CHAPTER-THREE

AUDIT PLANNING PROCESS

There are several purposes of the planning procedures discussed in this section. A major purpose is to provide
information to aid the auditor in assessing acceptable audit risk and inherent risk. These assessments will affect
the auditor’s client acceptance or continuation decision, the proposed audit fee, and the auditor’s evidence. A
second purpose is to obtain information that requires follow-up during the audit. Doing so is one step in
obtaining sufficient competent evidences. Examples include identifying approvals in the minutes such items as
dividends and officer’s salaries, and searching for the names of related parties to help the auditor determine
whether related party transactions exists. Others, purposes includes staffing the engagement and obtain and
engagement letter.

Generally, planning is very important:

a) To enable the auditors to obtain sufficient competent evidence for the circumstances
b) To keep audit costs reasonable
c) To avoided misunderstandings with the client.
Obtaining sufficient competent evidence is essential if the audit firm is to minimize legal liability and maintain
a good reputation in the business community. Keeping costs reasonable helps the audit firm remains
competitive and thereby retains or expand its client base, assuming the firm has a reputation for doing high-
quality work.

Avoiding misunderstandings with the client is important for good client relations and for facilitating high-
quality work at reasonable costs. For example, suppose that the auditor informs the client that the audit will be
completed before June-30 but is unable to finish it until August because of inadequate scheduling of staff. The
client is likely to be upset with the audit firm and may even sue for breach of contract.
3.1. Client acceptance procedure
I. Obtaining clients-As a starting point, it is essential for an auditor or auditors/audit firms/ to maintain its
integrity, objectivity, and reputation for providing high-quality services. No auditor can afford to be
regularly associated with clients who are engaging in management fraud or other misleading practices.
The continuing wave of litigation involving auditor underscores the need for audit firms to develop
quality control policies for thoroughly investigating prospective clients before accepting an engagement.
The auditor should investigate the history of prospective client, including such matters as the identities
1|Page
 and reputations of the directors, officers and major stockholders, financial strength and credit rating of a
prospective client to help assess the overall risk associated with particular business (business risk).
In addition to considering business risk the auditors should consider:
- Whether they can complete the audit in accordance with generally accepted auditing standards
- Whether there are any conditions that would prevent them from performing an independent audit of
the client.
- Whether the partners and staff have appropriate training and experience to competently complete the
engagement.

III. Submitting a proposal- To obtain the audit, the auditors may be asked to submit a competitive proposal
that will include information on the nature of services that the firm offers, the qualifications of the firm’s
personnel, anticipated fees, and other information to convince the prospective client to select the firm.
IV. Communication with audit committees- Arrangements for the audit may be made through contact
with the company’s audit committee (if any). An audit committee must be composed of at least three
independent directors. During the course of the audit the discussions with the audit committee members
will focus on:
- Weakness in internal control
- Proposed audit adjustments
- Disagreement with management as to accounting principles
- The quality of accounting principles used by the company
- Indications of management fraud other illegal acts by corporate officer.

V. Fee Arrangements-when the business engages in the services of independent public accountants, it
will usually ask for an estimate of the cost of the audit. Staff time is the basic unit of measurements for
audit fees. It involves the application of the audit firm’s daily or hourly rates to the estimated time
required. Other direct costs such as staff travel costs, report processing costs and other out-of-pocket
expenditures are also included in the cost of audit.
VI. Communication with predecessor auditors – According to Statement of Auditing Standards (SAS-
84) “Communication between predecessor and successor Auditors” requires the successor auditors
to communicate with the predecessor before accepting an engagement. When predecessor auditor is
permitted by the client company to communicate (When there is the consent of client’s to give
confidential information), the successor auditors’ inquiries may include questions about:
- Disagreement with management over accounting principles

2|Page
 - The predecessor’s understanding of the reasons for the change in auditors
- On the nature of client’s internal control structure
- Other matters that will assist the successor auditors in deciding whether to accept the engagement
VII. Engagement Letters- The auditors should establish an understanding with the client regarding the
services to be performed, the objectives of the engagement, management’s responsibilities, auditor’s
responsibilities, scope and/or limitations of the engagements and other related issues.
3.2. Phases of audit planning
The following presents the seven major parts of audit planning. Each of the fist six parts is intended to help the
auditor develop the last part, and effective and efficient overall audit pan and audit program.
Before beginning the discussion of the first four parts of the planning phase, it is useful to briefly introduce two
risk terms: acceptable audit risk and inherent risk. These two risks have a significant effect on the conduct and
cost of audits. Much of early planning on audit deals with obtaining information to help auditor assess these
risks.

