(Audit Note Book and Working Papers, Evidence Test Checking and Audit Principles, Procedures and Techniques)
I. AUDIT PLAN
The audit of accounts of an organisation is the most important task and hence should be properly planned. The auditor has to understand scope of his work and prepare audit plan accordingly. To complete his work within the specific time limit he has to distribute his work among his subordinate staff. The efficiency and effectiveness of an auditor depends upon how his audit plan is made. Before starting his audit work, the auditor should proceed in the following manner:
1. Scope and Nature of Work Assigned :
The scope of work of an auditor depends upon the written agreement entered into by him with his client in case of organisations where cuditing is not compulsory under any statute. In case of joint stock companies, the scope of work is determined according to Indian Companies Act, 1956 and not as per the mutual agreement. The auditor has to see the nature of audit in these cases, i.e., types of audit-whether it is periodical, continuous, interim or complete audit, etc. and also as to time frame of audit, objective of audit and whether or not he has to perform the task of preparation of final accounts, agreeing trial balance, etc. Because if he performs such duties he shall be entitled to additional remuneration.
2. Nature of Business :
The auditor must study the nature of business of his client and should acquaint himself with the same before proceeding further. It is important to study the important documents of the concern, e.g., memorandum and articles of association and partnership deed in case of partnership concerns. He must understand the technical features of the business with regard to sales, purchases, advertisement, investments policies. Essential or characteristics of good working papers, responsibility, protection, presesvation and ownership of working papers.
3. List of Books :
He must procure the list of various books prepared by the concerns and names of persons who are responsible to prepare these books from his client.
4. System of Book-keeping and Accountancy :
The auditor should study the system of book-keeping and accountancy prevailing in the organisation and get well-versed with it. Different types of establishments, ie, insurance companies, electricity companies, educational institutions, b: aks etc. follow different systems of accounting. He should be well aware of the basis of book-keeping, ie, whether it is cash basis or accrual basis, types of books kept by the organisation, etc. The auditor should collect information about all these before starting audit work.
5. Examination of Final Accounts and Auditor's Report for Previous Year :
The auditor should examine audited final accounts and auditors report for previous year to know about the details of various liabilities, assets and items of income and expenditure, etc.
6. Internal Check :
The auditor should study the internal check system, if any, in operation, so as to know how effective it is or there are some shortcomings. An efficient internal check system eases the work of an auditor.
7. Names, Responsibilities and Specimen Signatures of Responsible Officials:
The auditor should obtain a list of responsible officers and their specimen signatures before starting audit work. This is important to certify the genuineness of various vouchers and documents. This also helps to see whether certain transaction like purchase, sales, bad debts, rate of depreciation, etc. is duly authorised.
8. Instructions to the client :
After getting above mentioned information and knowledge, the auditor must issue clear instructions to his client on the following lines:
(i) Books should be totalled and trial balance and final accounts should be kept ready.
(ii) All vouchers should be arranged serially.
(iii) Schedule of debtors and creditors should be prepared.
(iv) Schedule of bad and doubtful debts should be drawn.
(v) Schedule of outstanding expenses, prepaid expenses and accrued income should be prepared.
(vi) Stock sheet along with value and method of valuation of stock should be prepared.
(vii) Schedule of investments with details regarding cost of acquisition should be prepared.
(viii) Certified list of returned goods concerning transactions with different branches, representations and related firms should be prepared.
The above information is required by the auditor from time to time during the course of his work. Therefore, he must prepare an Audit Memorandum Book and note down the above information in the same. This saves him of inconvenience of asking for information from managers and employees time and again.
9. Division and Distribution of Work :
An auditor works for many concerns, so he cannot perform his task all done. Thus, he has to divide and distribute his work among different persons in order to complete the same within scheduled time. Every Chartered Accountant has some trainees under him called Article Clerks. Old and experienced article clerks are called Senior Article Clerks and new ones are called Junior Article Clerks. The efficiency and effectiveness of auditor depends upon proper division of work among these clerks. Juniors have to work under the guidance of senior article clerks. Although there is no hard and fast rule or basis of distribution of work, yet it is to be divided in such a way that the work is completed within stipulated time period. Here, it is important to note that the final responsibility is of the auditor who has to prepare and sign his report.
II. AUDIT PROGRAMME
Proper implementation of any plan depends upon a good programme. Therefore, the auditor should check out a programme according to requirements of each case as to how the work is to be distributed and by what time it is to be completed. It involves the following:
(i)Which work is to be performed?
(ii) Who has to do such work?
(iii) Within what time it is to be done?
1. "Time programme is an outline of all procedures to be followed in order to arrive at an opinion concerning the client's financial statements."[Howard Stettlar]
2. "An audit programme is flexible planned procedure of examination." [Arthur W. Holmes]
3. "An audit programme is a detailed plan of the auditing work to be performed, specifying the procedure to be followed in verification of each item in the financial statements and giving the estimated time required." [W.W. Biggs]
Thus, the idea behind an audit programme is to ensure that the auditor has a complete grip over his staff, the procedure to be followed and the parts of work actually to be performed by each of them and by the auditor himself. The audit programme is prepared in consultation with some senior clerk in his staff. The entire work should be divided among staff according to qualifications, experience and training. Everyone should know what he has to perform and by what time he has to perform
Objects of an Audit Programme
Important objects of an audit programme are as follows:
(i) Division of work among auditor's staff.
