Chapter 2

Auditing Procedures
 The Operation/ Techniques Of Audit
Audit work is operated with the help of the following techniques:
1. Ticking: indicates placing a mark against an entry in the book
to denote that it has been examined by auditor for a certain
purpose.
• Various shaped marks are used to denote checking of
additions, postings , carry-forward, tracing, extraction of
balances etc (e.g., V=Vouched, T=Traced, C=Casts checked, !
=Posting checked, B=Balance checked).
• Ticks are put in indelible pencil or pen & ink may be used for
this purpose.
• To ensure consistency , good auditors use a tick chart which
is required to be learnt by heart by all the members of the
audit staff.
The Operation / Techniques Of Audit…continued.

2. Casting: refers to checking of additions of books of

accounts/financial statements.
• Arithmetical accuracy should be checked for the
detection of frauds/errors.
• This is done by a junior audit staff member.
• Auditors use mechanical appliances/ adding
machines (calculators) to check the casting of the
books of accounts.
3. Calling –over: Comparison of entries in two or more books
with its supporting evidence/voucher.
• Usually carried out by two clerks, one reading out item to
other.
• Care should be used to see that the whole of the important
details of each item is checked & not merely the amount.
• Special care in checking postings to personal ledgers is needed
as to names and title of account, otherwise a wrong posting
may remain undetected.
• Clarity in pronunciation is essential, confusion between ninety
and nineteen, sixty as sixteen etc. It is advisable to pronounce
ninety as ninetie, sixty as sixtie and so on.
• When calling out a figure as Rs. 80.90, there should be a pause
between 80 and 90, lest it should be understood as Rs. 89
4. Vouching:
• the function of the voucher is to authenticate an entry and the
auditor must satisfy himself that it does exist.
• It must correspond in date and account to the entry in the
books.
• It must be in respect of the client and the entry must be
correctly passed in the books.
• The act of vouching consist of checking the documentary
evidence (invoices, cash memos, bills, receipts, vouchers,
minutes, reference to legal documents etc.) as should establish
the accuracy and truthfulness of the entries appearing in the
books of account, and in those cases where it is not so, the
matters are noted for discussion and if the auditor still remains
unsatisfied, the outstanding matters are reported to the client.
5. Verification:
• When an auditor has vouched the entries appearing in the books of
accounts, his duty is not thereby fully discharged.
• If the auditor is appointed for the audit under Act, he has to report
whether or not the balance sheet exhibits a true and correct view of
the state of affairs of the company. For this purpose, he should satisfy
himself on the following points:
(a) That each asset and liability is correctly valued and correctly stated
in the balance sheet.
(b) that the assets actually existed at the date of the balance sheet.
(c ) that they are property of the business.
(d) that they are not suffering from a charge except that disclosed in
the balance sheet.
The technique of audit carried out to achieve the foregoing objective is
known as “verification”.
6. Reporting: After all the points discussed have been
carried out, the auditor will then be required to submit
his report.
• The form and the contents of the report depend upon
several factors, e.g., legal status of the appointing
authority, the contract for the scope of the work to be
done, whether the audit is being conducted under the
Companies Ordinance, Banking Companies Ordinance,
Insurance Law, 1938 etc.
• The form of the auditors’ report to be submitted after
the annual audit of accounts of a company has been
prescribed as Form 35-A annexed to the Companies
Rules, 1985.
Modern trends in auditing follow the undernoted
sequence.
1) Examination of the accounting system.
2) Evaluation of internal controls.
3) Sample checking of vouchers.
4) Verification of assets and liabilities.
5) Submission of auditors report.
 PROCEDURES AFFECTING AUDIT
Compliance Procedures
• These tests are designed to obtain reasonable assurance that those
internal controls on which audit reliance is to placed are in effect.
Substantive Procedures
• These are designed to obtain evidence as to the completeness ,
accuracy and validity of the data produced by the accounting
system.
1. Tests of details of transactions and balances.
2. Analysis of significant ratios and trends including the resulting
investigation of unusual fluctuations and items.
Analytical Procedures
• These are used to describe the analysis of significant ratios and
trends including investigation of unusual fluctuations and items.
 CONDUCT OF AUDIT
 From the point of view of the conduct of audit, it may be classified as
Continuous Audit, Interim Audit, Final Audit. These are now explained:
1. Continuous Audit:
• also known as running audit.
• Auditor is required to visit business at intervals (fixed or otherwise),
during the financial year and check the books to date as for as
possible.
• This kind of audit is practiced, when it is desired that audited final
accounts should be ready immediately after the close of the financial
year as in the case of the banking companies, when a business is
extraordinarily large and numerous transactions are to be checked,
when a business, monthly or quarterly final accounts are required
throughout the year.