Acceptable audit risk-is a measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an unqualified opinion has been issued. When the auditor
decides on a lower acceptable audit risk, it means that the auditor wants to be more certain that the financial
statements are not materially misstated. Zero risk would be certainty, and a 100 percent risk would be complete
uncertainness.

Inherent risk-is a measure of the auditor’s assessment of the likelihood that there are material misstatements in
an account balance before considering the effectiveness of internal control. If for example, the auditor
concludes that there is a high likelihood of material misstatements in an account such as accounts receivable,
the auditor would conclude that inherent risk for accounts receivable is high.
When the auditor concludes that there is a high inherent risk for an account or a class of transactions, the same
three potential effects are appropriate as for he lower acceptable audit risk. However, it is easier and more
common to implement increased evidence accumulation for inherent risk than it is for acceptable audit risk
because inherent risk can usually be isolated to one or two accounts. For example, if inherent risk is high only
for accounts receivable, the auditor can restrict the evidence expansion to the audit of accounts receivable
When the auditor decides that a lower acceptable audit risk on an audit is appropriate, there are three potential
actions, where all three, two or just one can be done, depending on the auditor’s judgments.

3|Page
a) More evidence is required to increase audit assurance that there are no material misstatements; it is difficult
to implement increased evidence accumulation because acceptable audit risk applies to the entire audit. It is
expensive and often impractical to increase evidence in every part of an audit
b) The engagement may require more experienced staff. Audit firms should staff all engagements with
qualified staff, but for low acceptable audit risk client’s special care is appropriate in staffing.
c) The engagement will be reviewed more carefully than usual. Audit firm need to be sure that the working
papers that document the auditors planning, evidence accumulation and conclusion, and other matters in the
audit are adequately reviewed. When acceptable audit risk is low, there is often more extensive review,
including a review by personnel who were not assigned to the engagement.
3.2.1. Preplan the audit-It involves three things, all of which should be done early in audit. First, the auditor
decides whether to accept a new client or continue serving an existing one. This is typically done by an
experienced auditor who is in a position to make important decisions. The auditor wants to make that decision
early, before incurring any significant costs that can not be recovered. Second, the auditor identifies why the
client wants or need an audit. This information is likely to affect the remaining part of the planning process.
Thirdly, the auditor obtains an understanding with the client about the terms of the engagements to avoid
misunderstandings and staff the engagements.

3.2.2. Obtain background information- An extensive understanding of the client’s business and industry and
knowledge about the company’s operations are essential for doing an adequate audit. Most of this information is
obtained at the client’s premises, especially for a new client.

a) Obtain knowledge about the client’s industry and business-There are three primary reasons for obtaining a
good understanding of the client’s industry. First, many industries have unique accounting requirements that he
auditor must understand to evaluate whether the client’s financial statements are in accordance with generally
accepted accounting principles. For example, if an auditor is doing an audit of a city, the auditor must
understand governmental accounting and auditing requirements. There are also unique accounting requirements
for construction companies, rail road’s, non for profit organizations, financial institutions, and many other
organizations.
Second, the auditor can often identify risks in the industry that may affect the auditor’s assessments of accepting
audit risk, or even whether auditing companies in the industry is advisable. As stated earlier, certain industries
are more risky than others, such as the savings and loan and health insurance industries.

4|Page
Thirdly, there are inherent risks that are typically common to all clients in certain industries. Understanding
those risk aids the auditor in identifying the client’s inherent risks. Examples, include potential inventory
obsolescence inherent risk in the fashion clothes industry, accounts receivable inherent risk in the consumer
loan industry, and reserve for loss inherent risk and causality insurance industry

Knowledge of the client’s industry can be obtained in different ways. These include discussions with the auditor
who was responsible for the engagement in previous years and auditors currently on similar engagements, as
well as conferences with the client’s personnel. Knowledge about the client’s business that differentiates it from
other companies in its industry is also needed. That knowledge will help the auditors more effectively assess
acceptable audit risk and inherent risk and will be useful in designing analytical programs.