(ii) To complete the work within specified time.
(iii) Smooth conduct of audit work.
(iv) To know the progress of work from time to time.
(v) To ensure that no part of the work is left undone.
(vi) To fix the responsibility among auditor's staff.
(vii) To determine the process of audit.
(viii) To fix the limits of audit.
(ix) To prepare accurate audit report.
Preparation of an Audit Programme/Essentials of an Audit Programme
Every auditor prepares the audit programme according to his convenience and the nature or type of business. Although there are standard or model programmes for different types of audits. These can be altered according to needs and requirements of a particular case. The efficiency and effectiveness of an audit depends upon the audit programme, therefore such a programme should be formulated very carefully. Following essential points should be considered while preparing an audit programme
1. In writing: An audit programme should always be in writing. This is done because the auditor's staff is clear about their jobs and written programme avoids misunderstanding between the two in future. The auditor's staff need not enquire again and again about the work to be performed by them.
2. Clarity: An audit programme should be clear and simple to understand. It should be so made that everyone concerned and understand it easily. If it is not clear, both time and labour would be wasted.
3. Departmentwise: There should be a separate audit programme for each department and section. In addition separate audit programmes should be made according to nature of work, i.e., cash, purchases and sales, etc. This is to facilitate in getting information and clarification from the concerned officer and employees and such department.
4. Flexibility: The audit programme should be flexible so that changes could be incorporated according to changed situations. No programme can be rigid in today's fast changing situations. In order to get maximum advantages from the audit programme it should be such that there is a possibility of incorporating changes.
5. To Facilitate Complete Examination: The audit programme should be such that it helps in the examination of a book completely from beginning till end. For example, for audit programme for audit of purchases should be made in such a way that it covers all activities relating to purchases, i.e., from demand letter to payment for purchases.
6. Fixation of Responsibility: The auditor should clearly fix the responsibility of each and every employee working under him and accordingly prepare audit programme in different parts. This will enable him to fix the liability in case of any negligence or lapse.
7. Object Oriented: Audit programme should be such which serves the objectives of the organisation, so that uniformity in the work of the concern is maintained and is completed within stipulated period.
8. Division of Work: The work should be divided according to departments and according to qualifications of the staff. It should be so divided that everybody's responsibility is fixed and no part of audit work is left undone.
9. Policies, Programmes and life-laws: While formulating an audit programme the policies, programmes, memorandum of association, articles of association and deed in case of partnership should by duly considered as these affect auditor's work. The accounting and internal check of system prevailing in the organisation should be given consideration and then shortcomings should be removed.
10. Previous Reports: While making an audit programme, previous year's final accounts and audit report should be duly consulted in order to know any matters which may be of importance to an auditor.
Types of Audit Programme
Audit programmes can be of two types, keeping in mind the nature of organisation and general principles of auditing:
1. Standard Audit Programme
2. Objective Audit Programme
1. Standard Audit Programme: Standard audit programme is made for general audit of an organisation keeping in mind and according to general principles of auditing. For such audit separate audit programme is to be made for each audit.
2. Objective Audit Programme: An audit programme which is prepared keeping in mind specific accounting system and specific nature of an organisation is called objective audit programme. Such programme is prepared to cater to the special needs and nature of an organisation and hence is more flexible.
Precautions while Preparing Audit Programme
The following precautions must be taken into consideration, while preparing the audit programme-
(i) Audit programme must be elastic so that essential modification may be incorporated, if need be.
(ii) Audit programme should be elaborate and clear.
(iii) Audit programme should be well prepared and for the clarification of the work performed by each audit staff along with his signature, date and time taken for the assigned work.
(iv) Audit programme must be objetive and different for different work.
(v) While preparing audit programme object of audit must be taken care into consider- ation.
(vi) Responsibilities of the audit staff must be mentioned is it.
(vii) Various books maintained by the business firm must be collected, before starting the audit work.
(viii) The auditor must obtained the list of officials along with their rights, duties and liabilities.
(ix) Scope of audit work must be determined before starting the audit work.
(x) The auditor must study the previous audit reports while auditing the books of accounts.
(xi) The audit clerk must consider the opinions of experienced persons of the firm.
(xii) The audit programme must be kept a secret while auditing the books of accounts.
Advantages of an Audit Programme
Following are the advantages of an audit programme :
1. Division of Work: An audit programme clarifies the division of work among the employees and right man is assigned job according to qualifications, experience, etc. This helps to divide the work among the employees of the auditor according to his qualifications.
2. Knowledge of Progress of Work: The auditor e n know the progress of work at any time he feels so ie., how much work is completed and how much is left.
3. Change in Employees: During the course of the audit, if some of the employees proceed on leave or resign, it is not difficult to assign the work to another employee as an audit programme clearly lays down the work to be performed and the amount of work completed and yet to be done.
