MODULE -1- INTRODUCTION AUDITING

INTRODUCTION OF AUDITING
The word Audit has been derived from Latin word 'Audire' which means 'to hear'. In the
middle ages, an auditor used to listen to the accounts read over by an accountant in order to
check them.
Meaning: Auditing
Auditing simply means verification and examination of accounts. It is done to ascertain the
reliability and validity of information. The auditing process can be started only when
accounting ends.
Definition: Auditing
According to A.W. Hanson, "An audit is an examination of such records to establish their
reliability and the reliability of the statement drawn from them".
MEANING OF AUDITOR
An auditor is a trained professional who is responsible to review and verify the accounting data
of any business undertaking pertaining to its business activities.
OBJECTIVES OF AUDITING
1.Primary Objectives: The primary objectives of an audit are as follows:
To express an appropriate opinion as to whether the financial statements present fairly.) in all
material respects, the financial position, the results of operations, and the cash flows of the
company's business).
2. Secondary Objectives: An auditor may come across some errors and frauds while
examining the books of accounts in order to report the true financial condition of the business.
This detection and prevention of frauds and errors are the secondary objectives of auditing.
These objectives are classified into following types:
A. Detection and Prevention of Errors.
B. Detection and Prevention of Frauds.
A. Detection of and Prevention of Errors : Errors refers to the mistakes which are committed
unintentionally because of carelessness, ignorance etc. Errors are of different types
I.Clerical Errors Clerical errors refer to those errors which arise due to wrong posting,
ignorance, carelessness etc. If these errors are discovered in the process of audit, the auditor
should get them rectified. Clerical errors mainly are of two types
a. Errors of Omission: These are the types of errors which arise on account of transaction
omitted to be recorded in books of accounts wholly or partially. This omission of transaction
does not affect the agreement of trial balance; hence it is more difficult to find out.
example: Furniture purchased for Cash Rs.5000 not recorded in the books of accounts.
b.Errors of Commission: These are the types of errors which arises due to wrong posting to
ledger accounts, wrong totaling, wrong calculations or balancing in the books of accounts
wholly or partially. These errors affect the agreement of trial balance.
Example: Cash sales Rs.10,000 recorded as Rs.1,000
ii. Compensating Errors: When an error is counterbalanced with another error, such an error
is known as compensating errors. These errors will not disturb the agreement of trial balance.
iii. Error of Principle: When transactions are not recorded in accordance with the fundamental
principles of accounting, such errors are known as Errors of Principle. Example: Furniture
purchased for Rs.5,000 dehited to Purchases a/c. This is an error of principle.
Detection and Prevention of Frauds: Fraud refers to the intentional and deliberate
misrepresentation of accounting records for a financial gain. These frauds are intended to
deceive, to mislead or to conceal the truth or the material facts. They are more serious than
errors.
Frauds are of three types:
i.Embezzlement of cash: In big business organisations, where there is separate existence
between ownership and management, it is impossible by the individual owners to have direct
control over receipts and payments of cash. Hence, misappropriation of cash is more frequent
in these organisations.
Cash can be misappropriated by various ways which are as follows:
a. Recording of fictitious payments.
b. Recording more amount than the actual amount of payment.
c. Suppressing receipts.
ii. Misappropriation of goods: The companies which are dealing with high value of goods are
prone to this kind of frauds. Hence, proper stock records have to be maintained. The auditor
can detect this fraud by checking the stock records and physical verification of goods.
iii.Misappropriation or Falsification of accounts: Responsible persons who are in the top
management of the organisation will manipulate the accounts in order to achieve specific
objectives.
TYPESOFAUDIT

I. Classification on the basis of the organisation:

The audits under this classification are further divided into two types:
A. Statutory Audits
B. Voluntary or Non-statutory Audits.
a) Statutory Audit: Statutory audit refers to the audit of an organisation performed under a
statute. In this type of audit, the rights, powers, duties and responsibilities of auditors are laid
down by the statute which cannot be altered or curtailed by the client or auditor himself.
The following are some of the organisation which requires statutory audits:
  Companies According to Companies Act 1956.
 Banking Companies - According to The Banking Regulations Act, 1949,
 Co-operative Societies The Co-operative Societies Act, 1912
 Insurance Companies - The Insurance Act, 1938,
b) Voluntary or Non-statutory Audits: Voluntary audit refers to the audit performed by the
auditors because the proprietors or the Government bodies of the organisation wants their
accounts to be audited as it provides the assurance on the reliability of accounts and the
financial results of the organisations.