b) Tour the client plant and offices-A tour of the client’s facilities is helpful in obtaining understanding of the
client’s business and operations because it provides opportunity to observe operations firsthand and to meet key
personnel. The actual viewing of the physical facilities aids in understanding physical safeguards over assets
and in interpreting accounting data by providing a frame of reference in which to visualize such assets as
inventory in process and factory equipment. Knowledge of the physical layout also facilities getting answers to
questions later in the audit. The tour may also help the auditors identify inherent risks. For example, if the
auditor observe unusual inventory, it will affect the assessment of inherent risks for equipment and inventory.
Discussion with non accounting employees during the tour and throughout the audit is useful in maintaining a
board perspective.

c) Identify related parties-Transactions with related parties are important to auditors because generally accepted
accounting principles require that they be disclosed in the financial statements if they are material. Transactions
with a related party are not arm’s length transactions. Therefore, there is a risk that they were not valued at the
same amount as they would have been if the transactions had been with an independent third party. The
disclosure requirements include the nature of the related party relationships; a description of transactions,
including dollar amounts; and amounts due from and to related parties. Most auditor assess inherent risk as high
for related parties and related party transactions, both because of the accounting disclosure requirements and the
lack of independent between the parties involved in the transactions.
A related party is defined in SAS-45 as an affiliated company, a principal owner of the client company, or any
other party with which the client deals where one of the parties can influence the management or operating
policies of the other. A related party transaction is any transaction between the client and a related party.
Common examples include sales or purchase transactions between a parent company and subsidiary, exchange

5|Page
of equipment between two companies owned by the same person, and loans to officers. A less common
example is the exercise of significant management influence on an audit client by its most important customers.
Because material related party transactions must be disclosed, it is important that all related parties be identified
and included in the permanent files early in the engagement. Finding undisclosed related party transactions is
thereby enhanced. Common way of identifying related parties include inquiry of management, review of SEC
filings, and examinations of stockholder’s listings to identify principal stockholders.
d) Evaluate need for outside specialists-when the auditor encounters situations requiring specialized knowledge,
it may be necessary to consult a specialist. SAS-73 establishes the requirement for selecting specialists and
reviewing their work. Examples include using a diamond expert in evaluating the replacement cost of diamonds
and an actuary for determining the appropriateness of the recorded value of insurance loss reserves. Another
common use of specialist is consulting with attorneys on the legal interpretations of contracts and titles. In the
case of a large inventory of computer and computer parts, the audit firm may deicide to engage a specialist if
no one within the firm is qualified to evaluate whether the inventor is obsolete or not.
The auditor should have a sufficient understanding of the client’s business to recognize the need for a specialist.
The auditor should also evaluate the specialist’s professional qualifications and understand the objectives and
scope of the specialist’s work. The auditor should also consider the specialists relationship with the client,
including circumstances that might impair the specialist’s objectivity.
3.2.4. Perform preliminary analytical procedures- Auditors are required to perform analytical procedures
while planning the audit to assist in determining the nature, timing, and extent of auditing procedures.
Analytical procedures performed during the planning phases enhance the auditor’s understanding of the client’s
business and events occurring since the prior year’s audit. Planning analytical procedures also help the auditors
identify areas that may represent specific risks of material misstatements warranting further attention.
Analytical procedures used in planning are often based on aggregate, companywide data. For some clients,
reviewing changes in account balances on the trial balance may be sufficient for planning purposes. Along with
comparative industry information, auditors might consider key financial ratios such as efficiency ratio, return on
assets, liquidity ratio, inventory and accounts receivable turn over ratios and other similar rations. The
collectability of accounts receivable and inventory obsolescence may also receive additional attention of the
auditor.
3.2.5. Set materiality and assess acceptable audit risk and inherent risk- The scope paragraph in auditors’
reports includes two important phrases that are directly related to materiality and risk. These phrases are
emphasized in bold italic print in the following two sentences of a standard scope paragraph.

6|Page
 We conducted our audits in accordance with generally accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material statements.

The phrase obtained reasonable assurance is intended to inform users that auditors do not guarantee or ensure the
fair presentation of the financial statements. The phrase communicate that there is some risk that the financial
statements are not fairly stated even when the opinion is unqualified.

The phrase free of material misstatement is intended to inform users that the auditor’s responsibility is limited to
material financial information. Materiality is important because it is impractical for auditors to provide assurance
on immaterial amounts.

Thus, materiality and risk are fundamental concepts that are important to planning the audit and designing the audit
approach. Materiality is a major consideration in determining the appropriate audit report to issue.

