UNIT II
AUDIT PLANNING PROCEDURES AND DOCUMENTATION
Q1) What do you mean by Audit Programme? Explain its Advantages.)
A1) Audit programme is an outline of procedures to be followed in order to arrive at an opinion concerning the financial statements of a company. An audit programme is a detailed, written statement designed by the auditor indicating the work to be performed by the audit assistance, specifying the time limit for completion of work, introductions and guidance to the audit staff. In short, it is a tool for planning, directing and controlling the audit work. An audit programme is a detailed plan of the auditing work to be performed. It specifies the procedures to be followed in the conduct of audit more efficiently. The auditor outlines the whole procedure of audit from beginning till the finalization of audit report. Audit programme is generally contained in the audit notebook.
The main advantages of audit programme are as follows:
Q2) Explain permanent audit and its contents.
A2) Permanent audit files are the files that use to keep the information that uses by auditors continuously. That information includes engagement later, client’s M&A, long term contract or agreement as well as board meeting minute. It is very important for the auditor to keep the documents or events based on nature and classification. And make sure that all information and documents that they obtain from their clients are safe and not leak to the person or party that should not access.
A permanent audit file is different from the current audit file because of the current audit file only the current year audit. Yet, the permanent file keeps information or documents that subject to be used in the next audit period.
Content of Permanent Audit File
(a) Copy of initial appointment letter if the engagement is of recurring nature.
(b) Record of communication with the retiring auditor, if any, before acceptance of the appointment as auditor.
(c) NOC from previous auditor.
(d) Information concerning the legal and organisational structure of the entity.
(e) Organisational structure of the client.
(f) List of governing body including Name, Address and contact details. For instance, the list of directors in case of a company, list of partners in a partnership and list of trustees in a trust.
(g) Extracts or copies of important legal documents, agreements and minutes relevant to the audit.
(h) A record of the study and evaluation of the internal controls related to the accounting system. This might be in the form of narrative descriptions, questionnaires or flow charts, or some combination thereof.
(i) Copies of audited financial statements for previous years
(j) Analysis of significant ratios and trends
(k) Copies of management letters issued by the auditor, if any.
(l) Notes regarding significant accounting policies.
(m) Significant audit observations of earlier years.
(n) Assessment of risks and risk management
(o) Major policies related to Purchases and Sales
(p) Details of sister concerns
(q) Details of Bankers, Registrars, Lawyers etc
(r) Systems and Data Security policies
(s) Business Continuity Plans
Q3) What are the major functions of audit work papers?
A3) Major Functions of Audit Work Papers
Other than for internal management reporting purpose, the audit work papers maybe—in some situations—submitted to some legal institutions, regulatory authorities, or governments, through court orders, as supporting evidence.
The major functions of auditor work papers include:
1. As Basis for planning of an Audit
Workpapers from a prior audit provide an auditor with background information for conducting a current review in the same overall area. They may contain descriptions of the entity, evaluations of internal control, time budgets, audit programs used, and other results of past audit work.
2. As Record of Audit-Work Performed
Work papers describe the current audit work performed and also provide a reference to an established audit program. Even if the audit is of a special nature, such as a fraud investigation where there may not be a formal audit program, a record should be kept of the auditing work carried out. This workpaper record should include a description of activities reviewed, copies of representative documents, the extent of the audit coverage, and the results obtained.
3. Use during the Audit
In many instances, the work papers play a direct role in carrying out the specific audit effort. A flowchart might be prepared and then used to provide guidance for a further review of the actual activities in some process. Each of these elements would have been included in the workpapers in a previous audit step.
4. As Description of Situations of Special Interest
As the audit work is carried out, situations may occur that have special significance in such areas as compliance with established policies and procedures, accuracy, efficiency, personnel performance, or potential cost savings.
5. As Support for Specific Audit Conclusions
The final product of most internal audits is a formal audit report, containing audit findings and recommendations. The documentation supporting the findings may be actual evidence, such as a copy of a PO lacking a required signature, or derived evidence, such as the output report from a computer-assisted procedure against a data file or notes from an interview. The workpapers should provide sufficient evidential matter to support the specific audit findings that would be included in an audit report.
6. As Reference Source
Workpapers can answer additional questions raised by management or by external auditors. Such questions may be in connection with a particular audit report finding or its recommendation, or they may relate to other inquiries. For example, management may ask internal audit if a reported problem also exists at another location that is not part of the current audit. The workpapers from that review may provide the answer. Workpapers also provide basic background materials that may be applicable to future audits of the particular entity or activity.
7. For Audit Coordination
An auditor may exchange work papers with external auditors, each relying on the other’s work. In addition, government auditors, in their regulatory reviews of internal controls, may request to examine the internal auditor’s work papers.
Q4) What are the sources of obtaining information for auditing?
A4) Sources Of Obtaining Information
When planning the audit, the auditor should have knowledge of the client’s operations, other than macroeconomic and client’s industry. For a new client, the primary sources of information are discussions with the predecessor auditor and inquiries of client management. During the discussion, the auditor should obtain enough knowledge about the client’s business, organization and operations to understand the events, transactions and practices that may have an effect on financial statements.