II. Classification on the basis of the Functions:
A. Internal Audit.
B. External Audit.
a) Internal Audit: Internal audit is a type of audit conducted by the own staff of the
organisation specially assigned for that purpose.
b) External Audit: It is a type of audit performed by the auditors outside the business
organisations. Qualified Chartered Accountants are appointed as external auditors of the
organisation.
III. Classification on the basis of Audit Approach:
a) Time Basis: Further audit can be divided on the time basis which is as follows:
1. Continuous Audit: Continuous audit is also known as 'Detailed Audit'. Under this type of
audit, detailed examinations of books of accounts are conducted at regular intervals say weekly,
monthly or once in three months.
2. Interim Audit: It is a type of audit which is conducted in between two annual audits with a
view to find out the interim profits. It is done for the purpose of declaring interim dividend to
the shareholders.
3. Periodical or Final or Complete Audit: It is a type of audit where the checking and
verification of books of accounts are conducted only at the end of the accounting period.
b) Scope basis: The types of audit on the basis of its scope are as follows:
1. Partial Audit: It is a type of audit where an auditor is asked to check and verify only few
books of accounts for a particular work. This type of audit curtails the work of auditor.
c) Objective basis: On the basis of the objective of audit, it can be classified into two types:
1. Balance Sheet Audit: Under this type of audit, the checking and verification of books of
accounts starts from the balance sheet and working back to the original books of entry and
other related documents.
2. Occasional Audit: It refers to a type of audit which is carried out whenever the clients desires
it and whenever there is need. This type of audit cannot be carried out in case of joint stock
companies, Banking, Insurance companies. Only proprietary concerns can opt for this type of
audit.
IV. On the Basis of Audit Dimension
1.Tax Audit: A tax audit refers to examining of an organisations or individuals incomes or
expenses and claims of deductions or exemptions for the purpose of assessment of tax.
2.Management Audit: Management audit is one of the techniques of management control. It
refers to the systematic examination of the activities of management at all levels of
management.
3.Cost Audit: Cost audit simply means audit of cost records. In other words, it refers to detailed
checking and verification of correctness of cost accounts, costing techniques and system.
4.System Audit: System audit refers to an audit concerned with evaluation of accounting
practices which is directed to ascertain whether they are up-to-date and economical.
5.Cash Audit: Cash audit involves the evaluation of all the cash transactions of the
organisation for a given period of time. In this type of audit, the auditor will check all the cash
receipts and payments with the vouchers and documents. It is the oldest concept of auditing.
6.Social Audit:This type of audit is concerned with examination of performance of an
organisation or an entity towards the fulfillment of social obligation.
7.Energy Audit: It is an important factor for the present day world to conserve the energy
resources. This type of audit aims at evaluating whether the right type of energy is used in the
organisation and also confirming that there is no waste of energy due to human difference.
8.Proprietary Audit: Proprietary audit aims at examining the allocations of resources and also
ascertaining whether there is any violation of legal, economic or financial aspects of the
organisation.
9.Performance Audit: In this type of audit, the auditor examines the growth of the organisation
in terms of production, sales and profitability of the organisation. The purpose of this audit is
to evaluate and compare the optimum return with the amount of capital invested.
10. Secretarial Audit: It is an audit which ensures that the corporate body's legal requirements
have been duly complied with and in time. If there is any non-compliance noticed by the
auditor, the management will have time to rectify the situation with less problem and cost.
ADVANTAGES OF AUDITING
1. Verification of Books and Statement: The main object of audit is the verification of the
books and the financial statements of the company concerned.
2. Detection and Prevention of errors and frauds: The main advantage of auditing is to
detect errors and frauds. It is the duty of auditors, while examining the books, they should find
out various kinds of errors and frauds.
3.Moral check: When each employee of the company knows that this financial transactions
will be examined by the auditor then he fears to do the fraud. The fear of their detection acts as
a moral check on the employees of the company.
4.Independent Opinion: Auditing is very useful to obtain the independent opinion of the
auditor about the business condition. If the accounts are audited by the independent auditor, the
report, of the auditor will be a true picture and it will be very important for the management.