• Continuous audit…….
Advantages of Continuous Audit:
• 1- Easy rectification of errors. As the books are checked soon after
the entries have been made, errors can be spotlighted as well as
rectified more quickly and frauds can be detected at an early stage.
2- Check on frauds. Imposes check upon frauds because of the
reason that books are kept up-to-date and amoral check is exerted
on the staff.
3- Quick completion. Accounts are kept up-to-date and the audit
could be completed more quickly and can be presented to
shareholders soon after the closing of the financial year.
4- Closer contact with the business. Auditor has greater touch with
the transactions of the business and can consider all the important
points and there is less likelihood of neglecting any important
matter.
Continuous audit…….
5- Proper attention. Auditor has ample time before the
finalization of accounts, greater attention can be paid to
the checking of accounts and detection of errors and
frauds.
6- Interim dividend. When interim dividend is decided,
continuous audit will expedite the preparation of the
interim accounts without delay.
Disadvantages of Continuous Audit.
1- Alteration in figures: there is a possibility of alteration in
figures either ignorantly or deliberately after they have
been checked by an auditor.
• In this way, errors or frauds cannot be detected without
further rechecking which is seldom carried out.
Continuous audit…….
2- Interruption in work: As the audit is conducted for
several time, the auditor may lose the thread of work
and omit to follow up transactions completely which
may have been left upon at the date of his last visit.
3- Inconvenience: the frequent visits by an auditor and his
frequent checking may dislocate his client’s work and
cause inconvenience to him.
• the thread of work is also likely to be lost.
4- Expensive: This type of audit is comparatively more
expensive as the auditor makes several visits and
performs detailed work involving more time being
spent.
Continuous audit…….
The following precautions must be taken to reduce the
above disadvantages to the minimum possible.
(a) the auditor must take special steps while conducting
the audit on continuous basis. These steps should
require the prohibition of the alteration of figures.
Moreover, all the corrections should be recorded
through journal entries with full narration.
(b) On his next visit, the auditor must glance through
the altered figures.
• He should inquire of the alterations and ensures that
they were duly authenticated. In this way frauds can be
minimized.
• Continuous audit…….
(c ) at the end of each visit, the auditor should make a
note of all significant totals and other figures.
(d) There must be a well developed program so that the
possibility of any loose motives should be dealt with.
(e) Checking of a book must be completed at least in
one visit while the checking of all impersonal accounts
should be postponed till all the books are at the
disposal of the auditor.
(f) All queries must be noted in the audit note-book and
complete record as to how they were cleared should
also be maintained.
Continuous audit…….
Continuous audit…….
The system becomes indispensable in the following
cases:
1) Where monthly financial accounts are required
throughout the year.
2) Where it is required to have the audited accounts
ready immediately after the close of the financial
year, e.g., a bank or a financial institution.
3) Where a satisfactory system of internal control is
lacking.
4) In big concerns requiring considerable detailed
checking.
2- Internal Audit:
Definition:
It is an independent appraisal activity within
organization for the review of the operations as a
service to mgt. it is a managerial control which
functions by measuring and evaluating the
effectiveness of other controls.
3- Final Audit:
• Final / complete audit is started after close of the accounting year
of the business and is carried out after completion.
• It is also called “balance sheet audit” or “periodical audit”
Advantages of Final Audit:
1. Auditor is supplied with full facts relating to the year under review
and he can pursue the books and accounts duly completed in
respect of that particular year.
2. Less danger of manipulation and alteration of figures after they
have been checked.
3. Thread of the work is not likely to be lost, as the whole work is
performed at one stretch.
The final audit works satisfactorily in small concerns but, in case of
large businesses , it takes more time to check accounts and to
submit report to the shareholders.
4- Interim Audit:
• Lies midway between final audit and continuous audit.
• It is arranged to know about reliable trading results during the
year, i.e., monthly, quarterly or half-yearly.
• May be conducted if the company desire interim dividend.
Advantages:
1. Enables final audit to be completed soon.
2. Auditors suggestions can be implemented quickly in interim
audit than in the case of final audit and work can be
satisfactorily done by staff along with the advice of the auditor.
3. Indispensable in case of large and important concerns, so that
sufficient amount of detailed checking may be done.
This kind of audit to be adopted depends upon the magnitude and
the requirements of the business.
