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Audit Procedure

What is Auditing?

Auditing is the process of examining and evaluating a company’s financial statements and internal controls to ensure accuracy and compliance with legal and regulatory standards. Generally, an audit is conducted by an independent outside party, such as a Certified Public Accountant (CPA) firm.

The audit process includes analyzing and reviewing the documentation and records of the company, as well as interviewing the personnel involved in the financial activities of the business. The audit report issued by the CPA firm provides an opinion on the financial statements of the company. An unqualified opinion indicates that the financial statements are presented fairly and in accordance with the applicable financial reporting framework.

An internal audit is an internal review of the company’s financial and operational activities. It is conducted by employees of the company or independent auditors. The internal audit is aimed at providing assurance to the company’s management and helps identify any weaknesses in the internal control system. The findings of the internal audit are used to improve the internal control systems of the company.

What are Audit Procedures?

The examination of an organization’s financial information requires specific techniques, processes, and methods to obtain reliable evidence. These procedures are known as audit procedures and are used by auditors to form a judgment about the accuracy of an entity’s financial statements.

Audit procedures involve a variety of activities such as inspecting records and documents, questioning personnel, and examining the entity’s internal control. Depending on the nature of the audit, the procedures may include tests of details, analytical procedures, and inquiries.

The purpose of audit procedures is to ensure that the financial statements are true and accurate. The auditor must obtain sufficient evidence to support the opinion expressed on the financial statements. To do this, the auditor may use several different types of audit procedures, such as inspections, inquiries, confirmations, analytical reviews, and reperformance. These procedures help the auditor to form an opinion on the fairness of the financial statements.

Type of Audit Procedure

Observation

The purpose of an observation is to gain an understanding of the client’s business operations and controls. During the observation, the auditor should focus on obtaining an understanding of the client’s business activities, processes, and control environment. The auditor should also pay attention to the client’s internal control procedures and assess whether they are adequate to mitigate risks associated with the client’s business activities.

The observation should be conducted in a manner that allows the auditor to obtain sufficient evidence to support the conclusions reached in the engagement. The auditor should also document all significant observations made during the course of the engagement.

Inquiry

The audit procedure of inquiry involves asking management and other employees questions about the company’s financial statements and internal controls. The auditor must exercise professional skepticism when performing this procedure, as management may be biased in their responses. T

he auditor should also consider whether the answers they receive are consistent with other information they have obtained during the audit. If there are any discrepancies, the auditor should investigate further to determine the cause. Overall, the procedure of inquiry helps the auditor to obtain an understanding of the company and its operations, which is essential for conducting a successful audit.

Analytical review

The analytical review is one of the key audit procedures performed by auditors in order to obtain an understanding of the client’s business and assess risk. This procedure involves reviewing a client’s financial information and comparing it to similar companies in order to identify anomalies that could indicate potential problems.

The reviewer will also look for trends that might impact the client’s financial health, such as increasing levels of debt or declining sales. By performing an analytical review, the auditor can obtain a valuable insight into the client’s business and identify any areas that warrant further investigation.

Inspection

An inspection is a formal process conducted by an independent body to assess whether a company or organization is adhering to standards. Audits are similar to inspections, but they are conducted by an internal body such as the company’s accounting department. The inspection process usually begins with the issuing of a notice of intention to inspect, followed by an oral briefing on the scope and purpose of the inspection.

The inspection team then carries out its work, which may include interviews with employees, review of documents, and observation of work practices. After the inspection is complete, the team debriefs the company management and issues a report detailing its findings. Depending on the outcome of the inspection, further action may be required, such as the implementation of corrective action plans or follow-up inspections.

Recalculation

Recalculation is an audit procedure where the auditor recalculates certain information in the client’s records to confirm its accuracy. This may be done, for example, to confirm the mathematical accuracy of amounts recorded in ledgers or journals. Recalculation is also often used to test the reasonableness of estimates made by management, such as bad debt provision or depreciation expense.

In performing this procedure, the auditor will prepare their own calculations using the same basic assumptions as management. If the auditor’s recalculations differ materially from management’s original estimates, this may indicate a possible issue that requires further investigation.

How To Design The Audit Procedure?

Designing an appropriate audit procedure requires a detailed analysis of the characteristics and risks associated with the target transaction or event. Auditors must take into account the following factors:

  1. The assertion to confirm
  2. The procedure to test it
  3. The reason for performing the procedure

The analysis must ensure that the audit procedures address the potential risks associated with the transaction or event, and should include considerations such as the time period, the entity involved, and the underlying accounting principles. The audit procedures should also be tailored to reflect the complexity of the target transaction or event.

For example, if the transaction or event involves multiple parties and jurisdictions, it may require more detailed audit procedures. It is also important to consider the resources available and the budget allocated for the audit.

Auditors should also ensure that the procedures are properly documented, tested, and reviewed for accuracy and completeness. Documentation should include the purpose of the procedure, the method used, and the results obtained. Testing should involve executing the procedures and assessing the results against expectations.

Benefits

Adopting a structured audit procedure helps to ensure an accurate, reliable, and comprehensive audit report. The benefits of audit procedures are numerous, helping auditors to identify any potential issues and evaluate their potential impact.

The procedure helps to maintain the accuracy and completeness of the audit and aids in making sure that all relevant information is collected and evaluated. Furthermore, it can be used to detect fraud and errors, as well as to identify areas of concern that require further investigation.

Audit procedures are also beneficial in providing a systematic approach to auditing and ensure that all necessary steps are taken in order to achieve the desired results. This helps to ensure that the audit process is conducted in an efficient and timely manner, allowing the auditor to maximize the value of their work.

Limitation

Despite their potential benefits, audit procedures can be limited in their effectiveness due to the complexity of the task and the potential difficulty of obtaining reliable external confirmation. This can be caused by a number of factors, such as:

  1. Auditors may be unable to follow all audit procedures due to their complexity and time-consuming nature.
  2. Large organizations with many transactions can make it difficult for auditors to recalculate or reperform tasks to identify mistakes or misstatements.
  3. Organizations may not allow for external confirmation, which requires auditors to report limitations and give qualifications to the company.

Accountants may also struggle to understand audit procedures, leading to practical problems for auditors. This can result in the auditors not being able to accurately identify or report on potential misstatements or other errors that may have occurred.

Conclusion

The audit procedures used are designed to obtain evidence about the appropriateness of the financial statements disclosures and whether the amounts included in the financial statements are free from material misstatement. The specific audit procedures employed will vary depending on the circumstances, but may include a review of prior year audits, analytical procedures, and confirmation with third parties.

If the auditor concludes that there is a material misstatement in the financial statements, they will adjust their opinion accordingly. However, if the auditor finds that the financial statements are free from material misstatement, they will express an unqualified opinion.