5.Protects the interest of shareholder: Audit protects the interest of shareholders in the case
of Joint Stock Company. Through audit shareholders are assured that the accounts of the
company are maintained properly and their interest will not suffer.
6. Check on directors: Audit acts a check upon the directors and precaution against fraud on
the part of the management.
7. Valuable Advice: The auditor has expert knowledge about the accounts and finance
problems, so he will be the right person to consult about these problems.
8. Advantage for General Public: Audited financial statements present the real position of the
company before the general public. Keeping in view the position of a company one can do the
investment.
9. Useful for Tax Department: Assessment of tax becomes very easy job for the tax
department. Keeping in view the audited accounts they impose the taxes.
10. Information about Economic Condition: Economic conditions of various companies can
be judged through their audited. If these companies are improving their economic condition, it
mean it is a good sign for the economy.
Disadvantages of Audit
1. Expensive:
This process puts a heavy monetary cost on a firm for execution. This requires a cost of
examination of all financial statements and records, which may include duplication of records
for easy access and availability, by an auditor. Auditing firms charge a high fee for their
services.
2. Not Suitable for Small Businesses:
An audit may not turn out to be of use for small-scale organizations, which include very limited
business transactions.
3. Chances of Uncertainty in the Report:
There can be cases where errors can be found in audit reports if the staff involved is not careful
or inexperienced and biased. The report helps in the future planning for the business entity, so
any mistake may turn out to be a disaster.
4. Lack of Certainty in Standards:
There are no rules or general standards followed in the audit process. For every other firm,
there must be a newly defined audit plan.
5. Lack of Participation:
The planning of an audit program does not include participation in terms of suggestions by
efficient and competent staff. So this prevents their application of knowledge and caliber.
Instead, turns into their harassment in a way.
6. Ignorance of Technology:
The audit process still depends on manual examinations and ignores the internal control based
on the particular technology used in the firm. The difference in technology creates a problem,
but this audit system does not include prevention measures for these issues.
7. Less Guaranteed:
The report does not disclose any details about the data or figures involved in the analysis. So
the report does not guarantee any explanations. Most of the components are based on
information and disclosures made by departmental personnel of concerned departments.
Relationship of Audit with Other Disciplines
1. Accounting
it is a known fact that Auditing and accounting are closely related. Auditors rely on accounting
records and financial statements to assess the accuracy of financial information.
2. Law and Legal Studies
Auditors need a strong understanding of laws and regulations that pertain to financial reporting
and business operations. Such knowledge helps them to ensure compliance of auditing with
relevant laws.
3. Information Technology (IT)
IT audits focus on evaluating an organization's IT infrastructure, data management, at
cybersecurity measures. Auditors assess the effectiveness of IT controls to ensure data
accuracy, security, and reliability.
4. Economics
It is a fact that economic trends and indicators can impact an entity's financial performance and
risk profile. So, auditors must consider economic factors when assessing an organization's
financial health.
5. Statistics and Data Analysis
Auditing involves analysing large volumes of financial data. Statistical techniques help
auditors to determine the reliability of financial information, identify unusual patterns, and
select samples for testing.
6. Management and Business Administration
Understanding an organization's operations, internal controls, and risk management processes
is crucial for auditors. Knowledge of management principles helps auditors to assess whether
internal controls are effective and operational processes are efficient.
7. Ethics and Philosophy
Philosophical concepts guide auditors in making ethical decisions and resolving ethical
dilemmas. So, Auditors must adhere to professional ethics and principles while performing
audit work.
8. Finance and Investment
A strong understanding of finance and investment concepts helps auditors to evaluate an
organization's financial performance and assess its investment attractiveness.
9. Environmental Studies
With increasing attention to sustainability and environmental responsibility, auditors need to
consider the environmental impact on organization's operations and whether it is accurately
disclosed in the financial statements.
10. Psychology and Communication
Effective communication and interpersonal skills are essential for auditors when interacting
with clients. Understanding psychological principles can help auditors to navigate difficult
conversations in an impressive manner and build rapport.
11. Risk Management
Auditing involves assessing risks and controls within an organization, Knowledge of the
management principles helps auditors to identify areas of potential risk and develop appropriate
audit procedures
12. Mathematics
Auditors use mathematical calculations to perform analytical procedures, evaluate financial
ratios, and assess the reasonableness of financial figures.