TERMS OF AUDIT ENGAGEMENTS
 ISA 210 is in respect of Terms of Audit Engagements. This is
effective for audit of Financial Statements for period beginning
on or after December 15, 2006. The latest version is given
below:
Introduction: The purpose of this international Standard on
Auditing (ISA) is to:
1. establish standards and provide guidance on:
(a) Agreeing the terms of the engagement with the client; and
• (b) The auditor's response to a request by a client to change the
terms of an engagement to one that provides a lower level of
assurance. The auditor and the client should agree on the terms
of the engagement.
See next slide
2. The agreed terms would need to be recorded in an audit
engagement letter or other suitable form of contract.
3. This ISA is intended to assist the auditor in the
preparation of engagement letters relating to audits of
financial statements.
The guidance is also applicable to related services. When
other services such as tax, accounting, or management
advisory services are to be provided, separate letters may
be appropriate.
4. In some countries, the objective and scope of an audit
and the auditor's obligations are established by law. Even
in those situations the auditor may still find audit
engagement letters informative for their clients.
Audit Engagement Letters
5. It is in the interest of both client and auditor that the
auditor sends an engagement letter, preferably before
the commencement of the engagement, to help in
avoiding misunderstandings with respect to the
engagement.
The engagement letter documents and confirms the
auditor's acceptance of the appointment, the objective
and scope of the audit, the extent of the auditor's
responsibilities to the client and the form of any
reports.
Principal Contents:
The form and content of audit engagement letters may
vary for each client, but they would generally include
reference to:
•The objective of the audit of financial statements
•Management's responsibility for the financial
statements;
•The scope of the audit, including reference to
applicable legislation, regulations, or pronouncements
of professional bodies to which the auditor adheres;
When relevant, the following points could also be made:
•Arrangement concerning the involvement of other
auditors and experts in some aspects of the audit
•arrangements concerning the involvement of internal
auditors and other client’s staff.
•Arrangements to be made with the predecessor auditor,
if any, in the case of an initial audit.
•Any restriction of the auditor's liability when such
possibility exists.
•A reference to any further agreement between the
auditor and the client .
•An example of an audit engagement letter is set out in
the Appendix.
 Audits of Components:

(9)When the auditor of a parent entity is also the auditor of

its subsidiary, branch or division (component), the factors
that influence the decision whether to send a separate
engagement letter to the component include the following:
•Who appoints the auditor of the component
•Whether a separate auditor's report is to be issued on the
component
•Legal requirements.
•The extent of any work performed by other auditors.
•Degree of ownership by parent
•Degree of independence of the component's management.
Recurring Audits:
• On recurring audits, the auditor should consider whether circumstances
require the terms of the engagement to be revised and whether there is
a need to remind the client of the existing terms of the engagement.
• The auditor may decide not to send a new engagement letter each
period. However, the following factors may make it appropriate to send a
new letter:
• Any indication that the client misunderstands the objective and scope of
the audit.
• Any revised or special terms of the engagement.
• A recent change of senior management or those charged with
governance.
• A significant change in ownership.
• A significant change in nature or size of the client's business.
• Legal or regulatory requirements.
Acceptance of a Change in Engagement
• 12) An auditor who, before the completion of the
engagement, is requested to change the engagement to one
which provides a lower level of assurance, should consider
the appropriateness of doing so.
• 13) A request from the client for the auditor to change the
engagement may result from a change in circumstances
affecting the need for the service, a misunderstanding as to
the nature of an audit or related service originally requested
or a restriction on the scope of the engagement, whether
imposed by management or caused by circumstances.
• The auditor would consider carefully the reason given for the
request, particularly the implications of a restriction on the
scope of the engagement.
• Public Sector Perspective
• 1 )The purpose of the engagement letter is to inform the
auditee of the nature of the engagement and to clarify the
responsibilities of the parties involved.
• The legislation and regulations governing the operations of
public sector audits generally mandate the appointment of a
public sector auditor and the use of audit engagement
letters may not be a widespread practice.
• Nevertheless (yet) a letter setting out the nature of the
engagement or recognizing an engagement not indicated in
the legislative mandate may be useful to both parties.
• Public sector auditors have to give serious consideration to
issuing audit engagements letters when undertaking an
audit.
PLANNING AN AUDIT OF FINANCIAL STATEMENTS
• 1SA 300 is in respect of Planning an Audit of Financial
Statements.
• The redrafted version of this is given below and is
effective from December 15, 2009.
• INTRODUCTION
• Scope of this ISA
• 1.This International Standard on Auditing (ISA) deals
with the auditor's responsibility to plan an audit of
financial statements.
• This ISA is framed in the context of recurring audits.
• Additional considerations in initial Audit engagement
are separately identified. (Ref Para. Al-A4)
Effective Date
• 2.This ISA is effective for audits of financial statements
for periods beginning on or after December 15, 2009.
