Audit Procedure

An audit r reports on a number of issues .for this purpose he adopts a number of steps. In
this context he carries out a number of tests to find out the degree of compliance to internal
controls as also the effectiveness of internal audit and internal control techniques. He
satisfies himself about existence of control and its effectiveness throughout the period these
procedures are related to the system itself and therefore should not be construed as
producer of information. Besides above it is imperative that substantive procedure be
adopted to obtain evidence regarding accuracy and validity of data used for arriving at the
different figures in various schedules.
Audit Techniques
It refers to different exercises carried out for collecting evidence for forming the opinion as
also supplementary information which find place in the audit report. Generally following
techniques are widely used by the auditors:
Physical Examination: The auditor carries out physical verification procedures as far as
practicable. It is relevant specially where the auditor verifies the physical assets himself and
compares it the records of the organisation e.g.
Stock of raw materials, finished goods and work in progress is compared with Stores
Records and other schedules.
Investments are compared with Investment ledger .Similarly, vehicle plant and machinery
are compared with Vehicle register and plant and machinery registers
He should carry out the physical tests carefully on random selection basis. Physical
verification includes counting, identification and evaluation of the quality of the item.
(ii)Observation:-It aims at looking at the processing of manufacturing or procedures
performed by others as per pre drawn programme.
(iii)Formal Discussions:- The auditors engages himself with the various functionaries of the
organisation on different aspects and activities which may include current market conditions,
effect of new products, changes in competition, Changes in selling prices, variation in
different cost concepts, change in methods of stock valuation, change in methods of
depreciation capital expenditure changes in accounting and financial policies.
(iv)Confirmation:-Written confirmation is obtained on debtors and creditors balances, stage
of completion of WIP etc.
(v)Examination of documents and their comparison with records. Transactions are to be
supported by the relevant documents. Therefore appropriate course of action should be
adopted.
(vi)Recomputation:-The auditor is expected to carry out the computation of figures stipulated
in various financial statements to determine the reliability level of figures appearing in these
statements.
(vii)Retracing Procedures:-The auditor would like to check postings of figures for cash book,
journals and ledgers to determine the reliability level of the accounting procedure.
(viii)Depth Testing:-It aims at retracing the the retained documentation of all links related to a
particular figure.it begins with inception of transaction, traces the threads conclusion .through
every department and conclusion arrived at.
(ix)Weakness Tests:-In this step a number of tests are carried out to to locate errors and
weaknesses which might have crept into the books and /or statements .It is important also
because it confirms the adequacy of procedures adopted so far. If the number of errors so
located are more than expected it will be concluded that assessment system was optimistic
one and thereafter extensive detailed checking of all important, material and significant
figures will be carried out.
(x) Statistical Sampling:-It is commonly used by auditors as electrocardiograph is used by
the physicians .It evaluates the reliability of records produced by the system .It is selection of
a part of aggregate to represent the whole aggregate. It is a scientific approach which takes
in to consideration size of sample, precision level, reliability level confidence level and errors.
It ensures that items within a population must have equal chance of being selected for
examination .It eliminates the personal bias in selection process .The sample should be
carefully selected taking into account the following:
Time and effort of staff, Confidence level during test checks, effectiveness of internal control
and internal audit system and unusual features located during sample checking.
It can be applied in the field of purchases and creditors, inventories pay rolls stores ledger.
It should not be applied in
Cash Book, Abnormal costs nonrecurring items, Determination of depreciation, accounting of
raw materials, stores tools and components Profit and Loss Account and Balance Sheet etc.
Analytical Review Techniques
It is defined as the analysis of significant ratios and trends including the resulting
investigation of usual functions and items. The auditor analyses various statements by
correlating various transactions or figures with each other The consistency can be checked
by calculating ratios which show the relationship between one accounting figure and another
.With the help of ratios, trends and comparisons attempt is being made to pinpoint the areas
which require detailed examination .The analytical review technique will assist the auditor in
different stages of audit.
These techniques are useful in Understanding the organisation, identifying the potential,
risks, assessment of the extent of test of transactions and balances, identification of areas
requiring further audit investigation, corroborating conclusions formed during the audit,
carrying out overall review of the financial information
Ratio Analysis---A Tool of Analytical Review
It is very powerful analytical tool of an audit. It concentrates on the interrelationship between
the figures appearing in the balance sheet and profit and loss Account .It is is helpful in
verifying internal consistency and overall reasonableness of data ,and therefore may be
applied know the trends of an organisation over a number of years. Inter firm comparison
and intra firm comparison can also be made. It will assist the auditor in forming his opinion.
Chapter 2
Internal control and Internal Audit
Internal Control:-By internal control is meant not only internal check and internal audit but the
whole system of of controls ,financial and otherwise ,established by the management in
order to carry on the business of the company in an orderly manner ,safeguard its assets
and secure as far possible the accuracy and reliability of its records.
Thus internal control may be made operative in every area of the organisation. It is whole
system of control. There are two important constituents of this activity-viz. internal check and
internal audit.
Basic Features of Internal Control:-segregation of functional responsibilities/Maintaining
system of authorisation and recording to establish reasonable accounting control over
assets, liabilities revenue, expenditure/employment of qualified personnel/assignment of
responsibilities on the basis of qualification and competence of personnel and maintaining
effective managerial supervision and review system
Budgetary Control System is one of the important internal control systems .It uses budget for
the purpose of planning, &controlling .It should fulfil following conditions:-
(a)The budget will incorporate physical and financial figures to facilitate the performance of
the managers.
(b)There should predetermined standards and budgets. The management may like to
measure the performance based on standards. However these standards may be set taking
into account the opinion of managers and operators responsible for the same. The reports
should be simple and easily understandable.
Periodical training be imparted to them. The purpose of maintaining this system should be
well expresses
(d)Its coverage and should well be assessed.
The adequacy of budgetary control system should be evaluate in the area of planning,
Coordination, Control
2 Internal Audit
Internal Audit may be defined as an independent appraisal activity established within an
organisation as a service to it It is a control which functions by examining and evaluating the
adequacy and effectiveness of other controls Though it is primarily related to financial
records its investigative techniques may be applied in all areas of operations and
management.
Functions of internal audit:-
1. Ensuring adequate internal control
2. Review the reliability of records
3. Monitoring reporting procedures
4. Detection and prevention of fraud
5. Carry out special investigations
6. Implementing external audit requirements
7. Carrying out value for money exercises.

3. Internal Check
It is defined as detailed administrative aspect of an organisation designed to prevent or early
detection of fraud.It emphasises that no single task is carried out from beginning to end my
one individual .The work of each individual who has been assigned a particular task be
independently checked by another individual in course of his duties.
4. Internal Control and Internal Audit
Internal control
It is a whole system of control for running the organisation efficiently. Its scope is
comprehensive one.
Internal Audit
It is one of the tools of internal control .It is an independent appraisal activity for reviewing
accounting, financial and other operations to serve the management It measures and
evaluates the effectiveness of other control systems.