PREPARATION BEFORE COMMENCEMENT OF NEW AUDIT
1. Obtaining the letter of appointment
He must have a proper letter of appointment from the appropriate authority and ensure that his
appointment is an order. Further, if he has been appointed in place of another auditor, he should
enquire from the retiring auditor, the reasons for the changes.
2. Knowing the nature and scope of his duties
He should obtain definite instructions from his client about the nature and scope of his work
i.e. whether he is to do continuous audit or final audit, whether he is to do the accountancy
work or audit work or both.
3. Knowledge of the system of accounting employed
He should examine the system of accounting employed by his client. If he finds any weak point,
he must study it thoroughly and make recommendations to his client to remove these weak
spots.
4. Obtaining of the list of principal officers of the client's organization
He should obtain a list of the principal officers of the client's organization together with their
authorities and responsibilities. This will help him to obtain the required information from
them.
5. Knowledge of internal control in force in the client's business
He should obtain a written statement of internal control system in force in the cere organization.
It will help him in determining the extent of his audit work.
6. Obtaining of the list of books
He should obtain a list of all the books maintained in the office, together with the names in
charge persons and their specimen signatures. Such a list should be duly signed by responsible
official of the company.
7. Study of the previous year's financial statements
He should study the previous year's financial statements as well as the auditor's report This will
help him to know the state of affairs of the concern.
8. Study of the important documents
He should study all the documents viz., M/A, A/A etc, which have a bearing on the accounts.
9. Giving instructions to the client
He should give clear instructions to his client in regard to the following:

 The books should be closed before audit.

 The vouchers should be arranged date wise.
10. Ascertain the nature of business
He should ascertain the nature of the business of his client l.e. whether it is manufacturing or
trading or service. Such knowledge helps the auditor in planning of the audit procedure.
11. Knowledge of the organization structure
He should get organization structure present in the client's business. This will help the auditor
in planning his work procedure wisely.
After all the above steps are taken, he should prepare his audit program i.e. a complete program
of his audit work.
AUDIT WORKING PAPERS
Audit working papers are the written private materials which an auditor prepares for each audit.
They describe the accounting information which he has received from his client, the methods
of examinations used, his conclusions and financial statements.
ADVANTAGES OF AUDIT WORKING PAPERS
1. They provide evidence to prove the work carried out by the auditor and to establish the
opinion or assertion made by the auditor.
 2. With the help of it, the auditor can co-ordinate and control the audit work in a better
manner
3. They serve as the basis for the evaluation of the audit staff. With the help of the working
papers, an auditor can find out whether his audit staff have done their jobs as per the
required standards.
4. They serve as a connecting link between original documents and financial statements.
5. They help the auditor to prepare his audit report easily. They form the basis as regard
the opinions or assertions made in the audit report.
6. They serve as a guide to the auditor in succeeding audits
7. It provides a training ground to the audit staff as to how to make the summary of the
work done by them.
ESSENTIALS OF WORKING PAPERS
1. The working papers should be prepared in a standard form ie the subject matter should
arranged under various headings and sub-headings.
2. Paper of good quality should be used for working papers, as they are subject to frequent
handling.
3. Paper used should be of uniform and convenient size, so that the working papers can
be filed easily and properly.
4. The working papers should be quite clear and self explanatory.
5. The information contained in the working papers should be accurate.
6. The notes made on the working papers should be legible and neat.
7. The details included in the working papers should be relevant. Irrelevant details should
be avoided.
AUDIT NOTE BOOK
An audit notebook is a formal record that auditors use to document their work, findings, and
conclusions during an audit engagement. It serves as a repository for all the information related
to the audit process, ensuring transparency, accuracy, and accountability.
FEATURES OF AUDIT NOTE BOOK
1. Record Keeping
An audit notebook is used to keep a detailed record of the auditor's procedures, observations,
evidence collected, and assessments. It provides a clear trail of the audit process.
2. Evidence
Auditors use the notebook to document the evidence they gather, both supportive and
contradictory, that helps them arrive at their conclusions.
3. Work Progress
The notebook helps auditors keep track of the progress of the audit. They can note down which
areas have been reviewed, what tests have been conducted, and what results have been
obtained.
4. Documentation
Audit notebooks document the basis for the auditor's judgments and decisions. They include
information on the audit plan, risk assessment, testing procedures, and results.
5. Support for Conclusions
The notebook supports the final audit report and opinion. It provides a source of reference to
justify the auditor's findings and the conclusions drawn from the audit procedures.