Objective
• 3.The objective of the auditor is to plan the audit so that
it will be performed in an effective manner.
REQUIREMENTS
• Involvement of Engagement Team Members
• 4.The engagement partner and other key members of
the engagement team shall be involved in planning the
audit, including planning and participating in the
discussion among engagement team members, (Ref
Para. A5)
 Planning Activities
• 6. The auditor shall establish an overall audit strategy that
sets the scope, timing and direction of the audit, and that
guides the development of the audit plan.
• 7. In establishing the overall audit strategy, the auditor
shall:
• (a) Identify the characteristics of the engagement that
define its scope.
• (b) Ascertain the reporting objectives of the engagement to
plan the timing of the audit and the nature of the
communications required.
• (c) Consider the factors that, in the auditor's professional
judgment, are significant in directing the engagement
team's efforts.
Documentation
• 11. The auditor shall document:
• (a) The overall audit strategy;
• (b) The audit plan; and
• (c) Any significant changes made during the audit engagement to the
overall audit strategy or the audit plan, and the reasons for such
changes. (Ref Para. A17-A20)
Additional Considerations in Initial Audit Engagements
• 12. The auditor shall undertake the following activities prior to starting
an initial audit:
• (a) Performing procedures required by [proposed] ISA 220 (Redrafted)
regarding the acceptance of the client relationship and the specific
audit engagement; and
• (b) Communicating with the predecessor auditor, where there has been
a change of auditors, in compliance with relevant ethical requirements,
(Ref Para. A21)
• Minute book. He should go through the director’s and
shareholder’s minute book and jot down notes of important
decisions.
• Contract .services contracts concerning the term of appointment
and the scope of the authority in respect of officers of the
company should be scrutinized.
• All material contracts entered into by the company with the
outsiders should be procured and studied ( with vendors,
underwriters, agents) important matter should be noted.
• Technical operation: he should acquaint himself as far as
possible with the technical operations of the company.
• It is advisable that auditor should visit works before audit.
• List of books. He should obtain a list of books statutory
Statistical and accounting which are in use together with the
names and duties of various clerks who are write up them.
• System of accounting. A note on the system of accounting employed
by the company should be obtained.
• Internal check. He should ascertain whether the internal check system
in operation appears in black and white in some accounting manuals. If
so, he should go through the same and carefully note the loopholes.
• The system whatever exist in practice, should be tested in all Practical
aspects.
• Previous year audited account and reports. with the exception of new
company, the auditor should examine the last balance sheet for the
purposes of checking the opening entries for the period under audit.
• The previous auditor report should also inspected and if any
qualification are contained in it’ the possibility of being applicable
under audit should be carefully examined.
• 11) Audit program. He should then draft an audit program and
commence the work of audit.
• AUDIT PROGRAMME
• Definition : An audit program is a written scheme of exact
details of the work to be done by the auditor and his staff in
connection with the particular audit.
• It is generally contained in the audit note book and is invariably
in black and white.
• A space is also provided in the audit program against each item
of the work to be done so that each audit clerk’ responsible for
any portion of the particular work, may put down his signature
or initial.
• One audit program is prepared for one audit. The detail of the
audit program will depend upon the adequacy or otherwise of
the system of internal control, special provision of
memorandum and articles of association affecting the duties of
an auditor and the nature of business etc.
Preparation of Audit Program:
• The audit program must be developed with due care and
skill. Particular attention should be given to the following:
• Exact scope of the duties of an auditor.
• Books of original entry and ledger in use
• The system of book-keeping employed, and its
weakness( if any)
• System of internal check and extent of the reliability
• Special provision contained in legal documents
(partnership deed, memorandum and articles of
association, etc) affecting the duties of an auditor.
• General nature and routine of the business.
Preparation of audit program…continued
• The audit program should not be very rigid; it
must be capable of being reviewed in the view of
changing circumstances.
• A similar audit program is required to be prepared
in respect of all books of original entries and
ledgers.
• The scope of contents of the audit program should
cover all the routine checking and vouching.
Extent of work
• The extent of work to be performed in respect of each item must be
indicated in audit program for guidance of audit staff.
• The extent may be a full checking or checking may be restricted to a
test basis, the extent of which (whether one in a quarter, one week in
a month, one day in a week etc.) must be clearly indicated in the
audit program.
Advantages
• The use of the audit program offers the following advantages;
• It is one of the basic instruments for training the staff that can be
used as a guide for the performance of the job.
• Progress of the work can be watched periodically.
• The audit can be divide among the staff.
See next slide for other advantages
• Uniformity of the performance of audit work is ensured.