4. Increase in Efficiency: An audit programme increases efficiency of the audit staff because work is distributed according to qualifications, expertise, etc. To perform a particular type of work without frequent changes increases efficiency of the employees. Moreover, with duties clearly assigned, the auditor need not to enquire time and again which saves his time.
5. Conduct of Audit of Different Organisations Simultaneously: Since the audit programme clearly lays down well in advance what is to be done and how many people and time is required for a particular audit, the auditor can take up audit of different organisations simultaneously.
6. Fixed Responsibility: Every employee's responsibility is fixed, so he can be held liable for carelessness or for not performing a particular task.
7. Evidence in Court: The audit programme serves as evidence in a court of law in defence of the auditor, because if any proceedings for negligence are initiated against the auditor in the court, the audit programme will serve as defence for him as it clearly lays down what is to be done and what has been done..
8. Uniformity in Audit Work: Generally, an audit programme is based on audit programmes of previous years This brings uniformity in audit work which also saves time and energy for framing an audit programme from the scratch.
9. Effective Control: Audit programme help in exercising control over audit work because work and responsibilities are divided well in advance. This increases efficiency of the audit staff and minimises errors and negligence.
10. Complete Checking: Audit programme ensures that complete checking is done and no item is left unaudited.
Disadvantages Demerits of an Audit Programme
1. Mechanical Work: Audit programme is not liked by many people because it makes the work of the employee mechanical and hence necessary changes cannot be made as and when desired.
2. Lack of Initiative: As the auditor's staff has to work in accordance with the programme already set for them, they do not get opportunity to show their intelligence and initiative and give their suggestions even if they think necessary.
3. Cannot take into Account Every Minute Detail: Even an exhaustive and detailed audit programme cannot take into account each and every minute work involved during the course of audit of a business. The programme cannot be open to amendment.
4. Lack of Moral Influence: The employees of the organisation are aware of the aspects being examined into, due to uniformity in the audit. Hence, they work in a pre-planned manner and the moral pressure is reduced.
5. Uniformity not Applicable: A uniform audit programme cannot be applied to all types of business. The audit programme has to be changed according to nature of business. The same audit programme cannot be used for every organisation all the time.
6. Lack of Elasticity: As the audit programme is formulated well in advance before the audit work starts, it becomes very difficult to change it according to circumstances.
7. Does not disclose Inefficiencies: Inefficient and careless auditors try to conceal their weaknesses on the basis of audit programmes.
8. Does not Suit Small Business: Preparing audit programme is expensive and unnecessary for a small business. Thus, small business cannot take advantages of the audit programme.
Suggestions to Guard against Disadvantages
Following points should be kept in mind to overcome the disadvantages of an audit programme:
(i) The audit programme should be so framed that the employees feel that audit programme is for their guidance and they should be free to show their initiative and efficiency and give suggestions.
(ii) The employees should not know the framework of the programme of audit, so that surprise checks can be done.
(iii) A separate audit programme should be made for different concerns.
(iv) There should be scope of changes in the programme whenever the same is needed, i.e., it should be flexible.
(v) The programme should be made according to peculiar conditions and nature of the business.
The auditor should consult and have discussions with his colleagues and wherever necessary he should incorporate and implement suggestions given by them .
III. AUDIT NOTE BOOK
It is difficult for the auditor and his staff to remember each and everything all the time. During the course of audit a book known as audit note book is maintained in which the audit staff notes down important points and enquiries, etc., which has to be referred to officers of the client or to be discussed with his seniors. The audit note book contains exhaustive record of enquiries made, replies received, correspondence etc. Following are the main contents of an audit note book:
1. Technical details about the business, ie, both financial and non-financial.
2. List of books maintained by the client.
3. Queries, etc., for which information and explanation is sought.
4. List of missing vouchers and invoices etc., the duplicates of which are to be obtained.
5. Frauds and errors found during the course of audit.
6. Details which are to be included in auditor's report.
7. Audit Programme.
8. Information needed in future.
9. Name of officers authorised to certify depreciation, provision for bad debts, writing off debts etc.
10. Record of important correspondence.
11. Totals of important ledger accounts.
12. Progress of audit work.
13. Record of suggestions made by audit staff.
14. Details of amount certified by some other person other than authorised person.
15. Main provisions affecting accounts from memorandum and articles of association.
16. A brief description of internal check system.
17. A description of terminology used in the business.
Thus, audit note-book is a book in which L such points which occur during the course of audit, ie, important querries, their replies, informations sought but not replied or given in time, or unsatisfactory replies received etc., must be recorded in this book.
Importance of Audit Note Book
The audit note book is an important book for the auditor. Following are the advantages of maintaining this book:
1. Evidence in Court of Law: In case of any dispute between auditor and client with regard to his efficiency, intelligence and commitment, the audit note book serves as evidence in the court of law.
2. Eases the Work: It eases the audit work because all important points are noted at one place. The work does not get disturbed even if there is a change in employees.