6. Review and Quality Control
Audit documentation plays a vital role in the review and quality control processes within audit
firms. It allows supervisors and reviewers to assess the accuracy, completeness, and
appropriateness of the work performed by the audit team.
7. Regulatory Requirements
Many auditing standards and regulations require auditors to maintain proper documentation of
their audit procedures and findings.
8. Continuity
Audit notebooks aid in maintaining continuity in case multiple auditors work on the same
engagement over time.
9. Legal and Liability Purposes
In case of legal disputes or liability issues, the audit notebook can serve as evidence to support
the actions and decisions taken during the audit process.
10. Confidentiality
Since audit engagements often involve sensitive financial and operational information, the
notebook must be maintained securely and in accordance with confidentiality standards
AUDIT PROGRAM
An Audit program is the auditor's plan of action, specifying the work to be done, the procedures
to be followed for doing the work, the persons responsible for the completion of the work and
the duration of time within which the work has to be completed.
ADVANTAGES OF AUDIT PROGRAM
1. 1 Audit work can be started immediately in a systematic manner once an audit program
is made ready
2. 2 It ensures that each part of audit work is completed, and nothing is omitted.
3. It provides guidelines to the audit staff for the performance of the audit work allotted
to them.
4. It facilitates proper distribution of works among the audit staff.
5. It facilitates the conduct of audit work by several audit assistance simultaneously

6. It fixes up responsibilities among the audit staff for any omission or commission.
 7. It helps the auditor to watch the progress made by the audit staff in the audit work.
8. It helps the auditor to exercise effective control over his audit staff.
9. It helps to complete the audit work within the scheduled time.
10. It helps the auditor in assessing the cost of audit.
11. It helps to increase the efficiency of the audit staff.
12. It serves as a guide for audit in succeeding years.
DISADVANTAGES OF AUDIT PROGRAM
1. It makes the work of the audit staff stereotyped and mechanical.
2. It discourages the initiative and interest of the efficient audit staff, as they have to simply act
according to the audit program and are not allowed to exercise their own judgment and
discretion in the performance of the audit work.
3. As it fixes a time limit for the completion of the audit work, the work may be hurried up by
the audit staff. Consequently, the efficiency of the audit staff may suffer.
4. When there is an Audit Program, there is the danger that the audit program may be followed
from year to year without any alteration. This will reduce the effectiveness of the audit work.
5. A rigid audit program is useless.
STEPS TO BE TAKEN FOR OVERCOMING THE DISADVANTAGES OF AUDIT
PROGRAM
1. The audit staff should be made to understand that the Audit Program is only a guide,
and they should use their initiative and intelligence in the course of their audit work.
2. The audit staff should be encouraged to make suggestions for the preparation of the
audit program, and their suggestions should be taken into consideration, while drafting
the audit program
3. Great care must be taken to see that the audit program does not become stereotyped and
mechanical
4. It must be made flexible and not rigid.
5. It should be reviewed periodically, and revisions should be made in the audit program
in the light of the experience gained in the course of the audit.
6. Care should be taken to see that every audit program is an improvement over the
previous year's audit program.
QUALITIES OF AN AUDITOR
Statutory Qualification
1. Only Chartered Accountant is qualified to act as an auditor of the company.
2. A firm can be appointed as the auditor of the company, if all partners are practicing Chartered
Accountant in India.
3. A person, who holds a certificate under restricted auditors certificate rules, 1956, is also
qualified to act as an auditor of the company.
Professional Qualities
1. He should have knowledge of principles and practice of General Accounting, Cost
Accounting and Management Accounting.
2. He should have knowledge of provisions relating to Income Tax, Sales Tax, Wealth Tax
etc.
3. He should have knowledge of Economics, Business Law, Mathematics, Statistics,
Business Management, Financial Management etc..
4. He must have the ability to draft the report clearly, correctly, concisely and forcefully.
5. He should be vigilant and alert in his work.
6. He must be methodical and systematic.
7. He must not disclose the confidential information about the business of his client to
others.
8. He should be independent and impartial.
9. He is a watch dog but not blood hound.
10. He should convey information but not means of information.
Disqualifications of an Auditor
Certain persons are disqualified from being appointed as auditors of a company. They are:
1. A body corporate.
2. An officer or employee of the company
3. A director or a member of a private company or partner of a firm, who is the managing agents
or the secretary and treasurer of the company.
