the company in many areas.

The computation on the whole verifies the arithmetical accuracy of thecalculations done by the client.



Recomputation

When the computation is done several times it is calledrecomputation.

It is a technique to check the computation already doneby the auditor to be more perfect.

This is a famous technique since it prevents any form of error in auditing to a great extent.



Vouching

This is a famous technique of verifying the documents along with thecorresponding registers

This verifies items like date , no , amount , etc.

This is the only technique where documents is verified with registers.

The signature of the authority is also verified.

This is a very good internal evidence showing all the details of atransaction.

It is normally done for cash and bank purchases, cash and bank sales ,

credit purchases and credit sales.

It is also done for journal proper.



Cross examination

This is verification of one item withanother item to find out if it is correct.

For example the cost price of an asset canbe verified with the voucher and the fixedassets register.

The depreciation can be verified with thefixed asset register and the profit and lossaccount.



Stratified sampling

This consists of dividing the whole population in groups called strataand then taking a sample from each of them.

Each stratum is treated as if it were a separate population. The groups into which the whole population is divided by the

auditor on the basis of his judgment.

The entire expense vouchers may be divided into : Vouchers above 1,00,000 Vouchers between 25,000 and 1,00,000 Vouchers below 25,000 The auditor can decide like this All vouchers above 1,00,000 , 50% between 25,000 and 1,00,000

and 25% below 25,000.



EDP AUDIT

Auditing around the computer

The auditor does not care about thetransformation of data which took placeinside the computer.

This is done by examining the print out of the computer.

The transformation that takes place insideis ignored.



Auditing through the computer.

This is a complete loss of audit trail andthus the auditor has to test the systemitself.

The results are then analyzed for theprocessing reliability and accuracy of thecomputer program.

This is actually the testing of the computerprogram.



Auditing with the computer.

Here the computer is used for making theaudit program.

The modern concept is using the CAAT.



Surprise checking

This is done on a surprise basis.

It is done for the verification of books accounts and records, whichare maintained at branch offices.

For the verification of cash, stock and similar type of assets, which

are kept at other places. For checking of cash on non routine basis.

For checking of investments on a non routine basis.

For the verification of the regularity of maintenance of books of accounts, statutory registers and other important documents.

For the physical verification of stock and stores on non routinebasis.



Cut off examination

This is done to ensure that at the year end the trading transactionsare entered in the period to which they relate. Cutoff means thatthey are separated from the present period to the previous period.

The examples being sales, purchases, stocks, etc.

This is important since it will distort the true and fair view of theaccounts.

Normally the cut off examinations are undertaken at the end of theyear since in the last week if there are many transactions there isevery possibility that it will be reported in the next financial year.



Internal control questionnaires.

This is designed to get Quick Answers like yes or no . The answershelp in the judgment of the auditor instead of asking too manyquestions or descriptive questions.

This also helps in formulating an audit programme. This cuts downunnecessary work and also saves time of audit.

But the questionnaire should be updated from time to time.

The topics related to ICQ are cash sales, cash received fromdebtors, cash payments, etc.



Auditing in depth.

this involves examination of small amount of transactions in greatdetail.

This is done to understand the system of recording transactions.

This also saves a lot of time without distorting the judgment of the

auditor. This is mainly done in cash transactions and internal control of

purchases.

This technique is also called selective verification.



Physical verification

this is mainly done for assets.

Since assets are tangible items it has to be seen that they are reallyexisting.

A register is also maintained for physical inspection of the fixed

assets. It is also done for cash.



Test checking

a part of the transactions are checked depending on the judgmentof the auditor.

This is the actual checking of the representative sample. The factors to be taken in this regard are the following : Nature of transactions.

Effectiveness of internal control. Materiality of items. Previous experience. There are some transactions that are not suitable for test checking Exceptional transactions.

Transactions involving seasonal fluctuations. For opening and closing balances. Bank reconciliation statement. Presentation and disclosure of information in balance sheet and

profit and loss account.



Audit tests.

Compliance test and substantive tests.

Compliance is done to ensure that internalcontrol procedures are being applied asprescribed.

Substantive tests is done to see thevalidity of the information contained in theaccounting information .



Flow chart

this is done to see the sequence of operations with a yes or noanswer .

This is mainly done to see the systems of the company.

Flow chart of items to be checked is also done to formulate an audit

programme. Since it provides a yes or no answer it is similar to ICQ.



Conclusion

The auditor should follow the appropriate audit procedure andadopt different techniques of auditing. On the basis of hisassessment of the accounting system and evaluation of internalcontrols, the auditor will draw up an audit programme speciallydesigned for that particular audit.

The techniques of auditing depends on the nature of the work undertaken by the auditor and his objectives of the audit work. If hewants to see the existence then he should adopt physicalexamination technique and so on.

If he lacks the time frame he must undertake test checking.

He can also undertake balance sheet audit which is more of aprocedure when the internal control of the organization is verystrong. That is in the case of banking and insurance companies.

He can adopt the procedure of ledger scrutiny to see the accountsare true and fair.



Techniques of auditing ( continued )

the commonly used technique is recomputation which is often resorted toby the auditor to confirm the genuinity of the transactions.

The auditor must also follow the concept of materiality before selecting thetechnique meant for auditing. Otherwise the technique will not beappropriate under the given situations.



Vouchers

they are of three types

Receipt voucher, payment voucher and journal voucher.

Receipt voucher is prepared to record all bank and cash receipts.

