Professional Documents
Culture Documents
Auditors design detailed audit procedures to obtain sufficient appropriate audit evidence.
Procedures can include inspection, observation, confirmation, recalculation, reperformance, and
analytical procedures, often in some combination.
3. analyzing evidence and drawing conclusions, which may also involve evaluating
performance against the audit criteria; and
4. making decisions about whether additional information is required and can be obtained
(go back to step 1) or whether sufficient appropriate evidence exists.
Audit procedures typically focus on the key risk areas identified through a risk analysis.
It is not unusual for audits to be redesigned during the examination stage as teams encounter
unforeseen difficulties in gathering sufficient evidence of appropriate quality. Auditors have to be
alert to any signs that the evidence-gathering process may not be achieving the level of
assurance required for the audit assignment and take appropriate corrective action. If there are
any potential amendments to the audit program, communicate these changes and raise any
other issues, on a timely basis, with the senior members of the audit team. In instances where
modifications did not take place before the start of field work, modify the audit steps as the work
progresses, obtain approval for changes to audit programs, and include appropriate information
on the nature, timing, and extent of steps to be performed.
See OAG Annual Audit 7062 for guidance on observation of inventory counting.
Analytical procedures
Analytical procedures are used throughout the audit process and are conducted for the following
primary and secondary purposes:
Primary
Risk assessmentto direct attention to higher risk areas in determining the nature,
timing, and extent of audit procedures
Overall conclusionto assist in assessing the propriety of audit conclusions reached and
in evaluating the overall opinion/report
Secondary
Auditors use analysis at various stages of the audit for different purposes. They use preliminary
analytical procedures when planning the audit to confirm the planned audit approach or to
identify new risk areas that need to be addressed during the audit. At the reporting phase of the
audit, auditors use analytical procedures to assess whether the opinion/report taken as a whole
is reasonable and consistent with their knowledge of the subject matter and the expected results
where applicable.
Inquiry
Inquiry is used throughout the engagement to
A solid understanding of the control environment is important in order to assess the extent to
which inquiry will be effective in obtaining reliable evidence. For example, in an environment in
which management's integrity and trustworthiness are high, the auditor may be able to place
relatively more reliance on inquiry. A decision regarding the extent to which inquiry will provide
sufficient, appropriate evidence is required.
Inquiry involves
Inquiries can often be efficiently combined with other testing procedures such as observation and
will frequently be followed up by further audit procedures to obtain sufficient appropriate
evidence.
Inquiry is sometimes referred to as in-depth inquiry to emphasize that the technique is expected
to be performed with rigour. Do not infer from seeing the word inquiry on its own that it means
rigour is unnecessary.
Audit Evidence
Audit Report
Audit Sampling
Judgment
This sampling technique allows the auditor to use his judgment in making selection of samples. The
basic issues influencing the selection of sample are:
value of the items
relative risk involved
representativeness of the sample
(1) Every Auditor of a company shall have a right of access at all times to the books and accounts
and vouchers of the company, whether kept at the head office of the company or elsewhere, and
shall be entitled to require from the officers of the company such information and explanations as
the auditor may think necessary for the performance of his duties as auditor.
(1A) Without prejudice to the provisions of sub-section (1), the auditor shall inquire:
(a) Whether loans and advances made by the company on the basis of security have
been properly secured and whether the terms on which they have been made are not
prejudicial to the interests of the company or its members.
(b) Whether transactions of the company which are represented merely by book entries
are not prejudicial to the interests of the company.
(c) Where the company is not an investment company within the meaning of Section 372
or a banking company, whether so much of the assets of the company as consist of
shares, debentures and other securities have been sold at a price less than that at which
they were purchased by the company.
(d) Whether loans and advances made by the company have been shown as deposits.
(f) Where it is stated in the books and papers of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash has actually been so received, whether the position as stated in the
account books and the Balance Sheet is correct, regular and not misleading.
(2) The auditor shall make a report to the members of the company on the accounts examined by
him, and on every Balance Sheet and Profit and Loss Account and on every other document
declared by this Act to be part of or annexed to the Balance Sheet or Profit and Loss Account,
which are laid before the company in general meeting during his tenure of office, and the report
shall state whether, in his opinion and to the best of his information and according to the
explanations given to him, the said accounts give the information required by this Act in the
manner so required and give a true and fair view :
(i) In the case of the balance-sheet, of the state of the company's affairs as at the end of
its financial year and
(ii) In the case of the profit and loss account, of the profit or loss for its financial year.
(a) Whether he has obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purposes of his audit.