4. A person who is indebted to the company for an amount exceeding Rs. 1,000 or a person
who has given any guarantee to any third party regarding the repayment of any debt exceeding
Rs. 1,000 due to the company.
5. A holder of shares exceeding 5% in nominal value of the subscribed capital, of anybody of
corporate, who is the managing agents or secretary and treasurer of the company.
AUDIT PLANNING
An audit plan states the overall strategy and detailed steps to be followed in the conduct of an
audit.
In other words, auditors develop an overall audit strategy and a detailed audit plan The strategy
outlines the scope, timing, and resources for the audit, while the plan provides step-by-step
procedures.
1. Engagement Acceptance and Continuance
Before beginning an audit, auditors need to evaluate whether they should accept the
engagement. This includes assessing the client's integrity, independence, and scope of the work.
2. Understanding the Client's Business and Industry
Auditors need to gain a deep understanding of the client's business operations, industry trends,
and risks.
3. Risk Assessment
Auditors identify and assess the risks that could impact the accuracy and reliability of the
financial statements.
4. Materiality
Materiality is a concept that helps auditors to determine the significance of misstatements in
the financial statements.
5. Internal Control Evaluation
Auditors assess the effectiveness of the client's internal control system. This evaluation helps
to determine the extent to which reliance can be placed on these controls during the audit.
6. Sampling Methods
Auditors decide on the appropriate sampling methods to use when checking the transactions.
Sampling allows auditors to draw conclusions about the entire population based on a smaller
sample.
7. Audit Documentation
Comprehensive and well-organized audit documentation is essential for ensuring the
transparency, accountability, and quality of the audit process.
8. Communication with the Client
Throughout the planning process, auditors maintain clear communication with the client This
includes discussing the audit scope, objectives, timelines, and potential issues.
IMPORTANCE OF AUDIT PLANNING
1.Efficiency: Proper planning helps auditors to work efficiently, reducing the risk of oversights
and unnecessary delays.
2.Risk Mitigation: Through detailed risk assessment, auditors can focus on areas with the
highest risk of material misstatement.
3.Evidence Gathering: Planning helps to ensure that auditors obtain sufficient and appropriate
evidence to support their conclusions.
4. Client Relationships: Clear communication and collaboration during planning contribute to
a positive client-auditor relationship.
5. Compliance: Proper planning ensures that the audit is conducted in accordance with
auditing standards and regulatory requirements.
audit strategy
An audit strategy refers to the comprehensive plan and approach developed by an audit team
to conduct an effective and efficient audit. This strategy outlines the scope, objectives, and
methods that will be employed during the audit process to achieve the desired outcomes.
Here are the key components of an audit strategy:
1. Scope and Objectives
a) Clearly define the scope of the audit, including the areas, processes, and financial statements
that will be audited.
b) Set specific audit objectives that guide the focus of the audit and what the audit team aims
to achieve.
2. Risk Assessment
a) Determine the significance of various risks to prioritize audit procedures and resource
allocation.
3. Audit Procedures
a) Specify the nature, timing, and extent of procedures to ensure comprehensive coverage of
audit risks,
4. Sampling Techniques
a) Decide on appropriate sampling techniques to be used in checking the transactions and
balances.
b) Sampling helps the audit team to draw conclusions about the entire population based on
sample selected for the study.
5. Resource Allocation
a) Allocate audit team members and resources effectively to ensure that the audit is conducted
within budget and timeline constraints.
b) Consider the skills and expertise of team members for specific audit tasks.
6. Communication
a) Clearly communicate the audit scope, objectives, and expectations to stakeholders.
7. Documentation
a) Outline the documentation requirements for the audit, including working papers, evidence.
findings, conclusions, and recommendations.
b) ensure that all audit procedures and outcomes are adequately documented for future
reference and review
8. coordination and supervision
a) coordinate audit efforts among team members and departments to ensure a seamless and
organized audit process.
b) provide appropriate supervision and review procedures to maintain the quality of the audit
work.
9. adaptability
a) remain flexible and ready to adjust the audit strategy if unexpected developments or changes
arise during the audit.
10. reporting
a) determine the format and content of the audit report, including the scope of work performed,
key findings, and recommendations for improvement.
11. ethical considerations
a) ensure that the audit strategy adheres to the relevant ethical guidelines and professional
standards.