3. Aid to Memory: Human memory is short and same is the case with auditor. Audit note book records important points which arise during the course of his audit and which he might otherwise forget.
4. Assessment: Audit note book helps in assessment of the knowledge, efficiency and work of staff of auditor.
5. Subsequent Audits: Proper use of this book can be of great value for subsequent audits of the concern of other businesses. It serves as a guide to audit staff.
6. Helpful in Preparing Report: Audit note book is very helpful for the auditor in preparing audit report because important informations, clarifications, errors and irregularities are contained in the audit note book.
The advantage of audit note book from audit's point of view in case of legal proceeding against him for negligence, has been felt the worst as in many such cases court relied upon the information contained in audit note book and the judgement was based on the same, e.g., London and General Bank case.
Disadvantages of Audit Note Book
Most of the disadvantages of the audit note book may be on account of carelessness or negligence on the part of auditor's employees. For the sake of our study following can be disadvantages of an audit note book:
(i) Audit note book places too much reliance on the staff of the client for its preparation.
(ii) It develops a fault finding attitude in the minds of the audit.
(iii) It may create misunderstanding among client's staff and auditor's staff.
(iv) If the audit note book is prepared negligently, the same can be used as evidence against him. Thus, by preparing the audit note book carefully and vigilantly the above mentioned shortcomings can be removed.
IV. AUDIT WORKING PAPERS
The auditor uses a number of documents, papers, note book, etc., during the course of his audit. Some of such papers etc. are to be returned to his client and some are retained by him.
These are mostly those papers and documents which are prepared by him and are his personal property. The papers, documents, certificates and confirmation letters which are used by the auditor, for the purpose of audit are known as audit working papers.
According to A.W. Johnson, "Audit working papers are the written private materials, which an auditor prepares for each audit. They describe the accounting information which he received from his client, the methods of examination used, his conclusion and the financial statements." Audit working papers generally include the following:
(i) Audit programme.
(ii) Audit note book.
(ii) Appointment contract or letter of appointment.
(iv) Schedule of debtors and creditors.
(v) Opening and closing trial balance.
(vi) A copy of previous audit report.
(vii) Copies of correspondence done with debtors, creditors, bankers etc.
(viii) Rules of organisation, memorandum and articles of association.
(ix) List of cost vouchers.
(x) Certificates of management with regard to valuation of stock.
(xi) Adjustment journal entries.
(xii) List of investments.
(xiii) Explanations, clarifications, etc. received.
(xiv) Summary of minute book.
(xv) Documents, authorisation with regard to depreciation and bad debts etc.
(xvi) Working paper of auditor's employees on which they have taken out totals, balances and have made important observations and other calculations.
(xvii) Draft final accounts, etc.
Objects of Preparing Audit Working Papers
The audit working papers are in fact the compilation of all evidences gathered by the auditor. These papers serve the following purposes:
1. These papers show the amount of work which is performed by the auditor and his sub-ordinates. This facilitates the drafting and preparing detailed audit report.
2. Auditor can form his opinion as to the efficiency and inefficiency of his staff.
3. The staff is trained to sum up their work with the help of these papers.
4. On the basis of these papers the auditor can tell his client about weaknesses of internal check system and weaknesses or inefficiencies of the procedure of accounting.
5. The auditor can plan for future audits on the basis of these papers.
6. The auditor knows about the extent of performance and directions of his staff.
7. Audit working papers help in case of assigning duties of one clerk to an other in case of transfer, etc., without any interference.
8. These papers serve as defence for auditors in case of disputes in the court of law.
9. The business also sometimes require a number of working papers in order to obtain licences, assessment of tax etc. Hence, due to various legal compulsions it becomes necessary to maintain working papers.
Thus, the working papers are of utmost importance for an auditor. Although he is not bound to maintain these papers but it is in his interest to maintain these as they serve many purposes as discussed above. Therefore, he should keep all his audit working papers safely.
Essentials or Characteristics of Good Working Papers
1. The working papers should include all important information, i.e., they should be complete in all the respects. They should not contain any unnecessary or superfluous matter and should contain only essential data.
2. All papers should be properly organised and arranged so that there is no problem in pointing out any required matter.
3. All the facts should be clearly written so that they are easily understandable.
4. There should be accurate information, only then they can be relied upon.
5. There must be clarity in thought and expression so that they are self- explanatory and easily understandable.
6. Only relevant details should be there and irrelevant material should be kept out.
7. The audit papers should be properly preserved and filed and serially numbered and indexed so that they can easily be located whenever required.
8. As far as possible the type of paper used should be of same size and good. quality so that it does not get spoiled by using it time and again.
9. Sufficient space should be left after every noting so that auditor's comments or decision can be written against each.
Responsibility, Protection, Preservation and Ownership of Working Papers
It is the responsibility of the auditor to keep the audit papers safely with him and not to show these papers to any one without the permission of the client. There is no time limit to preserve these papers prescribed under law. It is desirable that such working papers should be preserved for at least 8 years. The logic behind. this is that a company is supposed to preserve its books of accounts for 8 years under Companies Act.