(b) Whether, in his opinion, proper books of account as required by law have been kept
by the company so far as appears from his examination of those books, and proper
returns adequate for the purposes of his audit have been received from branches not
visited by him.
(bb) whether the report on the accounts of any branch office audited under section 228 by
a person other than the company's auditor has been forwarded to him as required by
clause (c) of sub-section (3) of that section and how he has dealt with the same in
preparing the auditor's report.
(c) whether the company's balance sheet and profit and loss account dealt with by the
report are in agreement with the books of account and returns.
(4) Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in clauses (a),
(b), (bb) and (c) of sub-section (3) is answered in the negative or with a qualification, the auditor's
report shall state the reason for the answer.
(4A) The Central Government may, by general or special order, direct that, in the case of such
class or description of companies as may be specified in the order, the auditor's report shall also
include a statement on such matters as may be specified therein :
Provided that before making any such order the Central Government may consult the Institute of
Chartered Accountants of India constituted under the Chartered Accountants Act, 1949, in regard
to the class or description of companies and other ancillary matters proposed to be specified
therein unless the Government decided that such consultation is not necessary or expedient in
the circumstances of the case.
(5) The accounts of a company shall not be deemed as not having been, and the auditor's report
shall not state that those accounts have not been, properly drawn up on the ground merely that
the company has not disclosed certain matters if :
(a) those matters are such as the company is not required to disclose by virtue of any
provisions contained in this or any other Act, and
(b) those provisions are specified in the balance sheet and profit and loss account of the
company.
QUALIFIED REPORTS
QUALIFIED -- SCOPE LIMITATION
SCOPE PARAGRAPH MODIFY FIRST SENTENCE OF SCOPE
EXCEPT AS DISCUSSED IN THE FOLLOWING PARAGRAPH
PARAGRAPH, ... - EXCEPT
EXPLANATORY PARAGRAPH ADD EXPLANATORY PARAGRAPH BEFORE
WE WERE UNABLE TO OBTAIN AUDITED OPINION PARAGRAPH
FINANCIAL STATEMENTS SUPPORTING THE - WE WERE UNABLE TO AUDIT
COMPANY'S INVESTMENT IN A FOREIGN - NOTE SCOPE LIMITATION
AFFILIATE STATED AT $250,000 AT DECEMBER 31, - NOR WERE WE ABLE TO SATISFY OURSELVES
19X4 OR ITS EQUITY IN EARNINGS OF THAT BY OTHER PROCEDURES
AFFILIATE OF $650,000, WHICH IS INCLUDED IN
NET INCOME FOR THE YEAR THEN ENDED AS
DESCRIBED IN NOTE X TO THE FINANCIAL
STATEMENTS; NOR WERE WE ABLE TO SATISFY
OURSELVES AS THE CARRYING VALUE OF THE
INVESTMENT IN THE FOREIGN AFFILIATE OR
EQUITY IN ITS EARNINGS BY OTHER AUDITING
PROCEDURES.
OPINION PARAGRAPH MODIFY FIRST SECTION OF OPINION
IN OUR OPINION, EXCEPT FOR THE EFFECTS OF PARAGRAPH
SUCH ADJUSTMENTS, IF ANY, AS MIGHT HAVE - EXCEPT FOR THE EFFECTS OF SUCH
BEEN DETERMINED TO BE NECESSARY HAD WE ADJUSTMENTS, IF ANY
BEEN ABLE TO EXAMINE EVIDENCE REGARDING - HAD WE BEEN ABLE TO OBTAIN EVIDENCE
THE FOREIGN AFFILIATE INVESTMENT AND - NOTE SCOPE LIMITATION
EARNINGS, ...
QUALIFIED -- NON-GAAP
EXPLANATORY PARAGRAPH ADD EXPLANATORY PARAGRAPH BEFORE
THE COMPANY HAS EXCLUDED FROM OPINION PARAGRAPH
PROPERTY AND DEBT IN THE ACCOMPANYING - NOTE NON-GAAP ITEM
BALANCE SHEET, CERTAIN LEASE OBLIGATIONS - PROVIDE AMOUNTS IF REASONABLE POSSIBLE
THAT, IN OUR OPINION, SHOULD BE
CAPITALIZED IN ORDER TO CONFORM WITH
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES. IF THESE LEASE OBLIGATIONS
WERE CAPITALIZED, PROPERTY WOULD BE
INCREASED BY $300,000, LONG TERM DEBT BY
$250,000, AND RETAINED EARNINGS BY $50,000
AS OF DECEMBER 31, 19X4. ADDITIONALLY, NET
INCOME WOULD BE INCREASED BY $50,000 AND
EARNINGS PER SHARE WOULD BE DECREASED
BY $0.50 FOR THE YEAR THEN ENDED.
