Techniques of auditing an auditor employs various techniques while conducting his auditing work.

These techniques are useful guides to obtain a reliable evidence and then express an opinion in his report. There are many techniques in the audit work . Some of the techniques are already laid down while the others are developing techniques in the field of audit work.

CA R.MURALI

Inspection.

this consists of examining records, documents or tangible assets. Four different categories of documentary evidence which provide different degrees of reliability to the auditor are the following : (1) documentary evidences originating from the third parties and held by third parties. (2) documentary evidences originating from the third party and held by the entity. (3) documentary evidence originating from the entity and held by the entity. Inspection of tangible assets is to obtain reliable evidence as to their existence.

Observation.

Counting of inventories by the client. Counting of stamps by the client. Voucher entries made by the operators. Counting of cash by the cashier. This is normally resorted to by the auditor in places where there are no audit trails available to him.

Inquiry and confirmation

Inquiry consists of seeking appropriate information from a person inside or outside the business. This is very important in the practical sense because proper response from the other person is very important in the conductance of the audit work. Good inquiry also improves communication ability of the auditor. Confirmation is linked to inquiry since the evidence obtained in the inquiry results in strengthening it.

Computation.

This is the quantitative ability of the auditor in calculating in a sequential manner. The example of computation being the computation of gratuity, computation of depreciation, etc. This is done by the auditor to check the computation done by the staff of the company in many areas. The computation on the whole verifies the arithmetical accuracy of the calculations done by the client.

Recomputation

When the computation is done several times it is called recomputation. It is a technique to check the computation already done by the auditor to be more perfect. This is a famous technique since it prevents any form of error in auditing to a great extent.

Vouching

This is a famous technique of verifying the documents along with the corresponding registers This verifies items like date , no , amount , etc. This is the only technique where documents is verified with registers. The signature of the authority is also verified. This is a very good internal evidence showing all the details of a transaction. It is normally done for cash and bank purchases, cash and bank sales , credit purchases and credit sales. It is also done for journal proper.

Cross examination

This is verification of one item with another item to find out if it is correct. For example the cost price of an asset can be verified with the voucher and the fixed assets register. The depreciation can be verified with the fixed asset register and the profit and loss account.

Stratified sampling

This consists of dividing the whole population in groups called strata and then taking a sample from each of them. Each stratum is treated as if it were a separate population. The groups into which the whole population is divided by the auditor on the basis of his judgment. The entire expense vouchers may be divided into : Vouchers above 1,00,000 Vouchers between 25,000 and 1,00,000 Vouchers below 25,000 The auditor can decide like this All vouchers above 1,00,000 , 50% between 25,000 and 1,00,000 and 25% below 25,000.

EDP AUDIT

Auditing around the computer The auditor does not care about the transformation of data which took place inside the computer. This is done by examining the print out of the computer. The transformation that takes place inside is ignored.

Auditing through the computer.

This is a complete loss of audit trail and thus the auditor has to test the system itself. The results are then analyzed for the processing reliability and accuracy of the computer program. This is actually the testing of the computer program.

Auditing with the computer.

Here the computer is used for making the audit program. The modern concept is using the CAAT.

Surprise checking

This is done on a surprise basis. It is done for the verification of books accounts and records, which are maintained at branch offices. For the verification of cash, stock and similar type of assets, which are kept at other places. For checking of cash on non routine basis. For checking of investments on a non routine basis. For the verification of the regularity of maintenance of books of accounts, statutory registers and other important documents. For the physical verification of stock and stores on non routine basis.

Cut off examination

This is done to ensure that at the year end the trading transactions are entered in the period to which they relate. Cutoff means that they are separated from the present period to the previous period. The examples being sales, purchases, stocks, etc. This is important since it will distort the true and fair view of the accounts. Normally the cut off examinations are undertaken at the end of the year since in the last week if there are many transactions there is every possibility that it will be reported in the next financial year.

Internal control questionnaires.