Ownership: Both the auditor and client claim ownership on the audit working papers. Clients argue that since these papers are related to their business, they should have right to keep them in their custody. On the other hand, auditors claim that since these papers are prepared by them in exercising their audit work and they help in resolving any dispute arising later on as an evidence and hence ownership lies with them.
The question of ownership of audit working papers arose in Shockinsky us. Bright Grahn and Co. Case. The dispute here was that whether the auditor had right to keep these papers with him when he had received his audit fee. The judgement went in favour of the auditors on the grounds that auditor is an independent contractor and not the agent of the client. Same types of view were held in Ipswich Mills us. Dillon and Sons (1927) in U.S.A. It was held that real owner of audit working papers is the auditor but he cannot disclose confidential matter written therein to any body- else. If he does so he shall be guilty of professional misconduct. Any matter can be disclosed only on the request of client or by an order of the court.
Thus, the working papers are the property of the auditor. They are not a part of, nor substitute for, the client's accounting records.
Important Points to be Noted in Connection with Audit Working Papers
1. The audit papers should be prepared very carefully. Although, there is no hard and fast rule for the same but care should be taken so as to include all important papers.
2. The person preparing these papers must put his signature on them. This helps in fixing responsibility. The papers must contain the date on which they are prepared and the date on which they were reviewed.
3. The audit working papers should also contain a list of symbols used by the auditor and what they stand for.
4. The papers should be specific and clear, so that the required information is located quickly. They should be such that auditor is able to prepare his report without questioning from audit clerks. Also, in case one clerk leaves without completing work, other joining in his place should be in a position to take over work from the point of which previous incumbent had left without hastle.
V. AUDIT FILES
Preparing files and keeping them safe is an important task of audit office because entire work, present as well as future, depends upon these files. The audit files can be of two types, namely:
(1) Permanent Audit File and (2) Current Audit File.
1. Permanent Audit File:
A permanent audit file is one which contains all those papers, documents and information which are used for long-run and which are used by the auditor every year, e.g..
(i) Important documents of the company-copies of memorandum and articles of association,
(ii) Decisions of meetings of Board of Directors, Shareholders, etc.,
(iii) Copies of certificate of incorporation and certificate of commencement of business,
(iv) Notes regarding internal check system and accounting systems,
(v) Brief history of the company,
(vi) Long-term agreements,
(vii) Details of management structure,
(viii) Details of branches of the company,
(ix) Fixed assets and depreciation thereon, and
(x) Financial ratio for few years.
2. Current Audit File:
Current audit file includes all those documents, papers, schedules, etc., which are to be used by auditor for the current year's audit, e.g.,
(i) Internal check and control questionnaires,
(ii) Audit programme duly amended and modified,
(iii) Trial balance,
(iv) Schedules of various items of balance sheet,
(v) Bank Reconciliation Statement,
(vi) Various calculations,
(vii) Letters received from debtors and creditors,
(viii) Rights of various officials and their signatures,
(ix) Explanations received from employees,
(x) Clarifications received from various experts,
(xi) Weaknesses in the system of internal control, etc.
Advantages of Audit Files
1. Useful for Future References: These files help to secure papers, etc. for future references and complete the audit work according to circumstances.
2. Audit Plan: These files assist in preparation of audit plan which makes way for subsequent audits.
3. Increases Efficiency: Audit files maximise efficiency in audit procedures.
4. Relevant and Important Matters: These files are ready reference for the auditor and provide different materials to be used in audit work.
5. Suggestions: These files provide necessary information to auditor for giving suggestions on various issues to his client..
VI. EVIDENCE
The auditor examines and tests accounts, the basis of which is evidence and proof. The development of auditing does not depend upon accounting, rather based on logic and metaphysics. In fact, decisions relating to audit depend upon a scientific base. The method is used in taking strategical decisions in practice. This scientific technique is based on an 'abstract thought' and is related to many subjects like mathematics, grammar, policy etc.
Meaning of term Evidence:
The auditor has to examine financial statements and other data and documents. These statements are varifiable on the basis of a basic element. For this purpose the auditor examines all books of accounts, right from books of original entry to trial balance and final accounts and then gives his report as to whether the statements give true financial position of the business. All this is done on the basis of evidences, which are found in vouchers and documents of the concern. In addition to these, the auditor also collects evidences by self-inspection of assets, interviewing various persons.
It is the exclusive right of the auditor to decide which evidence is reliable and to what extent and what portion of it is to be used. The evidences should be reliable, sufficient and competent to verify the correctness of financial statements, because the conclusion arrived from an evidence will depend upon its reliability. Someone has rightly said, "Sufficient, competent evidential matter is to be obtained through inspection, observation, inquiries and confirmation to afford a reasonable basis for an opinion regarding the financial statement under examination."
Types of Evidence:
1. Physical Evidence: In case of tangible assets physical evidence is the best evidence. Building, plant, machinery, stock, furniture etc. can be physically verified.
2. Oral Evidence: The discussion with and explanation from the officials of the concern also help in arriving at conclusions. The consistency in the statements of various officials also certifies the reliability of events.