FASB has defined materiality as:

The magnitude of an omission or misstatements of accounting information that, in the light of surrounding
circumstances, makes it probable that the judgment of a reasonable person relying on the information would have
been changed or influenced by the omission or misstatement.
The auditor’s responsibility is to determine whether financial statements are materially misstated. If the auditor
determines that there is a material misstatement, he or she will bring it to the client’s attention so that there is a
material misstatement, he or she will bring it to the client’s attention so that a correction can be made. If the client
refuses to correct the statements, a qualified or an adverse opinion must be issued, depending on how material the
misstatement is. Therefore, auditors must have a thorough knowledge of the application of materiality.

A careful reading of the FASB definition reveals the difficulty that auditors have in applying materiality in
practice. The definition emphasizes reasonable users who rely on the statements to make decisions. Therefore,
auditors must have knowledge of the likely users of their client’s statements and the decisions that are being made.
For example, if an auditor knows that financial statements will be relied on in a buy- sell agreement for the entire
business, the amount that the auditor’s material may be smaller than for an otherwise similar audit. In practice, the
auditors may not know who all users are or what decisions will be made.

7|Page
3.2.6. Understand internal control and assess control risk-To effectively assess internal control for the purpose of
reducing planned audit evidence, auditors need to understand key internal control and control risk concepts. As
discussed in previous chapter, a system of internal control consists of policies and procedures designed to provide
managements with reasonable assurance that the company achieves its objective and goals. These policies and
procedures are often called control especially those controls related to the reliability of financial reporting , are
important to the auditors purpose.

3.2.7: Develop over all audit plan and audit program-It deals the last step in the planning phase of audit. It is
critical step because it results in the entire audit program the auditors’ plans to follow in the audit, including all
audit procedures, sample size, items to select, and timing. It is the process of making correct decisions in both the
effectiveness of evidences and the efficiency of the audit process.

The audit planning process is documented in the audit working paper through the preparation of audit plans, time,
budgets and audit programs. An audit plan is an overview of the engagement, outlining the nature and
characteristics of the client’s business operations and the overall audit strategy. Although audit plans differ in form
and content among public accounting firms, a typical plan includes details on the following.

1) Description of the client company-its structure, business and organization

2) Objective of the audit (e.g. audit for stockholders, special purpose audit, SEC filing some other purpose.
3) Nature and extent of other services, such as preparation of tax returns and other services that might be
performed for the client.
4) Timing and scheduling of the audit work, including determining which procedures may be performed
before the balance sheet date, what must be done on or after the balance sheet date and setting dates for
such critical procedures as cash counts, accounts receivables confirmations, and inventory observation.
5) Work to be done by the client’s staff
6) Staffing requirements during the engagements
7) Target dates for completing major segments of the engagements, such as the consideration of internal
control, tax returns verifications, the audit report, and presentation of the report to share holders, or to
SEC other authoritative bodies.
8) Any special audit risks for the engagement
9) Preliminary judgment about materiality level for the engagement and
10) Other related issues

8|Page
NB. The audit plan is normally drafted before starting field work. However, the plan may be modified
throughout the engagement as special problems are encountered and as the auditors’ consideration of internal
control leads to identification of areas requiring more or less audit work.

3.3. Audit program

An audit program is a detailed list of the audit procedures to be performed in the course of the audit. A tentative
audit program is developed as part of the advance planning of an audit. This tentative program however requires
frequent modification as the audit progresses. For example, the nature, timing, and extent of substantive test
procedures are influenced by the auditor’s assessment of control risk. Thus, not until the consideration of
internal control has been completed can a relatively final version of the audit program be drafted. Even this
version may require modification if the auditors revises their preliminary estimates of materiality or risk for the
engagements tests disclose unexpected problems.

An audit program is designed to accomplish audit objectives with each major account of the financial
statements. These objectives follow directly from management assertions that are contained in the client’s
financial statements.
These management assertions are:
1. Existence or occurrence
2. Completeness
3. Right and obligation
4. Valuation or allocation
5. Presentation and disclosure

From these assertions, general objectives may be developed for each major type of balance sheet accounts
including assets, liabilities, and owners’ equity and other financial statements items such as revenue, expense
and the like.

Relationship between financial statements, management assertions and the various audit concepts is given by
the following diagram.

