Auditing Techniques

7/28/2019 Auditing Techniques

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Auditing is the systematic examinationand verification of a firms books of

accounts, transaction records, otherrelevant documents and physicalinspection of inventory by qualifiedaccountants (called Auditors)


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To express an expert and independentopinion on the truth and fairness of the

financial statements; and

To ascertain and evaluate the reliability

of the accounting systems


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Financial Auditthe examination of a clientsaccounting records by an independentauditor to formulate an audit opinion.

Internal Auditinvestigation of the Creditunion procedures and operations by anInternal Auditor to assure that they conform toCredit unions policies

Management Auditevaluation of

managements effectiveness Compliance Auditascertains compliance to

the laws, regulations and policies of theorganization


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Audit Cycleperiod of time in which theAuditor conducts audit procedures.

Audit GuideA booklet that deals withthe accounting practices in differentindustries

Audit Evidenceproof that the Auditoruses to substantiate a recorded item soproper reliance may be placed on theFinancial Statements


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Audit Proceduresthe techniques ingathering audit evidence to substantiate

the reliability of accounting records. Audit Processthe sequential steps

followed by the Auditor in theexamination of the clients records.

Auditing Standardsguideline theAuditors follow when examining thefinancial statements and other data


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Audit Opinionthe report rendered by theindependent Auditor. The Auditor reportson the nature of his work, the degree of his

responsibilities and his opinion of thefinancial statements.

Audit Opinions may be: qualified,unqualified, adverse or disclaimer ofopinion.

Audit Riskpossibility that the Auditor willnot uncover irregularities in the financialrecords resulting from fraud, negligence orother reasons


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Audit Testprocedures applied to a sample

within a population. E.g sending out 75%

confirmation for Accounts receivable.

Audit Trail - recorded flow of a transaction

from initiation (source document) to

finalization (financial statements)

Working papersdocument prepared orobtained by the Auditor in performing an

examination of the financial records.


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Unqualified Opinionauditors judgment that he has noreservations as to the fairness of presentation of thefinancial statements and their conformity to acceptableaccounting standards.

Qualified Opinionjudgment by the Auditor that exceptfor something, the financial statements fairly present thefinancial position and operating results of the organization.

Adverse Opinionthe Auditor reports that the financialstatements do not present fairly the financial position,results of operations and changes in financial position or

do not conform to accounting standards. Disclaimer of opinionrendered by the Auditor when

insufficient evidential matters exist to form an auditopinion. E.g. where the Auditor cannot reasonably predictthe ultimate outcome of uncertainties (lawsuits) that canhave devastating effects on the organization


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Audit Phase Documentation

Planning Phase Audit Planning File

Execution Phase Audit Execution File

Completion Phase Completion & Reporting File


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Auditing standards require that the Auditorplan his work so that the audit is performedin an effective manner.

Efficient planning helps to ensure thatappropriate attention is devoted to theimportant areas of the audit, potentialproblems are identified and the work is

completed expeditiously. The extent of planning will vary according

to the size and complexity of theorganization


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Developing an overall Audit Plan

Detailed Audit Planning leading to

development of an Audit Program Documentation in the form of an Audit

Planning File

Audit administration and other matters


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This is a summarized strategy for the auditengagement which primarily consist ofstrategy decision of expected scopeand conduct of the audit based on:

- managements structure andphilosophy

- accounting and internal controlsystems

- audit risk and materiality and

- the audit administration


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Development of an Audit Program for eachcomponent of the financial statements (assets,liabilities)

Audit programs need to be reviewed to ensurethey lead to obtaining sufficient andappropriate audit evidence

An important area of detailed planning is thestudy and understanding of the internal control

systems and whether they can be relied upon. Document the overall audit plan, program,

time budget, planning checklist as part of thedocumentation of this phase of the audit


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Internal Control Systemsthe policies andprocedures adopted by management ofan entity to assist in achieving mgts

objectives ensuring as far as practicable,the orderly and efficient conduct of itsbusiness, including adherence to mgtspolicies, the safeguarding of assets, theprevention and detection of fraud and

errors, the accuracy and completeness ofthe accounting records and timelypreparation of reliable financialinformation.