3. Documentary Evidence: Most of the evidences are in the form of various documents, eg, vouchers, correspondence etc. Such documents have their own importance.
4. Accounting System: The primary evidences with regard to financial statements are depicted in the accounting system. Thus, the system of accounting should be reliable. The acceptability of the evidences of accounting system largely depends upon the reliability of internal control system.
5. Journal and Ledgers: The balances of ledgers are basis for financial statements. The entries in journal should be verified from source documents.
6. Subsequent Events: The events taking place after the deal of financial statement also serve as evidences. While preparing final statements 'window dressing' can be resorted to.
7. Circumstantial Evidence: The audit may sometimes use circumstantial evidences with regard to a particular fact. Such evidences are not 'direct evidences' but can be found out according to circumstances.
8. Computerised Records: Computerised records i.e., in concerns where the accounting records are computerised, the viewpoint of auditor is same as in case of manual records.
9. Ratios: Ratios relating to different periods of time of the same organisation or comparison of ratio with other organisation also serve as evidence for the auditors.
Methods of Collecting Evidence or Audit Techniques
The procedures of collecting evidence by the auditor are known as 'audit techniques'. It is a device to collect evidence and to verify its relevance. Following are the main techniques of audit:
1. Physical Examination: The tangible assets shown in the balance sheet. can be verified by physical inspection and examination.
2. Vouching: Vouching is an documentary evidence to check the authority and certification of transactions entered by clerks.
3. Reconciliation: The auditor reconciles differences in various statements by finding out reasons for such difference.
4. Confirmation: Confirmation means corresponding with outside parties and discussions with officers of the concern.
5. Analysis: Analysis is the process of finding out and studying the mutual relationship of different aspects.
6. Inquiry: Certain definite matters can be verified by inquiry, eg, internal control system and its effectiveness.
7. Testing: Under this the auditor investigates by choosing representative items and test them.
VII. METHOD OR PROCEDURE OF AUDIT WORK
There is no special method or procedure for conducting audit, which method is to be adopted depends upon the quality, capacity, efficiency and experience of the auditor. Every auditor adopts different methods for his audit, but still there are some general rules which most of the auditors adopt in the audit work.
(I) Regarding use of Ticks/Symbols:
(a) Use of different types of ticks for different transactions.
(b) He should make sure that such ticks/symbols are not used by employees of the client.
(c) The audit staff should take care that these symbols should be clear and small so that they do not merge into numbers already written.
(d) Complete secrecy should be maintained with regard to these ticks or symbols and the importance of these symbols should not be disclosed to client or his employees.
(II) Regarding Figures and Transactions:
(a) Pens or pencils of different colours should be used for various symbols and transactions.
(b) For figures which are not clear and are tampered with, special symbol should be used so that it is easy to detect changes made therein after the examination.
(c) The accounts written in pencil should not be examined until they are written in ink.
(d) The alternation of numbers with knives or safe blades should not be accepted under any circumstances.
(III) Completing One Part in One Sitting:
A particular part of work should be finished at one go or sitting as far as possible. If it is not possible the totals and balances of the work should be written in audit note book.
(IV) Change in Figures:
If it appears that some changes have been made after the examination then the posting of related accounts should be checked..
(V) Calling and Checking:
Every transaction should be checked with the vouchers. This work is to be entrusted to two clerks in the following way:
(a) The senior clerk should check the voucher and call out the amount given in it, and
(b) The junior clerk should compare the amount and place a tick against the item in the cash book. It should be remembered that whenever figures are spoken out in this way, the audit clerk should be very clear in his expression otherwise mistakes are likely to arise, e g., calling out ru.50 p. 7 may be understood as 57 or mistakes in understanding ninty and nineteen etc.
VIII. METHODS OF CHECKING
There are different methods of checking, which are as follows:
1. Routine Checking:
The size, constitution and nature of activities and transaction of a business may differ in different business. There are certain records and books which are common to all types of businesses. Such books are checked by auditor in routine and hence called routine checking in auditing. To be precise, routine checking means checking of arithmetical accuracy of books of original entry and ledgers with a view to detect clerical errors and frauds of a very simple nature.
What does Routine Checking Includes ?
Routine checking includes the following:
1. Checking of totals, sub-totals, calculations, amount carried forward in the books of original entry.
2. Checking out posting in ledgers.
3. Totals of accounts, carrying forward and checking of balances.
4. Checking of figures of the trial balance on the basis of balances of accounts. Whether the auditor should check all books from beginning to end or resort to test checking depends upon the system of accounting and internal check system of the organisation.
The following are the main objects of routine checking:
(i) Checking arithmetical accuracy.
(ii) Checking postings in the ledger.
Advantages of Routine Checking
1. It helps to detect arithmetical errors in the books of original entry.
2. It helps to know whether the postings in the accounts are correct or not.
3. It serves as an aid to examine final accounts.
4. Since various symbols are used while checking, the possibility of changing the figures is less. Even if it is done, the same can be detected easily.
