AUDITING TECHNIQUES

Auditing techniques are the devices, which are adopted in applying the basic principles and
auditing standards. The techniques of audit are devices or methods through
which an auditor conducts his audit work to obtain maximum perfection .
Before beginning an audit, the auditor should be familiar with the auditing techniques and
also full- aware of the basic principles of auditing. Thus auditing technique are the tools and
schemes adopted by An auditor for checking books of accounts performing his audit.
Auditing principles are basic rules which govern an auditor’s professional responsibilities
and fundamental rules that are applicable to a large extend to all kinds of audit.
 DIFFERENCE BETWEEN AUDITING PRINCIPLES AND TECHNIQUES

Basis Auditing principles Auditing techniques

Concept Basic rules – books of accounts Device adopted by an auditor
prepared

Nature Constant Not constant

Chance for Principles remain constant Techniques change from period to period or bus.
changes To bus.

Freedom to Auditor cannot change Auditor can change the technique at his will
change

End and means Principles are the end Techniques are the means for applying principles
Complementary Auditing based on fundamental Device adopted by applying principles.
principles
 AUDIT PLANNING

Pre arranging and co-ordinating the work of audit of a client

is called planning of audit. Important elements of planning are
allocation of time, arranging the work among the audit staff
etc.
 PRELIMINARY STEPS BEFORE AUDIT WORK
 LETTER OF APPOINTMENT
 LETTER OF ENGAGEMENT
 STUDY NATURE, SCOPE AND DUTIES
 ACQUIRE KNOWLEDGE ABOUT BUSINESS AND ITS NATURE
 VERIFICATION OF LEGAL DOCUMENTS
 OBTAIN LIST OF ALL BOOKS MAINTAINED
 IF IT IS NOT A NEW AUDIT
 EXAMINE ACCOUNTING SYSTEM
 PRELIMINARY STEPS BEFORE AUDIT
WORK-----CONTINUES………….
 INTERNAL CHECK - CONTROL SYSTEM
 DUTIES OF MEMBERS OF CLIENT’S STAFF
 LIST OF PRINCIPAL OFFICIALS
 INSTRUCTION TO CLIENTS
 PREPARE AUDIT PROGRAMME
 SYSTEM AUDIT-PRELIMINARY AUDIT BEFORE ORIGINAL AUDIT
 DISTRIBUTION OF AUDIT WORK
 PREPARATION AND SUBMISSION OF AUDIT REPORT
 AUDIT NOTE BOOK OR AUDIT MEMORANDUM
Audit note book is the book or register or diary maintained by audit
clerk during the course of audit. The audit clerk records his queries,
explanation and investigations, points which require further
clarification, enquiries made and replies received their to on loose
sheets filed and bound to the audit note book.

 Separate audit note book is maintained for each concern.

 It serves as a guide to the other audit clerks.
 It is a documentary evidence in favour of the auditor.
 It helps to prepare audit report.
 It is a tool to measure the efficiency of audit staff.
 AUDIT – NOTE BOOK - ADVANTAGES

Ensures uniformity and helps in knowing amount of work performed

Important matters relating to the audit work may be easily recalled
Facilitates preparation of audit report
In case assistant in charge is changed, no difficulty is faced in continuing the audit work
The responsibility for errors undetected can be fixed on clerk concerned
It shows the extent of interest and pains taken by the audit staff.it helps in their appraisal
It ensures that the audit programme has been sincerely followed. Deviation can be noticed.
It is a reliable evidence in court of law, if auditor has to defend himself
 DISADVANGES OF AUDIT NOTE BOOK

Create misunderstanding between clients staff and audit staff.

Audit note book is not properly prepared, it can be used against
auditor for negligence.
It develops a faultfinding attitude in the minds of the audit
staff.
 DOCUMENTATION

Collection and preservation of all documents relating to client and audit

staff according to their materiality is known as documentation.
These documents are properly arranged
These documents are property of the auditor
 AUDIT – NOTE BOOK
Audit note book is a diary or register maintained by audit staff to note errors,
doubtful querries and difficulties. The audit note book is also used for recording
important points to be included in the Auditor’s report.
Contents of audit note book:-

1. List of books of accounts maintained

2. The names, duties and responsibilities of principal officers

3. Particulars of missing vouchers and receipts

4. Mistakes and errors detected

5. The points calling for clarification and explanation

6. Points deserving attention of auditors

7. Various totals and balances

8. Extracts from the minute books and contracts

9. Date of commencement and completion of audit

10. Points to be part of the Auditor’s Report

 AUDIT WORKING PAPERS OR AUDIT FILES

Arnold.W. Johnson defines that “Audit working papers are written private
materials, which an auditor prepares for each audit. They describe the
accounting information which he receives from his client, the methods of
examination used, his conclusions and financial statements.”

Audit working papers are the detailed documents, statements, notes, minutes,
and other valuable information pertaining to the accounts, which are under
audit. These files are properly arranged and kept by the auditor for future
reference.
 Contents of Audit working papers
The trial balance
Schedule of debtors and creditors
Depreciation statement
Correspondence between debtors and creditors
Schedule of investment
Confirmation from the bank regarding bank balances of the client
Bank reconciliation statement
Details of cash balance
Certificate regarding stock in trade and valuation
 Contents of Audit working papers

Certificate regarding all outstanding assets and liabilities have been included
in the accouts-
Adjusting entries
Contingent liabilities
Extract of minutes book
A draft of final account
Details of the queries made during the course of audit.
 PURPOSE, AIM OR ADVANTAGES OF AUDIT WORKING PAPERS
1) These papers are necessary to prepare audit report.
2) These papers provide the extent of audit work done by auditor
3) The working papers become a valuable documentary evidence to defend the auditor.
4) It serves as a link between the documents and final report.
5) They serve as a guide to the auditor in subsequent audit.
6) The preparation of working paper is a means to give training to the audit clerk.
7) With the help of working papers, the auditor can coordinate and control the audit work
efficiently.
8) The working papers will help the auditor to point out the weakness in internal control system in
operation and inefficiency of accounting system.
9) In case of transfer of audit staffs, the working papers are of great help to continue to audit
without duplication of work.
10) They provide a historical record of the work that has been done.
 Classification of Audit working papers