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The IC System comprises two main areas: The Control Environment

The Control Procedures The Control Environmentthe overall attitude,

awareness and actions of directors andmanagement regarding the internal control systemsand its importance in the entity.- the functions of the BOD and its committees- Mgts philosophy and operating style

- the organizations structure and methods ofassigning authority and responsibility- mgts control system including the internal auditfunctions, personnel policies and procedures andsegregation of duties


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Those policies and procedures in addition to thecontrol environment which mgt has established toachieve the entitys specific objectives.- reporting, reviewing and approving reconciliations

- checking the arithmetical accuracy of records- monitoring and reviewing control accounts andtrial balance- comparing internal data with external sources- approving and controlling of documents- comparing the results of cash, security andinventory counts with records- comparing and analyzing the actual with thebudgeted


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Recent statement of financial condition and income statement.

Recent Regulatory Authoritys Inspection Report.

Credit union rules.

Credit union policies and procedures.

Board meeting minutes. Roster of employees and officials.

Last years internal audit reports and working papers.

Last years external audit reports and management letters.

Surety bond company risk management audit report. Loan, cash, investment, deposits and share internal control

check lists. Agreement signed with the external auditor. Agreement signed with the independent compensated internal

auditor (where applicable).


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To do so the Auditor would perform a walk-through testtracing transactions through theaccounting system in order to understand theIC system.- inquiring from mgt with reference todocumentation such as procedures manual,job descriptions etc- inspection of records and reports produced

by the accounting and IC systems- observations of the credit unions activitiesand operations- computation of work already done to test itsaccuracy


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Preventive Detective

Preventive Controlsattempt to deter or preventundesirable events from happening. They areproactive controls to prevent losses. E.g. segregationof duties, proper authorization, adequatedocumentation and physical control over assets.

Detective Controlsattempt to detect undesirableacts. They provide evidence that a loss has occurredbut do not prevent such loss. E.g. reviews, bankreconciliations


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Detective Preventive

Bank Reconciliation Approval

Review of Performance Verification

Security of Assets Security of AssetsControl over information systems Control over information systems

Authorization

Segregation of duties


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Completeness

Occurrence

Measurement

Presentation and Disclosure Aggregate carrying value

Rights and Obligations

Existence

CAPERassets and liabilities

COMPevents and transactions


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Completenessthere are no unrecorded assets andliabilities

Occurrenceall disclosed transactions & events did infact occur and relate to the entity during the related

period. Measurementaccuracy, cut-off and classification Presentation & Disclosureall items are disclosed,

classified and described in accordance with theapplicable accounting framework.

Appropriate carrying valuerecording assets and

liabilities at the correct value and the correct treatment ofall subsequent measurementsdepreciation, impairmentsetc.

Rights and Obligationsan asset or liability relates to thecredit union at a given date

Existencean asset or liability truly exist at the stated date


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Inspection

Observation

Inquiry (or Enquiry) Confirmation

Recalculations

Re-performance Analytical procedures


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CompletenessAll assets are recorded onthe Balance Sheet.

Aggregate carrying valuevalues are

accurate. Presentation & Disclosureall assets are

categorized correctly and in the correctperiod

Existenceall assets on the Balance Sheetdo exist and belongs to the credit union

Rights and obligationsthe credit union hasall rights to the use of the assets


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CompletenessAll liabilities are recordedon the Balance Sheet.

Aggregate carrying valuevalues are

accurate. Presentation & Disclosureall liabilities are

categorized correctly and in the correctperiod

Existenceall liabilities on the BalanceSheet do exist and were made by thecredit union

Rights and obligationsthe credit union isobligated to discharge those liabilities


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Completenessall expenses areaccounted for and recorded in the creditunions books for the appropriate period

Occurrencethe expenses are genuineand not fictitious

Measurementaccurate cut-off was usedfor all expenses

Presentation and Disclosureexpenses aredisclosed, classified correctlycapital andrevenue expenditure.


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Have a list of all employees and their grosssalary

Ensure there are no fictitious employees are on

the payroll Calculate the NIS and tax payments Confirm all deductions to hire purchase houses,

insurances etc Ensure all deductions have the written authority

of the employees Check changes in payroll deductions Is there a Salary Control Account that ensure

that all salaries and deductions are paid


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Check Investment listing to ensure allincome due from investments are

included Check the source documents to verify

that all passbooks sold, statements givenetc. are accounted for

Verify all Other Income


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Has a Strategic Plan

Has a Budget approved by the AGM

Has Policies and Procedures in key areasof operations

Hires qualified staff using scientific

methods Discusses financial statements at

meetings and use them to makedecisions


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Documents

Auditing Techniques