Disadvantages of Routine Checking
1. Routine checking is not a special checking, rather it is mechanical and is usually done by underqualified clerks.
2. It is done in hurry and carelessness and hence, if audit work is done on this basis, the chances of errors are there.
3. It is considered to be wastage of time, since the time spent on routine checking can be utilized for other work which is not good from auditor's point of view. In fact, all these disadvantages are not of the stem of routine checking but on the part of the persons who perform it. By proper training and motivation these shortcomings can be removed.
Whatever may be the shortcomings, routine checking is of utmost importance for audit as it serves many purposes, if it is done intelligently and efficiently. It is worthwhile to mention here that by routine checking only clerical errors and general frauds can be detected. It is difficult to detect errors of principles and frauds committed deliberately, which require intensive examination.
2. Test Checking:
If the auditor feels that the work is too much and it will take more time to examine each and every account and he also believes that the internal check system adopted by the concern is satisfactory, he resorts to checking of representative accounts of each category. It is believed that if such representative or selected accounts are correct, others will be correct too. This type of checking is known as test checking.
"Testing and test checking implies that from the large transactions of the same category a few transactions are chosen and examined in detail." [Prof. Miz]
The accounts selected for test checking, are chosen at random and no special principle is applied in doing so. The success of test checking depends upon the system of internal check. If internal check is effective, it can be applied, otherwise detailed checking is the only alternative.
Characteristics of Test Checking
1. Representative Transactions: The transactions selected for test checking are representatives of all kinds of transactions. They must include transactions of all kinds and cover the work of all employees and period.
2. Principle of Random Sampling: Test checking is based on principle of random sampling. No definite principle is applied to select the transactions. If representative transactions are correct, it is assumed that other transactions shall be correct too.
3. Change in Scope of Examination: If errors and frauds are detected during test checking, the auditor can widen the scope of examination and if necessary can resort to comprehensive checking.
4. Standards of Test Checking: The standards for test checking cannot be determined before hand. Its standards and limits are to be decided by auditor himself.
5. Internal Check: The results of test checking largely depend upon internal check system of the concern.
6. Objectives: The main object of test checking is saving time and freeing the auditor from conducting detailed examination.
Precautions for Applying Test Checking
To make test checking effective and satisfactory following precautions should be taken:
1. Random Selection: The accounts should be selected at random. This leaves no bias and the selected accounts cover all type of accounts and in this way all types of accounts are examined.
2. Cash Book and Pass Book: Cash Book and Pass Book should always examined completely and in detail.
3. Represent all Books and Accounts: As far as possible representative be transactions of all accounts and books should be checked.
4. Entries for First and Last Month: The entries for first and last month should be checked in more number and details. This is important because maximum adjustments are made during this time and possibility of errors and frauds may be maximum.
5. Every Employee's Work: Effort should be made to check the work of each and every employee responsible for maintaining accounts.
Advantages of Test Checking
1. Test checking saves time and energy.
2. Test checking can prove purposeful and useful if the transactions are selected intelligently.
3. Different audits can be taken up simultaneously by the auditor as the volume of work is reduced.
4. Employees of the client become more careful and vigilant as they know that any transaction can be checked.
5. Definite conclusion with regard to true and fair view of affairs of the concern can be arrived at with least efforts.
6. It helps in reducing the cost of audit.
Disadvantages of Test Checking
1. Report may not be complete. The audit report may not be complete and satisfactory as it is based on random checking.
2. Errors and frauds may remain undetected. Since all the accounts are not checked, there is a possibility of errors and frauds still remaining in the accounts or transactions which are not selected for examination.
3. The employees of the concern become careless as they have a feeling that entire work will not be checked.
4. Test checking increases auditor's responsibility. Though test checking reduces the work of the auditor his responsibility increases because he is personally responsible for transactions which are not checked.
Test Checking and Auditor's Responsibility: Whether or not to adopt test checking is the discretion of the auditor. Although the Institute of Chartered Accountants of India has given recognition to test checking, there is no provision: for absolving the auditor from non-detection of frauds and errors due to adoption of test checking. In other words, if errors and frauds remain undetected after the examination through this technique the auditor cannot be freed of his liability. If a charge of negligence is levied on the auditor in a court of law, the auditor cannot defend himself on the grounds that he had adopted test checking and hence he is innocent. Thus, by adopting this technique he can reduce his work but in no way his responsibility is reduced.
To conclude, it can be said that the auditor should adopt test checking only after he is fully convinced and satisfied about the effectiveness of internal check system of the concern. Test checking in no way reduces the responsibility and liability for negligence on part of the auditor.
3. Checking in Depth: Audit or checking in depth means examination of a transaction thoroughly from beginning to end in the order of its happening or in sequence. This technique is adopted in large scale concerns having a number of transactions. In this all the entries of the accounts are not examined, rather a few selected transactions are examined and verified in all its aspects. This method is also based on test checking. The main objective is to complete the audit in shorter period of time. The main advantage of selective examination is to enable the auditor to carry out audit in depth of the selected transactions. Such procedure can be adopted by the auditor where there is an effective system of internal check.