Payment voucher is prepared to record all bank and cash payments

Journal voucher is prepared to record all non cash transactions. The voucher should record the amount, narrative record, to enable

them to be accurately posted in the computer.

Code number should be properly entered otherwise it will be postedto the wrong account.



Auditing in depth.

This involves certain transactions from their origin to theirconclusion.

Investigating at each stage the records created and theirappropriate compliance with the systems.

Tracing of transactions from one department to another.

For example if a payment to a creditor is to be verified in depth. Itwill require the examination of the following documents : The invoice and statement of account received from the supplier. The entry in the stock records showing that the goods were

physically received. The goods received note and the inspection certificate showing the

goods in fact were ordered by an authority which was competent todo so.



Gross profit comparisons.

Comparison of the current year ratio with the previous year to see if there are abnormal fluctuations.

It will also show changes in sales prices, raw material prices and labour cost.

Verification and valuation of stock in trade. Correctness of sales and purchases to see if they are recorded

properly.



Quantitative reconciliations

Quantitative records regarding sales and purchases should beexamined properly .

The stock should also be checked in this case.

The closing stocks and the opening stocks are very important since

they do not appear from the ledger. The quantitative items should appear as a note in the final accounts

and should be disclosed in the final accounts.



Checking the capital and revenue

This is important since obviously this will distort the true and fair view. Let us take examples : Legal charges : this may be capitalized in case the same is incurred in

connection with an acquisition of fixed asset. For instance legal fees paidfor the certificate from the lawyer regarding proper title, etc. in respect of afixed asset is capitalized.

Wages : incase either a new building has been constructed or the existingbuilding has been altered to provide for additional accommodation, wagespaid are capitalized. Wages incurred in connection with erection of machines at premises are also capitalized.

Major repairs to assets : all expenses relating to the major parts of assets which lead to enhancing the earning capacity of the assets are alsocapitalized. Repairs undertaken due to breakdown of parts though major

should not be capitalized since additional capacity is not created. Interest on capital : interest paid to shareholders under section 208 of

the companies act is capitalized in case the completion of the project willtake a very long time and is not profitable.



TECHNIQUES AND AUDITING STANDARDS

According to AAS 1, he should rely on the work performed byother auditors provided he has exercised due skill and care andthere is nothing to persuade him not to place such reliance.

According to AAS 3, the auditor must satisfy himself that theschedules, and other working papers prepared by the client andutilized in the course of the audit have been properly prepared.

According to AAS 5, the techniques involved are observation,inspection, inquiry and confirmation, computation and analyticalreview.

According AAS 7, to assess the internal audit function it will benecessary to review accounting systems, examining of operational information, examination of effectiveness of operations, and physical examination and verification.



TECHNIQUES AND AUDITING STANDARDS ( CONTD. )

According to AAS -14, the techniques of auditing areindicated as follows:

Comparison of the entity’s financial information.

Comparable information of the prior periods. Anticipated results like budgets and forecasts. Predictive estimates like depreciation. Ratio analysis like ratio of sales to trade debtors with

industry averages, ratio of gross profit , ratio of net

profits, etc. Comparison of financial and non financial information

like payroll costs to number of employees.



TECHNIQUES AND AUDITING STANDARDS.

According to AAS -18, the auditor should assess thereasonableness of the accounting estimates based on hisknowledge of the business.

The auditor should consider whether there is any significant andsubsequent transactions or events, which affect the data, andthe assumptions used for determining the accounting estimate.

The auditor should evaluate the accounting estimate as awhole.




According to AAS – 20, the auditor should employ propertechniques to assess the knowledge of the client’s business.

For doing this the auditor has to judge the following :

General economic factors. The industry

Management and ownership

Products, markets, suppliers, and expenses.

Financial performance like key ratios and trends.

Reporting environment

Legislations.




According to AAS 18 , the auditor must assess thereasonableness of the estimate, and whether it is consistentwith other audit evidence obtained during the audit.

According AAS 19, the auditor must employ proper techniquesfor inventory cut off and payments to creditors.

The auditor must also review the procedures the company hasfollowed regarding the identification of subsequent events.

The auditor must enquire of the entity’s lawyers regarding

litigation and claims. The auditor must consider whether there is proper accounting

of such events in the financial statements.



All about vouching

Vouching means An examination by the auditor Examination of supporting documents. To authenticate the transactions entered into the books of accounts. Importance of vouching Detection of errors and frauds. Reduce the liability of the auditor Moral check on the employees. Back bone of auditing. Compliance with the law. Capital and revenue expenditure.

Genuineness of transactions. Nature of transactions. Accounting period. Accounting Easy conduct of the audit.



Importance points to considered while doing vouching

• All the vouchers are serially numbered and filed in order of the entries inthe accounts.

• Attention should be paid to the dates which must correspond to the auditperiod.

• The auditor should see whether the voucher is in the name of the client.

• He should see whether the amount written in words and figure is correct.

• He should ensure whether the account head is properly written or not.• He should also see that expenditure is reasonable or not.

• He should see that the expenditure is for the cause of the business.

• In case the expenditures exceeds Rs.5,000 the auditor should ensurewhether the revenue stamp is affixed on the voucher or not.

• The auditor should see that the voucher is properly accounted for in thebooks.

• He should see that the voucher is signed by the recipient of the amount.



BALANCE SHEET AUDIT.

• This is a technique of only checking assets and

liabilities of the company.

• The other items like transaction vouchers ,

subsidiary ledgers are not given much importance.• This is used in companies which have very good

internal control.

• The examples of such companies are banking

companies, insurance companies , etc.

Documents

Techniques of Auditing