This is designed to get Quick Answers like yes or no . The answers help in the judgment of the auditor instead of asking too many questions or descriptive questions. This also helps in formulating an audit programme. This cuts down unnecessary work and also saves time of audit. But the questionnaire should be updated from time to time. The topics related to ICQ are cash sales, cash received from debtors, cash payments, etc.

Auditing in depth.

this involves examination of small amount of transactions in great detail. This is done to understand the system of recording transactions. This also saves a lot of time without distorting the judgment of the auditor. This is mainly done in cash transactions and internal control of purchases. This technique is also called selective verification.

Physical verification

this is mainly done for assets. Since assets are tangible items it has to be seen that they are really existing. A register is also maintained for physical inspection of the fixed assets. It is also done for cash.

Test checking

a part of the transactions are checked depending on the judgment of the auditor. This is the actual checking of the representative sample. The factors to be taken in this regard are the following : Nature of transactions. Effectiveness of internal control. Materiality of items. Previous experience. There are some transactions that are not suitable for test checking Exceptional transactions. Transactions involving seasonal fluctuations. For opening and closing balances. Bank reconciliation statement. Presentation and disclosure of information in balance sheet and profit and loss account.

Audit tests.

Compliance test and substantive tests. Compliance is done to ensure that internal control procedures are being applied as prescribed. Substantive tests is done to see the validity of the information contained in the accounting information .

Flow chart

this is done to see the sequence of operations with a yes or no answer . This is mainly done to see the systems of the company. Flow chart of items to be checked is also done to formulate an audit programme. Since it provides a yes or no answer it is similar to ICQ.

Conclusion

The auditor should follow the appropriate audit procedure and adopt different techniques of auditing. On the basis of his assessment of the accounting system and evaluation of internal controls, the auditor will draw up an audit programme specially designed for that particular audit. The techniques of auditing depends on the nature of the work undertaken by the auditor and his objectives of the audit work. If he wants to see the existence then he should adopt physical examination technique and so on. If he lacks the time frame he must undertake test checking. He can also undertake balance sheet audit which is more of a procedure when the internal control of the organization is very strong. That is in the case of banking and insurance companies. He can adopt the procedure of ledger scrutiny to see the accounts are true and fair.

Techniques of auditing ( continued )

the commonly used technique is recomputation which is often resorted to by the auditor to confirm the genuinity of the transactions. The auditor must also follow the concept of materiality before selecting the technique meant for auditing. Otherwise the technique will not be appropriate under the given situations.

Vouchers

they are of three types Receipt voucher, payment voucher and journal voucher. Receipt voucher is prepared to record all bank and cash receipts. Payment voucher is prepared to record all bank and cash payments Journal voucher is prepared to record all non cash transactions. The voucher should record the amount, narrative record, to enable them to be accurately posted in the computer. Code number should be properly entered otherwise it will be posted to the wrong account.

Auditing in depth.

This involves certain transactions from their origin to their conclusion. Investigating at each stage the records created and their appropriate compliance with the systems. Tracing of transactions from one department to another. For example if a payment to a creditor is to be verified in depth. It will require the examination of the following documents : The invoice and statement of account received from the supplier. The entry in the stock records showing that the goods were physically received. The goods received note and the inspection certificate showing the goods in fact were ordered by an authority which was competent to do so.

Gross profit comparisons.

Comparison of the current year ratio with the previous year to see if there are abnormal fluctuations. It will also show changes in sales prices, raw material prices and lab our cost. Verification and valuation of stock in trade. Correctness of sales and purchases to see if they are recorded properly.

Quantitative reconciliations

Quantitative records regarding sales and purchases should be examined properly . The stock should also be checked in this case. The closing stocks and the opening stocks are very important since they do not appear from the ledger. The quantitative items should appear as a note in the final accounts and should be disclosed in the final accounts.

