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By: Neetu Chadha

Faculty, DIAS
Audit Process
An Audit Process is a well defined methodology for
organizing an audit and adopted to accomplish the audit
objectives.
The main stages of an audit are
Planning the audit,
Performing the audit, and
Reporting the findings.
Planning the Audit
Obtain knowledge of client’s business, industry,
accounting system and internal control system
Development of an overall plan
Prepare Audit Programme
Performing the audit
Study and evaluate internal control system
Adopt audit procedures to obtain evidence
Evaluate the evidence obtained
Reporting the findings

Determine the truthfulness and fairnessof financial


statements
Communicate opinion through audit report
GAINING AN UNDERSTANDING
OF THE CLIENT
At the outset of every audit, an auditor must gain an
understanding of their client. The purpose of this
procedure is to assess the risk that the financial
statements contain a material misstatement due to:
the nature of the client’s business
the industry in which the client operates
the level of competition within that industry
the client’s customers and suppliers
the regulatory environment in which the client
operates
 It requires the auditor to do the following:
 (a) Make inquiries of management and of others within the entity who may have
information to help identify the risk of material misstatements. Th is includes making
inquiries of both financial and non-financial staff at all levels of the organization,
including those charged with governance, internal audit, sales, and operational
personnel.
 (b) Perform analytical procedures at the planning stage of the audit to identify any
unusual or unexpected relationships that may highlight where risks exist. Analytical
procedures are a study of plausible relationships between both financial and non-fi
nancial data.
 (c) Perform observation and inspection procedures to corroborate the responses made
by management and others within the organization. These procedures also provide
information about the entity and its environment. Examples of such audit procedures
include observation or inspection of the entity’s operations, premises, and facilities;
business plans and strategies; internal control manuals; and any reports prepared and
reviewed by management (such as management reports, interim financial statements,
and minutes of board of directors’ meetings).
 By performing these activities, the auditor will gain an understanding of the
issues at the entity level, the industry level, and the economy level.
Considerations for commencing
an audit
Initial Enquiries
Communication with previous auditor
Sending the engagement letter
Acquiring knowledge of client’s business or business
review
Engagement letter
An engagement letter defines the legal relationship or
engagement between a professional firm and its
clients. The letter details the terms, conditions, and
compensation arrangement of the professional
relationship. These letters are commonly required by
services firms engaged in tax, audit, finance,
consulting, and legal advice.

The audit engagement letter states the terms and


conditions of the engagement, principally addressing
the scope of the engagement and the terms of
compensation for the firm.
Information contained in the engagement letter
Client background for example the nature of business,
location, key management etc
Scope of works
Objective of audit
Type of financial framework that client use
Audit fee or sometime call engagement fee
Timeline of audit report
Auditors responsibilities
Client responsibilities
Auditor right to assess financial information and related
records ( the most importance one)
Audit Programme
Audit programme may be defined as the auditor’s
plan of action indicating the work to be
accomplished, the audit tests and procedures to be
followed, the persons responsible for the
accomplishment of the work, and the time within
which the work is to be accomplished.
Howard F Settler: says that “Audit program is an
outline of all procedures to be followed in order to
arrive at an opinion concerning a client’s work
financial statements”. 
Advantages Of Audit Programme
 All the important areas will be covered in the audit programme and thus there
will be no chance of omitting any important area while conducting the audit.
 The audit work will be allotted to the audit staff according to their efficiency
and experience.
 Audit programme facilitates better control and supervision of audit work.
 The subsequent audit programme can be drawn on the basis of the existing
audit programme.
 If any error is found in the audit work, the person responsible for such
mistake can be easily found out.
 It serves as the evidence for conducting the audit. The auditor uses it as
protection, if he is charged with negligence in performing his duties. He can
prove through the audit programme that he has conducted his work with due
care and diligence.
 The efficiency of the audit staff increases and even if an audit staff goes on
leave, others can continue the work by referring to the audit programme.
Disadvantages Of Audit Programme
 The audit staff may find the work mechanical, and fail to notice unusual
features (if any) in the organization.
 The audit staff may not develop any innovative techniques in
audit. Initiatives on the part of the staff may not be encouraged in the
per-determined audit programmes.
 The audit staff will be more interested to complete the work in time
rather than to maintain any standard in the work.
 Staff cannot take their own decisions and they are compelled to comply
with the audit programme.
 The audit programme may not be revised from time to time even after
errors noticed during the audit.
 During the course of audit, new areas to be verified may come to the
notice of the audit staff Unless the audit programme is revised, such
areas may escape from auditing.
 Pr-determined audit programme may not be suitable for small
organizations.
Types of Audit programme
Standardized audit programmes: Is a pre-prepared
listing of objectives and tests which may be used in any
audit. A consistent approach to all audits. Reduce risks
that procedures are omitted.
 
