Audit Procedures and Techniques
Audit Procedures and Techniques
Audit Procedures and Techniques
Risks of material misstatement, which can arise from errors or fraud impacting the
accuracy of financial statements, must be carefully identified. These risks can be
categorized as inherent or control-related. Inherent risks stem from the complexity
or nature of transactions, while control risks are associated with weaknesses in the
entity's internal controls. Identifying these risks allows for the implementation of
targeted procedures to address areas where material misstatements are more
likely to occur, minimizing the potential for financial reporting errors.
Key financial statement areas with higher risk, such as revenue recognition,
inventory valuation, or asset impairment, require meticulous scrutiny. These areas
often involve estimations, judgments, and potential manipulation, increasing their
susceptibility to misstatement. Analyzing these areas ensures that audit and
internal control efforts are focused on mitigating the most critical financial reporting
risks, safeguarding the integrity of the financial statements.
2.1. Walkthroughs
● Observe and trace transactions through the accounting system to evaluate internal
controls.
(a) corroboration of management responses, for example by comparing them with the
auditor's knowledge of the business and other evidence obtained during the course of the
audit; and
(b) consideration of the need to apply other audit procedures based on the results of such
inquiries if management is unable to provide an explanation, or if the explanation is not
considered adequate.
(b) deviate from predicted amounts, the auditor should investigate and obtain adequate
explanations and appropriate corroborative evidence.
● Tests of Balances: Directly test yearend balances (e.g., receivables, payables, inventory).
4. Audit Techniques
4.1. Inspection
● Inspect physical documents (e.g., invoices, contracts) and accounting records (e.g.,
journal entries).
Ex. An auditor observes a company's cash receipt process. They watch an employee
receive a customer payment, record it in a log, and deposit the cash into a locked cash
box. This observation helps the auditor understand how the process is supposed to work
and identify any potential weaknesses in the controls.
4.3. Inquiry
Auditors ask questions of the organization’s managers, accountants and any other key
staff to help determine some relevant information. The auditor may ask about business
processes and the appropriate recording of financial transactions to make sure the
company is doing everything possible to avoid risks. It ensures that the firm is taking every
precautions to minimize risks
The accuracy and sincerity of the interviewee determine the quality of the information
obtained via inquiry. The auditor takes the responses into account, but does not accept
the answers alone as confirmation to establish additional testing criteria since this method
is often used in conjunction with other, more reliable methods.
4.4. Confirmation
● External Confirmation: Send requests to third parties (e.g., customers, banks) to verify
balances and transactions.
Confirmation requests in auditing should be customized to align with the audit objectives.
This involves considering the assertion being examined and the factors influencing the
reliability of the confirmations. The design of confirmation requests should be influenced
by various factors such as the type of assertion, past audit experience, the nature of the
information being confirmed, and the intended recipient. These factors directly impact the
reliability of evidence obtained from confirmation procedures.
Evidence obtained from third parties is typically considered higher-quality audit evidence
than internal sources, leading to the presumption that auditors will request confirmation of
accounts receivable unless the accounts are immaterial, confirmations would
beineffective, or the audit risk can be sufficiently reduced through analytical procedures
and other substantive tests. Confirmation of accounts receivable and other substantive
tests are often necessary to lower audit risk to an acceptable level for financial statement
assertions.
4.5. Recalculation
Auditors recompute the transactions themselves and compare them to the initial financial
statement or calculation of the company. Auditors can then identify if they are balanced,
or further investigate if there are any differences or discrepancies found.Recalculation
procedures can be used as a test of control and a substantive test, and like reperformance,
it results in audit evidence obtained directly by the auditor so it's considered to be highly
reliable evidence
● Recheck mathematical accuracy of journal entries and financial statement balances.
Rechecking the mathematical accuracy of journal entries and financial statement balances
involves a thorough review of all recorded transactions to ensure that debits equal credits
and that totals are correctly calculated. This process helps identify any discrepancies or
errors that could affect the integrity of financial reporting. Accurate journal entries and
balanced financial statements are crucial for reliable financial analysis and decision-
making.
4.6. Reperformance
● Independently perform the same procedures as the entity (e.g., recalculating balances,
confirming accounts) to check for accuracy.