For example, if purchase of raw material is selected for indepth examination, the auditor should take the following steps:
1. First of all he should examine the original requisition slip issued by the production department.
2. Then, the purchase order issued by purchase manager should be inspected.
3. Then, the tenders or quotations received by the concern are to be examined.
4. After this, the auditor should examine the 'goods received note' issued by the stores incharge on receipts of goods.
5. He should see the quality control report under which the goods have been certified as being of standard quality as desired.
6. He should examine the entries made in Bin Cards.
7. Lastly, the stores ledger should be checked and tallied with the vouchers and documents related to purchases such as challans and invoices should also be checked as they are important vouchers concerning purchase of raw materials. In this way an auditor examines transactions relating to a particular account from beginning to end.
4. Overall Checking:
A detailed or comprehensive examination of accounts is known as overall checking. This includes all those techniques and procedures used by the auditor to detect the errors and frauds which are not detected during routine checking.
For example, it is not possible to find out whether the entire amount due from debtors has been received or not. Likewise it is difficult to know that those liabilities for which provisions have been made, will actually be paid or not. In such circumstances auditor adopts overall checking and can personally correspond with debtors and creditors to confirm the balance due to or due from them. Similarly, rent receipts do not prove that the rent on property let out is actually received or not or that necessary adjustments have been made in the books with regard to rent receivable. For proper verification of this a list of property let out on rent has to be made which includes details regarding monthly, quarterly or annual rent and details regarding rent received from different tenants. Likewise, a list of various investments has to be made for the examination of interest received or dividend received or due from various investments.
One very common technique adopted these days for examination is establishing a correlation between various accounting ratios, which is also used in overall checking. For example, by comparing gross profit ratio of current year to that of previous year we can reasonably find out whether the stock was properly valued, or whether the sales have gone up or not, or whether the cost of raw material has gone up or has come down etc..
IX. AUDIT PRINCIPLES, PROCEDURES AND TECHNIQUES
Audit Principles
Accountancy has some definite principles. But there is a dearth of principles in audit- ing. The objectives of auditing are its principles. According to Arthur W. Holmes. "Audit Principles are those basic truths which tell us the objects of auditing. These principles suggest a way to achieve those objects." These are changing with the change in the eco- nomic world.
Audit Procedures
During audit certain methods are adopted to achieve the objects of auditing. This is known as audit procedure. In other words, the methods of work adopted for audit purposes or work are known as Audit Procedure. According to Arthur W. Homes, audit procedure is the work done during checking (audit).
Truly speaking no hard and fast rule or method can be laid down. The auditor adopts a method keeping in mind the nature of the business and other circumstances. It will vary with the auditor's training, experience, likes and dislikes and circumstances. He demands the assets and liabilities and other items of the business from his client and with their help and using audit techniques does the audit work.
Audit Techniques
Audit Techniques include all methods that the auditor adopts to collect all evidences for audit purpose as routine check, test check, certification and verification, etc. After collecting necessary evidence with the help of audit techniques, the auditor certi- fies the truth and propriety of accounts. Use of audit techniques depends upon preplanned procedures.
Difference between Audit Principles, Audit Procedures and Audit Techniques
A close relationship exists between the three. On the basis of audit principles, a plan is prepared according to fixed standards. Audit procedure is adopted according to the plan and then audit techniques are used to collect evidence. The following example will make this clear.
An auditor will pass through the stages of principles, procedures and techniques in the following manner if he is conducting the audit of credit sale dealings.
Principle- All the Credit Sale transactions should be written in account books.
Procedure- Keeping this principle in mind, the auditor will fix an audit procedure. He will decide that these should be checked with the help of sales order and the bill.
Technique- On the basis of above documents he will check after collecting evidence with the help of verification of account books, routine checking, test checking certification and valuation.
Method of Work- Audit procedure adopted for any audit work varies with the auditor's training, experience and circumstances. Audit procedure is different for every audit. Still, below are given certain rules which are generally adopted by all auditors in their audit procedures.
1. Relating to the use of Special Ticks
(i) Different kinds of ticks should be used for different kinds of transactions.
(ii) It should be stressed that the same ticks should not be used by the employees of the client.
(iii) The assistants of an auditor should see that these ticks should be clear, small and distinct from the digits.
(iv) These ticks should be kept secret and should not be explained to the client's employees.
2. Relating to Digits and Accounts
(i) Special kinds of ticks should be used for unclear and crossed digits so that any change in them after the audit has been done may be easily detected.
(ii) Accounts written with a pencil should not be checked till they are written in ink. The figures written with pencil can be easily tampered with. The auditor should not accept the figures with pencil and should insist that these should be written in ink.
(iii) Digits or figures erased with a knife or a safety raser should not be accepted in any case.
3. Each section of the work should be completed in one sitting.
4. In case of doubt of a change after the audit has been conducted, the posting in the concerned account and ledger should also be checked.
5. Vouching should generally be done by two audit clerks together. While checking the accounts, one person should speak and the other should check. The speaker should be clear in his speech.
6. Every account should be checked with the help of vouchers.