9|Page
 Financial statements
(Follow GAAP)

-Existence or occurrence
Management
Assertions -Right and obligations
-Completeness
-Valuations/allocation
-Presentations and disclosure

Audit objectives
Designed based on
Management assertions

Audit procedures

Audit program is detailed

List of auditing procedures

Audit Evidence
Summarized in audit
Working papers

Audit report on
financial statements

Explanation on general audit program objectives

A) Existence of assets-The first step in substantiating the balance of an asset account is to verify the existence
of the asset.
-Existence of cash on hand, marketable securities, and inventories can be verified by physical observation or
inspection, and by vouching from the recorded entry to the documents created upon their acquisitions.

10 | P a g e
- Assets under the custody of others, such as cash in bank and inventory on consignment, can be verified by
directing confirmation with the appropriate outside party.
- Existence of Accounts receivables can be verified by confirmation with customers
-Existence of intangible assets can be verified by gathering evidence on whether costs are incurred for probable
future benefits

B) Rights to the assets-usually, the same procedures that verify existence also establish the company’s rights to
the asset. For example, confirming cash balance in bank account establishes existence of the cash and
company’s ownership right to that cash. Similarly, inspecting marketable securities verify both existence
and ownership because the registered owner’s name usually appears on the face of the security certificate.
For other assets such as plant and equipment, physical examination establishes existence but not ownership.
Thus, the auditors need to inspect documentary evidence such as property tax bills, purchase documents and
other legal ownership documents such as deeds.
C) Establishing completeness –Effective internal control provides assurance that acquisitions are recorded and
helps the auditors to establish the completeness of recorded assets. When there is ineffective internal control
system, auditors need to increase the scope of their substantive testing to prove the completeness of assets (i.e.
whether all the assets that have been acquired are recorded in accounting records or not). For this, auditors may
follow different approaches such as:
- Tracing or cross checking source documents created upon acquisition of assets with entries made to
record assets in the accounting records. E.g. tracing shipping documents with details to record sales
transaction for account receivables.
- Observation and physical examination to test completeness of recorded physical assets such as inventory
(whether counted or included in inventory), whether purchase of equipment is properly recoded and so
on.

Verifying the cutoff of transaction- As a part of the auditors’ procedure for establishing completeness as well as
existence of recorded assets, the auditors verify the client’s cutoff transactions included in the period. The
financial statements should reflect all transactions occurring through the end of the period and none that occur
subsequently. The term cutoff refers to the process of determining that transactions occurring near the balance
sheet date are assigned to the proper accounting period.
To verify the client’s cutoff of transactions, the auditors should review transactions recorded shortly before and
after the balance sheet date to ascertain that these transactions are assigned to the proper period.
D) Valuation of assets-The auditors should establish or test whether

11 | P a g e
 (i) The proper accounting method such as Generally Accepted Accounting Principles (GAAP)
and some other appropriate standard is followed.
(ii) The method of valuation used is appropriate for the circumstance at hand.
(iii) Perform procedures to test the accuracy of the client application of the method of valuation to
the assets.

E.g. -Many assets are valued at cost. Therefore, a common audit procedure is to vouch the acquisition cost of
assets to paid checks and other documentary evidence.
-If the acquisition cost is subject to depreciation or amortization, the auditors must evaluate the reasonableness
of the cost allocation program and verify the computation of the remaining unallocated cost.
- For assets valued at market value or at lower of cost or market, investigation of current market prices is
necessary.

E). Clerical Accuracy of records- The amount appearing as an asset on a financial statement is almost always
the accumulation of many smaller items. For example, the amount of inventory on financial statements might
consist of the cost of thousands or, perhaps, hundreds of thousands of individual products.
The auditors must test the clerical accuracy of the underlying records to determine that they accumulate to the
total appearing in the general ledger and therefore the amount in the financial statements by applying
generalized audit programs and/or other appropriate means.
F). Financial statement presentation and disclosure-Even after the dollar amounts have been substantiated, the
auditors must perform procedures to ensure that the financial statements presentation conforms to the
requirements of authoritative accounting pronouncements and the general principles of adequate disclosure.
Procedures that may be performed by auditors for such case may include:
- view of subsequent events
- Search for related party transactions
- Investigation of loss contingencies
- Review of disclosure of such items as accounting policies, lease, compensating balances, and pledged
assets
- Consideration of the categories and descriptions used on all of the financial statements.

An illustration of audit program design-The above general objectives apply to all types of assets. Audit
procedures for a particular asset account must be designed to accomplish the specific audit objectives regarding

12 | P a g e
that asset. These specific objectives vary with the nature of the asset and the generally accepted accounting
principles that govern its valuation and presentation.

