Audit Procedures and Techniques

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1.

Planning and Risk Assessment Procedures

1.1. Risk Assessment Procedures

● Understand the entity’s business and industry.

A thorough risk assessment begins with a comprehensive understanding of the


entity's business and industry. This involves a detailed analysis of its operational
model, competitive landscape, and external environment. Identifying market
trends, economic conditions, and regulatory frameworks that could impact the
entity's performance or compliance is crucial. Such insights allow auditors and
management to pinpoint industry-specific risks and tailor control measures
effectively, ensuring a more targeted and efficient risk management strategy.

● Identify risks of material misstatement (both inherent and control risks).

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.

● Analyze key financial statement areas with higher risk.

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. Internal Control Procedures

2.1. Walkthroughs
● Observe and trace transactions through the accounting system to evaluate internal
controls.

Walkthroughs are a fundamental aspect of internal control evaluation, providing a


detailed understanding of how transactions flow through an entity's accounting
system. This process involves observing and tracing transactions from their
initiation to their final recording, examining the application of processes and
controls at each stage. It encompasses following the flow of documents, data, and
approvals to ensure that established controls are consistently implemented.
Walkthroughs effectively identify potential weaknesses or gaps in the control
environment, offering a practical understanding of the system in operation and its
potential vulnerabilities.

2.2. Control Testing

● Test the design and operating effectiveness of internal controls.

Control testing is a crucial step in evaluating the effectiveness of internal controls.


This process assesses both the design and operating effectiveness of internal
controls to determine whether they are functioning as intended. Specific control
activities, such as approvals, reconciliations, or segregation of duties, are
rigorously tested through inquiry, inspection, and observation. By evaluating both
the design and the consistent application of controls in practice, control testing
ensures that controls are not only well-conceived but also effectively implemented,
minimizing the risk of control failures.

3. Substantive Audit Procedures

3.1. Analytical Procedures


● Perform trend analysis, ratio analysis, or comparative analysis.

Analytical procedures involve a systematic examination of financial data,


comparing current information to historical trends, industry benchmarks, or
expected results. This process may encompass trend analysis to identify unusual
fluctuations, ratio analysis to assess financial health, or comparative analysis to
highlight variances between periods. These procedures serve as a powerful tool
for identifying areas that may require further investigation, such as unexpected
changes or inconsistencies in financial performance, providing valuable insights
into the entity's financial position and potential risks.

● Investigate fluctuations, inconsistencies, or deviations from expectations.

The investigation of unusual fluctuations and relationships ordinarily begins with


inquiries of management, followed by:

(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.

When analytical procedures identify significant fluctuations or relationships that:

(a) are inconsistent with other relevant information; or

(b) deviate from predicted amounts, the auditor should investigate and obtain adequate
explanations and appropriate corroborative evidence.

If the auditor concludes that there is a material inconsistency, he should determine


whether the financial statements, his report, or both require revision. If he
concludes that they do not require revision, he should request the client to revise
the other information.

3.2. Test of Details

➢ Test of Details is a specific type of audit procedure used by auditors to


obtain detailed evidence about individual transactions, account balances,
or items in the financial statements.

● Tests of Transactions: Examine individual transactions to verify validity and accuracy.


➢ A test of details of transactions is an audit procedure that examines individual
transactions to verify the accuracy and validity of financial data. It's a type of
substantive testing, which auditors perform when they identify significant
risks.
ex. sampling a population and sending confirmations.

● Tests of Balances: Directly test yearend balances (e.g., receivables, payables, inventory).

➢ A test of details of balances is an audit procedure that involves examining and


verifying individual account balances, transactions, and documentation to
ensure the accuracy of financial data

4. Audit Techniques

4.1. Inspection

● Inspect physical documents (e.g., invoices, contracts) and accounting records (e.g.,
journal entries).

➢ Inspection of documents is the process of gathering and examining transactions


through recorded information. This can be performed using two ways, vouching
and tracing.
➢ Vouching is where auditors manually check the details of supporting documents
to verify the transaction records. Meanwhile, tracing is the process of validating
transactions by tracking their connections to the source document.

● Inspect tangible assets (e.g., inventory,property) to confirm existence and condition

➢ Inspection of tangible assets is the procedure where auditors physically


examine the company’s assets including properties such as land, building,
vehicles, equipment, or inventory. This process doesn’t only confirm the
existence of the asset, but also helps in determining whether it suffered
defects or impairment, which affect its value.
4.2. Observation

● Observe internal control procedures (e.g.,inventory counts, authorizations).

Observation consists of looking at a process or procedure being performed by


others, e.g., the auditor's observation of inventory counting by the company's
personnel or the performance of control activities. Observation can provide
audit evidence about the performance of a process or procedure, but the
evidence is limited to the point in time at which the observation takes place and
also is limited by the fact that the act of being observed may affect how the
process or procedure is performed.

● Observe staff performing tasks to verify processes.


The auditor physically watches employees as they carry out their duties, such as:
- Receiving cash payments
- Processing customer orders
- Counting inventory
- Approving invoices

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

● Conduct interviews with management, employees, or third parties to gather information.

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

● Use inquiry to corroborate other audit evidence.

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.

● Confirm bank account balances, accounts receivable, or other financial information.

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

● Recompute calculations (e.g., depreciation, interest, tax) to verify accuracy.

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

5.1. Statistical Sampling

● Random Sampling: Select samples randomly to represent the population.

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.

5.2. Non-Statistical Sampling

● Judgmental sampling: Select samples based on the auditor’s professional judgment rather
than statistical methods.

Judgmental sampling, or purposive sampling, relies on the auditor's professional judgment


to select items based on experience and understanding of the audit area. Auditors might
choose specific items they consider risky or material rather than relying on random
selection. This approach allows auditors to concentrate on areas with known issues or
significant risks, enhancing the relevance of the audit evidence. However, because it’s
subjective, this method may introduce bias and lacks the generalizability of statistical
sampling. It’s often used when the population is small or when specific items are known
to be high risk.

6. Conclusion and Evaluation of Evidence

6.1. Evaluate Sufficiency and Appropriateness of Evidence

● 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.

6.2. Review and Final Procedures

● 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.

● Review audit documentation to verify consistency with findings.

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.

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