Audit engagement
an audit engagement refers to the formal arrangement between an auditor and a client to
conduct an independent examination and evaluation of the client's financial information and
operational processes.
KEY ELEMENTS OF AN AUDIT ENGAGEMENT
1.Engagement Letter: The engagement begins with the issuance of an engagement letter This
letter outlines the terms and scope of the audit, the responsibilities of both the auditor and the
client, and the fees and timeline for the audit
2.Scope of Work: The scope clearly specifies which financial statements, accounts, and
processes will be examined. It is based on a thorough understanding of the client's business and
risks.
3.Audit Plan: The audit plan is a detailed roadmap that outlines the procedures and tests the
auditor will perform to obtain sufficient and appropriate evidence. It includes a timeline, audit
objectives, risk assessment, and sampling methods.
4. Risk Assessment: Auditors assess the risks that could lead to material misstatements in the
financial statements. This helps determine the nature and extent of audit procedures needed.
5.Internal Control Evaluation: Auditors evaluate the client's internal control system to
determine their effectiveness in preventing and detecting errors and fraud. The assessment
informs the audit approach.
6. Evidence Collection: Auditors gather evidence through various procedures, including tests
of controls, substantive tests, and analytical procedures. Evidence is used to support the audit
opinion.
7.Audit Documentation: Comprehensive and organized documentation is maintained
throughout the engagement. This includes audit programs, working papers, supporting
documentation, and correspondence with the client.
8. Communication: Clear and open communication is maintained with the client throughout
the engagement. This includes discussing findings, potential issues, and progress updates.
9. Independence and Objectivity: Auditors must maintain independence and objectivity
throughout the engagement to ensure the integrity of the audit process and the resulting opinion.
10. Opinion Formation: Based on the evidence gathered and the evaluation of the financial
statements, auditors form an opinion on whether the financial statements present a true and fair
view of the client's financial position and performance.
11. Audit Reports: At the conclusion of the engagement, auditors issue an audit report that
includes the following:
a) Introductory Paragraph: States the purpose of the audit and the responsibilities of the
auditor and management.
b) Scope Paragraph: Describes the scope of the audit and the procedures performed.
c) Opinion Paragraph: States the auditor's opinion on the fairness of the financial statements.
d) Basis for Opinion: Provides details about the audit procedures, evidence, and
considerations that led to the opinion.
e) Other Reporting Requirements: If applicable, the auditor may include additional
information required by auditing standards or regulations
TYPES OF AUDIT ENGAGEMENTS
1. Financial Statement Audit: This is the most common type of audit engagement. It involves
examining and expressing an opinion on the fairness of the client's financial statements.
2. Compliance Audit: Auditors assess whether the client's operations and activities comply
with laws, regulations, and contractual agreements.
3. Operational Audit: This type of audit focuses on evaluating the efficiency and effectiveness
of an organization's operations and processes.
4.Information Systems Audit: Auditors examine the client's information technology systems.
including controls over data integrity and security.
5. Forensic Audit: Forensic audits are conducted to investigate fraud, misconduct, or other
irregularities.
AUDIT DOCUMENTATION
Audit documentation refers to the written records and materials that auditors create and
maintain during the course of an audit. It serves as a comprehensive record of planning.
execution, and results of the audit, providing evidence of the auditor's procedures, findings,
and conclusions.
KEY ELEMENTS OF AUDIT DOCUMENTATION
1.Purpose and Importance: Audit documentation provides a record of the audit work
performed, supporting the audit opinion, facilitating review and supervision, aiding in
continuity of the audit, and demonstrating compliance with auditing standards and regulations.
2. Types of Documentation:
a) Audit Programs: outlines the specific procedures to be performed during the audit.
b) Audit Tests and Procedures: describes the tests and procedures conducted, including
sample selections, calculations, and results.
c) Supporting Evidence: Copies of documents, reports, financial statements, and other data
used as evidence in the audit.
d) Analyses and Summaries: Interpretations, analyses, and summaries of financial data and
significant audit findings.
e) Correspondence: Communication with the client, management, and others related to the
audit work.
F) Memoranda: Notes and memos documenting discussions, decisions, and judgments made
during the audit.
g) Conclusions and Recommendations: Auditor's conclusions, recommendations, and
management's responses to findings.
3. Requirements and Standards: Audit documentation is required by auditing standards to
support the audit report and demonstrate that the audit was conducted in accordance with
professional guidelines.