• It is legal proof for the work done as initial/signatures of
those who have performed a particular job are to be
appended to it.
• The responsibility for negligence can be fixed.
• It extends a useful help in supervising the work of the staff.
Limitations
1) The audit work may become too much mechanical.
2) initiative and the dexterity of an audit assistant is likely to
be lost as he is required to faithfully carry out the steps
listed in audit program.
3) No rigid audit program can be laid down for each type of
work.
Removal of limitations
• However, These limitation can be easily overcome.
• The auditor should review and revise the audit
program off and on.
• The auditor should make a flexible program which
could be adjusted according to circumstances.
• He should not let it become mechanical and
automatic. 
Test checking
• the concept of test checking in auditing is based on the
‘law of statistical inertia; which means the selection and
checking of representative number of entries of each class
of transactions instead of going through every entry.
• The basis of thought is that the whole matter ( voucher;
entries; etc.) will corresponded to the samples, selected or
checking during an audit.
• Whether the auditor should resort to test-check or not
depend on the factor.
• The existence of an efficient system of internal audit or
otherwise etc. 
• However the following precautions must be taken by the auditor
while carrying a test checking of the transaction:
• while making selection for the test check, every effort must be
made to ensure the entries are representative of the whole set of
books.
• The client should not know the period selected for the test check.
• The month selected for test check should be different in
forthcoming.
• The first and the last months of the period covered by the
accountants may preferably be checked in every case.
• ISA 19 deal with audit sampling.
• Details in this respect have been included in this chapter dealing
with vouching.
• AUDIT NOTEBOOK
• It is that book in which a permanent record of the following is kept:
• It has already been explained at length earlier.
• Audit review notes.
• During the conduct of an audit, certain points do crop up which
need further elucidation/clarification and discussions with the
management.
• Therefore notes are taken during the conduct of work.
• A record of the progress of the disposal of audit notes is also
maintained.
• Audit queries. During the conduct of audit, all those voucher which
remain insufficiently vouched are to be noted in the query list of
the audit notebook.
• A complete record as to how they were cleared and those which
remained unclear and reported to management is maintained.
• Important balances. A note of the important closing
balances particularly in respect of cash and bank should
be noted so that after the work has been done in
alteration of any of the closing balances may be made
difficult.
• Extract from documents: Extracts from memorandum
and articles of association, agreement, contracts,
minutes of the proceedings of the director or
shareholders, etc.’ must be noted in the audit notebook
for ready reference.
• Accounting statistics. Statistics in respect of the page of
each book of the original entry and the number of the
voucher must be noted in this section.
• This serve two purposes. See next slide
• Firstly, it check on the staff so that they may not indulge
in wasting time.
• Secondly, it is intended to help the auditor for
requesting for increase in the audit fee if the
comparison of accounting statistics of the present year
with the previous one reveals that quantum of the work
has gone up.
• If the notes have been properly taken in the audit
notebook, they might prove of great value to the auditor
subsequently, in case a suit is filed against him for
negligence or misfeasance.
• The importance of such an audit notebook was
emphasized by Lord-Justice Vaughan William in London
and General bank case.
Working papers
• Working papers are the connecting link between
the clients record and the audited accounts.
• These include all the evidence gathered by the
auditor indicating what work has been done by him
and the procedure has been followed in verifying a
particular assets or a liability.
• These provide a permanent historical record
logically arranged in order, in which each item
appears in the balance sheet.
• In future in case the client files a suit against the
auditors negligence.
• The question of lien in regard to the working papers
arose in the case of sockockinsky versus Bright
Grahmeaned co. (1938) in England the vital question
involved in this case was whether the auditor had a right
to retain the working paper as if it were there their own
property even after the payment of the audit fee.
• The learned court gave the judgment in favor of the
auditors has no right of lien on the books of the
company in respect of the payment of their fee. (Hoale,
Smith and field vs. Valentine Tingey (1926) and Findely
vs. Waddell (1910)
RECORDS OF PROGRESS OF AUDIT
• The following steps should be taken to keep a record of the progress of each audit:
• Staff Engaged. Note names of principal, senior, semi-senior and junior clerks.
• Checking colors used. These should be noted.
• Record and Progress
• Date when client's request received for commencement of audit.
• Acknowledgement date.
• Date of interim audit started.
• Date of interim audit ended.
• List of queries sent to client.
• Date when final audit started.
• Examination of Memorandum, Articles and previous year's working papers.
• Draft accounts prepared/checked.
• Accounts approved by partner.
• Accounts submitted to clients and approved by them.
• Closing entries passed.
• Clients advised in writing of weaknesses in internal control.
• Taxation notes prepared and checked with certified accounts.