Permanent file: it contain papers of continuing interest over many years audit of the
same client. The file can be used year after year.
Contents:-
 Memorandum and articles of association and other statutory documents
(partnership deed.)
 Copies of other documents and minutes of the meetings having importance.
 A short description of the type of business carried on and places of business
 Lists of account, records and responsible officials and plan of organization ……contd
 The clients internal accounting instructions and internal audit instructions or
stock taking instructions.
 Copies of continuing contracts.
 A brief history of the company, its products, markets.
 Copies of balance sheets of earlier years
 Statements showing a note of any accounting matters of importance eg: the
policy regarding valuation of inventories, policy regarding charge of
depreciation.
Audit Administrative Papers (Current File): Administrative papers contain current
years files. All the work done in the course of audit planning, assignment of staff,
evaluation of internal control and audit program preparation as a part of audit
administration and is documented in the working papers.
Contents:
1. Appointment letter.
2. Memoranda of meetings with the management
3. Memoranda of meetings with the audit committee of the client.
 Contents:

4. Memoranda of review notes and unfinished procedures

5. Audit time budget
6. Internal control questionnaire
7. EDP control questionnaire
8. Internal control system
9. Audit program
10. A working trial balance of general ledger accounts
11. Working papers record of preliminary adjusting entries
 OWNERSHIP OF AUDIT WORKING PAPERS

Controversial question is whether the ownership of audit working

papers rests with the auditor or his client. This controversial question
in the case of Sockockinsky vs Bright Graham and co, it was held that
the working papers belongs to the auditor not to client, as the
auditors are independent contractors and not the agent of the client.
" in the case of Chantrey Martin and co vs Martin (1953). It was held
that "the working papers prepared by an auditor are the property of
the auditor". Thus the working papers are highly valuable and
confidentiaal therefore it must be kept secret by the auditor.
 AUDIT PROGRAMME

An audit programme is a written and predetermined plan of action for

conducting an audit. It is an action plan containing exact details in regards to the
conduct of a particular audit. The audit programme is prepared by the senior
staff in consultation with the auditor.
 TYPE OF AUDIT PROGRAMME

• A fixed audit programme is a pre-planned and detailed programme of audit.

• A flexible audit programme which is more flexible than fixed audit programme. Flexible audit programme
is drawn according nature, scope character and limitation of the audit
 ADVANTAGES OR OBJECTIVES

• It defines duties of clerks clearly.

• To know the volume of work done earlier.
• Audit programme fixes responsibility of audit staff.
• It defends the auditor in a suit against auditor.
• It serves as a guide for audit in future.
• It is helpful to the new audit staff.
• It brings uniformity in auditing.
• Timely completion of audit.
• Effective control over audit staff.
• To asses the cost of audit.
 TICK MARKS

• Marks or symbols used by auditors to measure the intensity of work that has
been done so far. The auditor should use distinctive ticks of various colours
while auditing the books of accounts.
 TEST CHECKING

Test checking is a sample checking of transactions in a firm. In large

business firms where the number of transactions checked is large and time at
the disposal of the auditor is limited and where having a good internal control
system, test checking is a substitute instead of detailed auditing.
 PRECAUTIONS TO BE TAKEN WHILE APPLYING TEST
CHECKS

• 1. Selection of transactions should be made at random.

• 2. The entries related to the first and the last month of the audit period should be checked thoroughly

• 3. The test check should be so arranged that the work done by all the clerks of the client is checked.

• 4. The sample transactions selected from every ledger should cover the whole period under audit.

• 5. The test checking should not be applied to cashbook and passbook, where every transaction should be
checked.
 ROUTINE CHECKING

• The process of checking such as posting, casting balancing in ledgers and subsidiary books are done in a
routine manner by the auditor is called routine checking. The routine checking is usually done by front line
audit staff i.E. Junior clerks in the audit team. Routine checking is not necessary in large business firms
where transactions are recorded by machines and are having a good system of internal checks.
 OBJECTIVES

• 1. TO TEST THE ARITHMETICAL ACCURACY OF THE POSTING.

• 2. TO DISCOVER CLERICAL ERRORS.

 ADVANTAGES

• 1. TO ENSURE THAT THE POSTING FROM THE BOOKS OF ORIGINAL ENTRY TO THE RESPECTIVE LEDGERS
HAS BEEN CORRECTLY MADE.

• 2. THE LEDGERS ARE CORRECTLY BALANCED.

•
 DISADVANTAGES OF AUDIT PROGRAMME

1. It makes audit work mechanical and stereotype

2. Out of data and useless

3. No chance to use intelligence.

4. Unable to cover all the point

5. Not suitable to all types of firm

6. Hurry in completion of audit as per programme.

 ELIMINATION OF DRAWBACKS AUDIT PROGRAMME

• There are some drawbacks associated with audit programme. These drawbacks can be eliminated in the following
steps.

• Audit programme must be revised and made upto date and modified from time to time.

• The audit clerk should be given encouragement to use his intelligence in the work.

• The audit staff must be allowed to go beyond the programme. The audit staff is allowed to make surprise visit outside
the audit programme.

• Audit programme should be revised in the light of past experience and be modified.

• Flexible and human touch audit programme may be drawn. The drawbacks of audit programmes are not much
serious. It can be overcome from the above guidelines.