4 Organizational Structure: Working papers are typically organized in a structured manner,
with clear headings, references to audit objectives, cross-references to supporting documents,
and proper dates.
5. Ownership and Access: Audit documentation is the property of the audit firm. It is
important to ensure that access is controlled and that only authorized individuals can view or
make changes to the documentation.
6.Review and Supervision: Senior auditors and reviewers use documentation to understand
the procedures performed, evaluate the quality of work, and provide guidance or feedback.
7.Future Reference and Continuity: Documentation is required for future reference, when
reviewing previous audits or conducting follow-up engagements. It also ensures continuity
when different auditors work on the same engagement in subsequent periods.
8. Legal and Regulatory Considerations: Comprehensive documentation can provide a
defense in case of legal disputes. It helps to demonstrate the auditor's due diligence and
professional judgment.
AUDIT EVIDENCE
Audit evidence is the information, documentation, and data that auditors gather and evaluate
during an audit engagement to support their conclusions and opinions on an organization's
financial statements and operational processes.
It is the foundation upon which auditors form their judgments and make decisions about the
accuracy and reliability of the audit work:
KEY CONCEPTS OF AUDIT EVIDENCE
1. Nature of Audit Evidence
Audit evidence can be in various forms, including financial statements, contracts, invoices,
bank statements, emails, physical assets etc. It may be obtained from internal or external
sources.
2. Sufficiency and Appropriateness
Audit evidence must be adequate, relevant and reliable to provide a reasonable basis for
forming an opinion.
3. Audit Procedures
Auditors use a variety of procedures to gather evidence, including inspection, observation,
inquiry, confirmation, recalculation, reperformance, and analytical procedures.
4. Risk Assessment
The nature and extent of audit procedures depend on the assessed risks of material
misstatement. High-risk areas receive more extensive testing.
5. Independence and Objectivity
Auditors must remain independent and objective to ensure that their conclusions are unbiased
and reliable.
6. Documenting Evidence
Audit evidence is documented in working papers to provide a clear record of the procedures
performed, results obtained, and conclusions reached.
TYPES OF AUDIT EVIDENCE
1.Physical Evidence: Tangible items, such as inventory, property, or assets, are physically
inspected or counted to verify their existence and condition.
2.Documentary Evidence: Written or electronic records, such as contracts, invoices, bank
statements, and emails, provide documentary support for transactions and balances.
3. Oral Evidence: Information obtained through discussions with employees, management, or
other parties can provide insights into operations, processes, and controls.
4.Analytical Procedures: Comparing financial information with expectations or industry
benchmarks helps to identify unusual or unexpected fluctuations that may require further
investigation.
5. Confirmations: External parties, such as banks or customers, may be asked to confirm
balances or transactions directly with the auditor to verify the accuracy of information.
6. Reperformance and Reconciliation: Auditors may independently perform calculations or
reconcile accounts to verify accuracy.
7. Observation: Auditors may observe physical processes, control activities, or operations to
assess their effectiveness.
AUDIT WRITTEN REPRESENTATION
Written representations in auditing refer to formal written statements provided by management
to confirm certain matters related to the financial statements, internal controls, and other
information being audited. These representations serve to enhance the reliability of audit
evidence and support the auditors conclusions and opinions
KEY POINTS ABOUT WRITTEN REPRESENTATIONS
1. Purpose
The primary purpose of written representations is to obtain acknowledgment and confirmation
from management regarding various matters relevant to the audit.
2. Auditor's Request
Auditors typically prepare a written representation letter and present it to management for their
review and signature. The letter includes a list of specific assertions and matters that
management is asked to confirm.
3. Scope of Representations
Written representations cover a wide range of areas, including financial statements,
completeness of information, accuracy of disclosures, significant estimates, contingent
liabilities, related party transactions, compliance with laws and regulations, and the availability
of records and documentation.
4. Management's Responsibility
Management is responsible for providing accurate and complete information in the written
representations. This reinforces the principle of management's accountability for the financial
statements and related disclosures.
5. Importance of Documentation
The auditor documents the process of requesting, obtaining, and evaluating written
representations in the audit working papers. This documentation provides evidence of
management's acknowledgment and confirmation of the matters covered.
6. Limitations
While written representations are valuable, they are not a substitute for other audit procedures.
Auditors must corroborate the information provided through other sources of evidence and
testing.
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