Checking the capital and revenue

This is important since obviously this will distort the true and fair view. Let us take examples : Legal charges : this may be capitalized in case the same is incurred in connection with an acquisition of fixed asset. For instance legal fees paid for the certificate from the lawyer regarding proper title, etc. in respect of a fixed asset is capitalized. Wages : incase either a new building has been constructed or the existing building has been altered to provide for additional accommodation, wages paid are capitalized. Wages incurred in connection with erection of machines at premises are also capitalized. Major repairs to assets : all expenses relating to the major parts of assets which lead to enhancing the earning capacity of the assets are also capitalized. Repairs undertaken due to breakdown of parts though major should not be capitalized since additional capacity is not created. Interest on capital : interest paid to shareholders under section 208 of the companies act is capitalized in case the completion of the project will take a very long time and is not profitable.

TECHNIQUES AND AUDITING STANDARDS

According to AAS 1, he should rely on the work performed by other auditors provided he has exercised due skill and care and there is nothing to persuade him not to place such reliance. According to AAS 3, the auditor must satisfy himself that the schedules, and other working papers prepared by the client and utilized in the course of the audit have been properly prepared. According to AAS 5, the techniques involved are observation, inspection, inquiry and confirmation, computation and analytical review. According AAS 7, to assess the internal audit function it will be necessary to review accounting systems, examining of operational information, examination of effectiveness of operations, and physical examination and verification.

TECHNIQUES AND AUDITING STANDARDS ( CONTD. )

According to AAS -14, the techniques of auditing are indicated as follows: Comparison of the entitys financial information. Comparable information of the prior periods. Anticipated results like budgets and forecasts. Predictive estimates like depreciation. Ratio analysis like ratio of sales to trade debtors with industry averages, ratio of gross profit , ratio of net profits, etc. Comparison of financial and non financial information like payroll costs to number of employees.

TECHNIQUES AND AUDITING STANDARDS.

According to AAS -18, the auditor should assess the reasonableness of the accounting estimates based on his knowledge of the business. The auditor should consider whether there is any significant and subsequent transactions or events, which affect the data, and the assumptions used for determining the accounting estimate. The auditor should evaluate the accounting estimate as a whole.

TECHNIQUES AND AUDITING STANDARDS.

According to AAS 20, the auditor should employ proper techniques to assess the knowledge of the clients business. For doing this the auditor has to judge the following : General economic factors. The industry Management and ownership Products, markets, suppliers, and expenses. Financial performance like key ratios and trends. Reporting environment Legislations.

TECHNIQUES AND AUDITING STANDARDS.

According to AAS 18 , the auditor must assess the reasonableness of the estimate, and whether it is consistent with other audit evidence obtained during the audit. According AAS 19, the auditor must employ proper techniques for inventory cut off and payments to creditors. The auditor must also review the procedures the company has followed regarding the identification of subsequent events. The auditor must enquire of the entitys lawyers regarding litigation and claims. The auditor must consider whether there is proper accounting of such events in the financial statements.

All about vouching

Vouching means An examination by the auditor Examination of supporting documents. To authenticate the transactions entered into the books of accounts. Importance of vouching Detection of errors and frauds. Reduce the liability of the auditor Moral check on the employees. Back bone of auditing. Compliance with the law. Capital and revenue expenditure. Genuineness of transactions. Nature of transactions. Accounting period. Accounting Easy conduct of the audit.

Importance points to considered while doing vouching

All the vouchers are serially numbered and filed in order of the entries in the accounts. Attention should be paid to the dates which must correspond to the audit period. The auditor should see whether the voucher is in the name of the client. He should see whether the amount written in words and figure is correct. He should ensure whether the account head is properly written or not. He should also see that expenditure is reasonable or not. He should see that the expenditure is for the cause of the business. In case the expenditures exceeds Rs.5,000 the auditor should ensure whether the revenue stamp is affixed on the voucher or not. The auditor should see that the voucher is properly accounted for in the books. He should see that the voucher is signed by the recipient of the amount.

BALANCE SHEET AUDIT.

This is a technique of only checking assets and liabilities of the company. The other items like transaction vouchers , subsidiary ledgers are not given much importance. This is used in companies which have very good internal control. The examples of such companies are banking companies, insurance companies , etc.