Tailored audit programmes: Some audit programs need
to be tailored to the specific circumstances of an
engagement as all clients are different. The design of the
audit procedures to be followed match exactly to the
actual system of the entity. Reference can be made
specifically to particular procedures/documents.
Audit Working Papers
Audit Working Papers include those papers and
documents, which consist of details about accounts,
which are under audit.
 They are the written, private materials, which an
auditor prepares for each audit.
They describe the accounting information, which he
obtained from his client, the method of examination
used, his conclusions and the financial statements.
Definition of Audit working papers

ICAI “Working papers must include audit programme,


queries, explanations given for the queries, schedules of
important items like depreciation, inventories,
confirmation from third parties, certificates issued by
the management, banks, etc”
Prof. Meigs “The term working papers is a
comprehensive one and includes all the evidences
gathered by the auditor to show the work he has done,
the methods and procedures he has followed and the
conclusions he has developed “.
Working paper should specify
How the work was planned and supervised?
How the internal control system was reviewed and its
reliability was assessed?
How the evidence was collected and what procedures
were adopted to collect the evidence?
Whether the testing performed provided sufficient
competent evidential matter to enable to form a
reasonable basis for an opinion or recommendation?
Objectives of audit working papers
 The working papers serve the auditor both as useful audit tool as well
as a permanent record of the audit work performed.
 They are useful to the auditor to control the current year’s audit work.
 They constitute a reliable guidance for planning the future audit
assignments.
 A review of the audit working papers gives an assurance that the audit
work is both accurate and complete.
 The auditors arrange the data properly in the working papers. Hence,
the data become more meaningful and useful for the purpose of
the,audit.
 Working papers are necessary to corroborate the work and the
findings of all the audit staff.
 The chief auditor is assured that the opinion is supported by the
findings of their audit staff.
 The working papers constitute complete and conclusive evidence in
future as to the entirety and completeness of the audit work.
CONTENTS OF WORKING PAPERS
1. CONTRACT LETTER: The working papers contain the contract letter. This letter
gives right to a person to start the work of audit. It states the terms and conditions of
appointment of an auditor. The nature and amount of work is recorded. This letter becomes
a part of audit working papers.
2. AUDIT PROGRAMME: An audit programme is a detailed plan of action to be used
for audit. It is a timetable of staff duties. The books to be examined are stated in audit
programme. Every audit work requires programme and then master audit programme is
prepared to cover all activities.
3.  AUDIT NOTE BOOK: The audit notebook is a part of audit working papers. It
contains useful information about business enterprise. This book provides data for audit
report. The weak point like missing  vouchers and unsettled queries are stated in it.
4. COPIES OF DOCUMENTS: The partnership deed, articles of association,
memorandum of association, trust deed, and lease contract are collected from the
management. These papers are useful to determine performance of business.
5.  COPIES OF CORRESPONDENCE: The copies of correspondence become part of
audit working papers. The auditor can write letters to other parties. The replies can be
received from debtors’ and creditors. Auditor keeps letters exchanged with other people.
6.  SCHEDULE OF DEBTORS: The clients provide schedule of debtors. This list is
compared with books of accounts. The auditor can confirm balances from debtors. He
can write letters to debtors for this purpose.
7.  STOCK CERTIFICATES: The management provides stock certificate. The
auditor can watch the stock taking process. When stock is lying in public warehouse,
the auditor can accept certificate of warehouse keeper.
8. COPIES OF PREVIOUS AUDIT: The auditor can collect copies of  previous audit
reports. These papers become part of audit working papers. The auditor can note
weakness stated in old reports. He can examine that same points are not repeated in
books of current year.
9. RESOLUTION COPIES: The auditors collect copies of resolutions. The decisions
of management should be implemented in preparing books of accounts. The auditor
can confirm whether such decisions are implemented or not.
10. DEPRECIATION: Audit working papers contains particulars of depreciation. The
rate of depreciation is applied throughout the life of an asset. Reasonable amount of
depreciation is charged every year. The auditor can determine exact amount of
depreciation.
11.  INVESTMENTS: The management can buy shares and certificates of other
companies. Investment can be made through brokers. The register of investment
provides relevant information. The details of investment are recorded in working
papers.
12.  MANAGEMENT CERTIFICATE: Management can provide various certificates
to auditor. The certificate may relate to inventory valuation and similar other matters. Such
certificate becomes part of audit working papers. The auditor can rely on certificates for audit
purpose.
13.  DETAILS OF QUESTIONS: The auditor can ask number of questions to the
management. The detail of questions is recorded in working papers. The questions not
properly answered are included in audit report. The queries settled are dropped from
working papers.
14. OTHER PAPERS: The auditor can collect information from experts like
engineers, advocates and other consultants. These papers furnish valuable information
about financial matters. The working papers may contain such papers.
FILING OF WORKING PAPERS

The audit working papers are divided into two parts.