The auditor should obtain knowledge of matters such as: type of business, types of products and services, capital structure, related parties, business locations, production and distribution methods and compensation methods. In more detail, the auditor should learn about the client and plan the audit by doing the following:
b. Obtain the entity’s forms and documents
c. Examine work area that will be allocated to the auditor
d. Walk through the accounting area
Q5) What are the sources of obtaining information for auditing?
A5) Audit note book is maintained by the audit assistant it note down to all those unclear matter which he may come across in the course of audit and on which he requires further clarification and explanation. It contains day to day work performed by the audit staff on any particular day. Notes about all types of errors, difficulties and uncleared point, etc. are recorded in audit notebook. Audit notebook is a diary on which auditor scribble down all important inquiries to avoid the possibility of unquestioned material facts.
Importance of Audit Note Book
1. Audit note book shall be taken as reliable evidence even by the Court of law in case of dispute or if the auditor is charged with negligence.
2. It is useful for drawing the audit programmes.
3. Audit note book enables the auditor to record important points, which arise during the course of his audit; otherwise he might forget these points.
4. An auditor can produce this book as documentary evidence in a suit filed against him for negligence or misfeasance.
5. It facilitates the preparation of the audit report.
6. If the assistant in charge is changed before the completion of a particular work, it acts as a guide and makes the completion of balance work easier.
7. A credit note book makes the work of audit convenient because all the important details about audit can be recorded in this book and, as such, any change in the staff of the auditor does not disturb or dislocate the work of audit.
8. It can help in making an assessment of the work of audit clerks.
9. It provides a key to evaluate the efficiency of the audit staff.
Q6) What necessary steps should be taken before commencing the work of Audit?
A6) Instructions before Commencing Works of Audit
Before the commencement of a new audit the auditor should go through the minutes of the directors and note down the important decisions. The auditor should prepare himself before the commencement of a new audit; he should consider the following points:
First of all auditor should confirm his appointment letter that it is in order from every respect and fulfilling all its legal requirements.
2. List of Books of account
The auditor should obtain a list of all the books of account and should see that all books have been kept in accordance with company ordinance.
3. Legal Documents
The auditor should take the copy of the legal documents of the company and should study them carefully before the commencement of audit. Such documents may be memorandum and articles of association, prospectus and contract with vendors etc...
4. Nature of Audit
Auditor should know regarding the nature of audit so that he may prepare himself accordingly.
5. System of Internal Audit
The auditor should also study the internal control system in the business concern. He should make detailed inquiries, inspect records and wherever possible, observe the actual procedure in operation.
6. Accounting System
Before the commencement of audit the auditor must know the system of accounting adopted by the business concern. He should thoroughly investigate the whole system of book keeping and accounting.
7. Name of Principal Officers
The auditor should obtain the list of the principal officers with their financial and other powers.
Q7) Which are the main advantages and disadvantages of Audit programme? How we can overcome that?
A7) Advantages of Audit Programme
The main advantages of audit programme are as follows:
Disadvantages of Audit Programme
Audit programme, however, has the following disadvantages:
Yet it must be appreciated that the concept of Audit programme has enough usefulness in the process of audit. A realistic assessment of the situation and a careful planning of affairs, therefore, can very well remove the above disadvantages of the Audit programme.
Q8) Explain the methods of work for Audit programme.
A8) An audit programme offers a basic plan for the audit team concerning the entity’s business, its size, the procedure to conduct the audit, allocation of work amongst the team members and the time estimate within which the audit must be completed. Therefore, audit programmes are created to enhance the accountability of the audit team and its members for the work performed by them.
An auditor may choose to revise the audit programme if it seems necessary due to prevailing circumstances. An audit programme would be influenced by the size of the entity, type of business or services the entity operates in, the effectiveness of internal controls, applicable laws, and other multiple relevant factors. Thus, an audit programme is prepared by an auditor as per the scope of the work.
The minimum essential work that is to be performed is the Standard Programme. However, a set audit standard programme applicable to all the circumstances does not exist. The Audit Working Papers document the activities that are performed by the audit programme. Audit Working Papers support the work performed by an auditor and provides assurance that the audit was conducted in accordance with all the appropriate and applicable standards on auditing. It assists the auditor for the proper execution of the audit work.
Therefore, an audit programme includes various steps of auditing in an audit programme such as the assessment of internal control, ascertaining accuracy and the reliability of books of accounts, vouching and verification, inspection, valuation of assets and liabilities, presentation of financial statements, scrutiny of accounts and the submission of reports and related disclosures.
Q9) Explain the importance of Audit Working Papers.
A9) Importance Of Audit Working Papers
Q10) What are the factors to be considered for Audit Planning?
A10) Factors To Be Considered In Audit Planning
The auditing Standards and Guidelines have placed considerable emphasis on audit planning. It states that the auditor should adequately plan, control and record his work at each stage of its progress. This is mainly ensured that the audit is carried out effectively and efficiently. The aim is to provide an efficient and economic service within an appropriate time scale. The exact form and nature of audit planning, however, should be governed by the following considerations:
A proper consideration of these factors will enable the auditor to appreciate the events and transactions likely to have a significant effect on the financial statements. All this helps in designing an appropriate audit approach to the assigned responsibility.