OPINION PARAGRAPH MODIFY FIRST SECTION OF OPINION
IN OUR OPINION, EXCEPT FOR THE EFFECTS OF PARAGRAPH
NOT CAPITALIZING CERTAIN LEASE - EXCEPT FOR THE EFFECTS OF NOT
OBLIGATIONS, AS DISCUSSED IN THE - NOTE NON-GAAP ITEM
PRECEDING PARAGRAPH, ...
1) TITLE
NDEPENDENT AUDITOR'S REPORT
- INDEPENDENT
TO THE STOCKHOLDERS OF ABC COMPANY 2) ADDRESSEE
- GROUP THAT HIRES AUDITOR GENERALLY NOT
MANAGEMENT
WE HAVE AUDITED THE ACCOMPANYING 3) INTRODUCTORY PARAGRAPH
BALANCE SHEET OF ABC CORPORATION AS OF - WE HAVE AUDITED
DECEMBER 31, 19x4, AND THE RELATED
STATEMENT OF INCOME, RETAINED EARNINGS - LIST FINANCIAL STATEMENTS
AND CASH FLOWS FOR THE YEAR THEN ENDED. - INDICATED MANAGEMENT'S RESPONSIBILITY
THESE FINANCIAL STATEMENTS ARE THE - INDICATED AUDITOR'S RESPONSIBILITY
RESPONSIBILITY OF THE COMPANY'S
MANAGEMENT. OUR RESPONSIBILITY IS TO
EXPRESS AN OPINION ON THESE STATEMENTS
BASE ON OUR AUDIT.
WE CONDUCTED OUR AUDIT IN ACCORDANCE 4) SCOPE PARAGRAPH
WITH GENERALLY ACCEPTED AUDITING - GAAS
STANDARDS. THOSE STANDARDS REQUIRE THAT - REASONABLE ASSURANCE STATEMENTS ARE
WE PLAN AND PERFORM THE AUDIT TO OBTAIN
FREE OF MATERIAL MISSTATEMENT
REASONABLE ASSURANCE ABOUT WHETHER
THE FINANCIAL STATEMENTS ARE FREE OF - EXAMINING ON A TEST BASIS EVIDENCE
MATERIAL MISSTATEMENT. AN AUDIT INCLUDES SUPPORTING AMOUNTS AND DISCLOSURES
EXAMINING, ON A TEST BASIS, EVIDENCE - ASSESSING ACCOUNTING PRINCIPLES USED
SUPPORTING THE AMOUNTS AND DISCLOSURES AND SIGNIFICANT ESTIMATES MADE, AS WELL
IN THE FINANCIAL STATEMENTS. AN AUDIT AS EVALUATING OVERALL PRESENTATION
INCLUDES ASSESSING THE ACCOUNTING - AUDIT PROVIDES A REASONABLE BASIS FOR
PRINCIPLES USED AND SIGNIFICANT ESTIMATES OUR OPINION
MADE BY MANAGEMENT, AS WELL AS
EVALUATING THE OVERALL FINANCIAL
STATEMENT PRESENTATION. WE BELIEVE THAT
OUR AUDIT PROVIDES A REASONABLE BASIS
FOR OUR OPINION.
IN OUR OPINION, THE FINANCIAL STATEMENTS 5) OPINION PARAGRAPH
REFERRED TO ABOVE PRESENT FAIRLY, IN ALL - IN OUR OPINION
MATERIAL RESPECTS, THE FINANCIAL POSITION
- PRESENT FAIRLY, IN ALL MATERIAL RESPECTS
OF ABC CORPORATION AS OF DECEMBER 31,
19x4, AND THE RESULTS OF ITS OPERATIONS - IN CONFORMITY WITH GENERALLY ACCEPTED
AND ITS CASH FLOWS FOR THE YEAR THEN ACCOUNTING
ENDED IN CONFORMITY WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES.
ANDERSON AND ZINDER, P.C., CPAs 6) SIGNATURE
- FIRM
MARCH 5, 19x5 7) DATE
- END OF FIELDWORK
Significance of Cost Audit
For management:
Determination and allocation of cost of products.
Helps to identity wastage, inconsistency and irregularity in
production and, thus, take corrective measures.
For shareholders:
Measure to determine the managerial efficiency.
For Government:
Provides data for deciding to offer subsidy or tariff protection
Miscellaneous:
1. Facilitates settlement of industrial disputes.