The first group consists of the Current file and
second group contains Permanent file. The material
relating to current year only is placed in current file.
The data to be used for a number of years is placed in
permanent file. The auditor can rely on the facts and
figures recorded in permanent files.
CURRENT FILE
 AUDIT PLANNING: The auditor makes planning for conduct of   audit. He can make
arrangements with clients. He can plan his activities for completion of audit in time.
 FINANCIAL STATEMENTS: The auditor can collect copy of financial statements from the
client. The statements may include income statement, balance sheet and cash flow statement.
 INTERNAL CONTROL: The auditor can check the effectiveness of internal control. It is
procedure adopted by management for   proper working of business as per policies of business.
 TRIAL BALANCE: The auditor can collect a copy of trial balance to note the important
balances and to check the accuracy of accounting records.
 AUDIT PROGRAMME: The auditor prepares audit programme for conduct of audit. It is list
of work to be done during course of audit. A master programme is prepared on the basis of
individual programmes.
 AUDIT QUERIES: The auditor can keep a record of all queries made by audit staff. The
accounting entries may not be self-explanatory. The management may fair to provide
satisfactory answer to the questions made.
 SUPPORTING SCHEDULE: The auditor can keep the record of supporting schedules. The
information recorded in the schedule can be compared with entries in the books of accounts.
The responsible officer must sign such schedule.
 MINUTES OF MEETINGS: There is need of minutes of meeting for audit. The
auditor can see whether decisions made by management have been implemented
or not. The resolution passed at the meetings can be put. into practice.
 MISSING VOUCHERS: The auditor can note the missing   vouchers. The-
transactions are recorded on the basis of vouchers. The transactions without
vouchers are not acceptable. The management is responsible for such
transactions.
 ANALYTICAL REVIEW: The auditor should make analytical review of
accounting ratios and other financial matters. The analysis of ratios provides an
insight into the unusual items appearing in the books.
 AUDIT REVIEW: The auditor can review audit programme and procedure. He
can note the good and weak points. He can take   steps to improve the audit for
next years.
 BANK RECONCILIATION: The auditor can collect copy of bank reconciliation
prepared by management. He can examine that there is no error or fraud on the
part of accounting staff or bank  employees.
 TAX SHEETS: The auditor can collect copy of tax sheets. The  figures recorded in
tax sheets are record of the current year. In case of need it can be used to draw
conclusion about business matters.
PERMANENT FILE
 BUSINESS HISTORY: The date of start of business is recorded.  The nature of
business and types of products is stated. The share   in market may be noted. This
information is helpful for audit purpose.
 BUSINESS ADDRESS: The official address of business is necessary for the
auditor. The name of building, street, city, and province must be recorded for
incoming mail.
 ORGANISATION CHART: The organization chart may be collected from
management. The name and duties of all officers may be noted in order to check
performance. This chart helps to understand the working of business:
 ENGAGEMENT LETTER: A copy of engagement letter can be kept on record for
future reference. The terms and conditions Of appointment of auditor and scope
of audit work are stated in it.
 COPY OF DOCUMENTS: The auditor should collect copy of documents relating
to business activities. The correspondence with various debtors and creditors may
be made. The copy of such documents is useful for audit of books.
 COPY OF CONTRACTS: The auditor can collect copy of contracts made by
 managements for purchase and sale of goods and other assets: The checking of
such contract is essential to note the terms and conditions.
 ACCOUNTING SYSTEM: The auditor can note the system of accounting. The
books, personnel and devices can be applied to  maintain record, A good
system of accounting can produce reliable results for audit.
 BUSINESS FINANCE: The auditor can record the details of capital  and loans.
The owners’ funds and borrowed funds are used to finance business activities.
 FIXED ASSETS: The auditor can record the book value of assets  and up to
date depreciation. The performance of assets can be determined by means of,
assets turnover rate. The unproductive  assets may be owned by the business.
 FINANCIAL RATIOS: The auditor can determine financial ratios for every
year. These ratios are useful to determine business performance. The auditor
can keep such papers in permanent files for record.
 BANKING ARRANGEMENTS: The auditor can note the banking
arrangements. The deposits into the bank and withdrawal from the bank must
be under proper safety measures.
 PROFESSIONAL ADVISORS: The auditor can seek professional advice in
various business matters. The name, qualification and address of the
professional advisor may be noted in permanent files.

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