In designing an audit program for a specific account, the auditors start by developing general objectives from
the financial statement assertions. Then specific objectives are developed for the account under audit and,
finally audit procedures are designed to accomplish each specific audit objectives.
- In actual practice, audit program must be tailored to each client’s business environment and internal control.
The audit procedure comprising audit programs may vary substantially from one engagement to the next.

The organization of audit program usually is divided into two major sections. The first section deals with the
procedures to assess the effectiveness of the client’s internal control (the “systems portions”), and the second
deals with the substantive testing of financial statements amounts, as well as the adequacy of financial
statements disclosure.

Test of the system or internal control of the audit program (systems-portion) - the systems portion of the audit
program is generally organized around the major transactions cycle of the client’s accounting system. For
example, the systems portion of the audit program for manufacturing company might be subdivided into
separate programs for such areas as (1) revenue/sales and collections/cycle, (2) acquisition /purchase and
disbursements/cycle, (3) conversion /production/cycle, (4) payroll cycle, (5) investing cycle, and (6) financing
cycle.

To illustrate one of these transaction cycles, let us consider sales and collection. The activities used in
processing sales transactions might include- receiving a customer’s purchase order, credit approval, and
shipment of merchandise, preparation of sales invoice/billing /, recording revenue and accounts receivables, and
handling and recording cash receipts.

Audit procedures in the system portion of the program typically include obtaining an understanding of the
controls for each transaction cycles, preparation of flowchart for each cycle, testing the significant controls, and
assessing control risk for the related financial statement assertions.

The substantive test portion of the program-the portion of audit program aimed at substantiating financial
statement amounts usually is organized in terms of major balance sheet accounts, such as cash, accounts
receives, inventories, and plant and equipment. Even though the present day auditors are very much concerned

13 | P a g e
with the reliability of the income statements, they still find the balance sheet approach to be an effective method
of organizing their substantive audit procedures. One advantage of the balance sheet approach is that highly,
competent evidence generally is available to substantiate assets and liabilities. Assets usually, are subject to
direct verification by such procedures as physical examination, inspection of externally created documentary
evidences, and confirmation by outside parties.
Liabilities usually can be verified by examination of externally created documents, confirmation, and inspection
of canceled checks after the liability has been paid.

Since revenue and expenses have no tangible form, they exist only as entries (double entry; one to recognize
revenues and expenses and the other to record corresponding changes in asset or liability account) in the client’s
accounting records, representing changes in owner’s equity. Consequently, the best evidence supporting the
existence of revenues or expenses usually is the verifiable changes in the related asset or liabilities

The relationship between test of controls and substantive tests – Test of controls provide auditors with
evidence as to whether prescribed controls are in use and operating effectively. The result of these tests assists
the auditors in evaluating the likelihood of material misstatements having occurred. Substantive tests on other
hand are designed to detect material misstatements if they exist in the financial statements. The amount of
substantive testing done by the auditors is greatly influenced by their assessment of the likelihood that material
misstatements exist. The stronger the internal control is, the less will be the likelihood of material misstatements
which in turn will lead to less degree of substantive testing and vice-versa.

Time budgets for audit engagements-a time budget for an audit is constructed by estimating the time required
for each step in the audit program for each of the various levels of auditors and totaling these estimated
amounts. A detailed time budgets can assist auditors in estimating the audit fees and other functions as
communicating with audit staff about those areas the manager or partner believe are critical and require more
time, and to measure the efficiency of staff members.

Analytical review procedures-The direction of audit test procedures can be performed by tracing information:
i) Back ward from financial statements to ledgers to journal and finally, vouching them to the original
source documents such as invoices and receiving reports. By doing so, the auditors may identify
journal entries that are not supported and possibly are not valid. This procedure provides evidences
that financial statements figures are based upon valid transactions. It is tests of the existence
assertions.

14 | P a g e
 ii) Forward from source documents to the journals, ledgers and financial statements. This approach
provides the auditor with assurance that all transactions have been properly interpreted and
processed. It is a test of the completeness assertion. Un supported transactions can not be found.

Finish Start
Test for existence (avoids overstatements)

Accounting system
Journ
Source Ledger
als
Docume
Source s Financial
nts
Source
Docume Statemen
Docume
nts t
nt

Start Test for completeness (avoids understatements) Finish

NB. Although, the techniques of working the audit trail in such a way are a useful one, auditors must acquire
evidence from sources other than the clients accounting records.

15 | P a g e