Reperformance is an independent attempt to carry out the same action as the entity to
verify the accuracy of financial data. This may involve recalculating balances in accounts
or confirming other account details with third parties. The foremost goal is ensuring the
accuracy and reliability of the reported numbers.
4.7. Vouching
● Trace transactions from the financial statements back to the source documents (e.g.,
invoices, contracts) to verify authenticity.
Vouching is the process of tracing transactions from the financial statements back to their
original source documents, such as invoices and contracts. This method helps auditors
confirm the authenticity and legitimacy of recorded transactions. By validating these
transactions against supporting documentation, vouching enhances the credibility of the
financial statements.
4.8. Tracing
● Trace transactions from source documents to the accounting records to verify that
transactions were properly recorded.
Tracing entails following transactions from source documents to the accounting records
to ensure they have been accurately recorded. This procedure verifies that all relevant
transactions are captured in the financial statements without omission or error. Tracing is
important for establishing the completeness and correctness of financial reporting.
5. Sampling Techniques
Random sampling consists of selecting samples from a population such that each member
is given an equal opportunity of being selected. This ensures that the sample represents
the features excellently and sufficiently diversity present in the population, to ensure that
it minimizes bias. Random sampling is widely utilized in research and surveys as it
provides valid conclusions about large groups from smaller subsets.
● Systematic Sampling: Select every nth item from a population for testing.
Systematic sampling requires the selection of every nth item from a population. It is a
structured approach to selection of samples and can potentially be simpler to implement
compared to random sampling, as it provides clarity of a consistent method of choosing
samples. A drawback could arise in the observable patterns within the population at
periodic intervals that corresponds to the sampling interval.
● Stratified Sampling: Divide the population into subgroups (e.g., by value) and sample from
each group.
Stratified sampling involves dividing the population into different subgroups or "strata"
based on specific characteristics, like value or type. Auditors then sample separately
within each subgroup to ensure all groups are proportionately represented. This approach
improves efficiency and precision because it allows the auditor to focus on subgroups that
may carry higher risk or significance. For instance, higher-value transactions may be
scrutinized more closely than smaller ones. By stratifying, auditors reduce sampling risk
and enhance the relevance of audit conclusions.
● Judgmental sampling: Select samples based on the auditor’s professional judgment rather
than statistical methods.
● Assess whether the evidence gathered is sufficient and reliable to form an opinion.
Auditors evaluate if the evidence they’ve gathered is enough (sufficient) and of high quality
(reliable) to support their conclusions. Sufficiency refers to the quantity of evidence,
whereas reliability refers to its dependability, relevance, and quality. If evidence is
insufficient or unreliable, the auditor may need to gather more or different evidence.
Evaluating evidence adequacy helps ensure that the audit opinion is based on sound,
defensible findings. This step is critical to fulfilling the auditor’s responsibility to provide
reasonable assurance.
● Evaluate whether the evidence covers all high-risk areas and assertions.
Auditors carefully consider if the evidence covers all high-risk areas, as these areas are
more likely to contain material misstatements. Additionally, the evidence should address
key audit assertions, such as completeness, accuracy, and validity. By focusing on high-
risk areas, auditors improve their ability to detect significant issues, which is essential for
a reliable audit opinion. This step ensures that no critical areas are overlooked and that
the evidence is appropriately targeted. Any gaps identified here may prompt additional
testing or review.
● Ensure all areas have been addressed and that audit evidence is complete.
In the review phase, auditors check that all planned audit areas have been addressed,
verifying that evidence is thorough and covers each aspect required by the audit plan. This
step helps to identify any overlooked areas or unaddressed issues. Ensuring
completeness also includes verifying that documentation aligns with audit findings, which
helps maintain a structured and defensible audit trail. By confirming completeness,
auditors mitigate the risk of reaching incorrect conclusions based on partial evidence. This
step also reinforces that the audit is finalized in line with professional standards.
Finally, auditors review their working papers and documentation to confirm consistency
between the evidence gathered and the audit conclusions. This review process includes
verifying that all findings and conclusions logically follow from the documented evidence.
Consistency ensures that audit results are credible and that any discrepancies are
reconciled before issuing the audit opinion. Additionally, this review serves as a quality
control measure, as supervisors or external reviewers can assess the audit’s integrity.
Reviewing documentation thoroughly is key to ensuring audit quality and transparency.