Practical approach to auditing v2
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The document outlines a practical approach to auditing, covering topics such as historical perspectives, definitions, objectives, and attributes of auditors, as well as the audit process, planning, and reporting. It emphasizes the importance of effective audit tests and procedures to ensure accurate assessments and recommendations. Additionally, it discusses the significance of maintaining thorough audit documentation and working papers throughout the audit cycle.
Practical approach to auditing v2
- 2. Outline • Historical Perspective • Definitions of Audit • Objectives of an Audit • Attributes of an Auditor • Audit Process Cycle • Audit Planning • Audit Test/Procedures • Audit Working Papers • Reporting the Result of an Audit • Conclusion • Interactive Sessions 2
- 3. Objective of the presentation • Demonstrate the practical approach to auditing. • Reinforce the attributes that make practitioners effective auditors. • Explain the approach to gathering evidence through audit tests and procedures. • Explain how to develop and maintain a file for the audit working papers. • Explain how to prepare an audit report from the available working papers suitable for presentation. • Challenge practitioners to adopt innovative approach to audit engagements.
- 4. Historical Perspective The term audit was derived from the latin word “audire” - which means to hear. Audit grew after the industrial revolution in the 18th century. The growth of the joint stock company saw the separation of ownership from management. (Agency Relationships). Business owners needed an independent report from an expert on the accounts being managed by the Directors who were employed to run the business. Audit as a profession grew rapidly and now governed by standards and made compulsory in some jurisdiction.
- 5. Definitions of Audit Auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions in which they relate - Prof. L.R. Dicksee Auditing is an objective assessment of evidence for the purpose of providing an independent opinion or conclusion regarding a subject matter. Audit can also be defined as an examination and verification of accounting records and the supporting documents with a view to rendering an independent and objective opinion.
- 6. Objectives of an Audit The objective of an audit is to render an independent and objective assurance on a subject matter. • The objective of the audit of financial statement is to obtain a reasonable assurance whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, to enable the auditor express an opinion on whether the financial statements are presented fairly in all material respects in accordance with applicable financial reporting framework. (Recall True and Fair View concept). • The objective of audit of internal operation is to assess the adequacy of the design and effectiveness of the system of internal controls established to mitigate risks and achieve organisational objectives.
- 7. Key Attributes of an Auditor Attributes Description Integrity Sincerity, trustworthy, independence, objective and unbiased approach to issues. Inquisitiveness Probe beyond the ordinary. Incisive mindset, level of scepticism. The 5Ws. Persuasiveness Ability to persuade clients beyond resistance to accept recommendations. Analytical/Communi cation Analytical mindset, effective oral, written and visual communication skills. Interpersonal Relationships Strike favorables relationships with clients. Applying diplomacy and civility to issues. Team Work Accommodating, corroboration, shared working relationships, trust and openness. Execellence Thirst for knowledge, desire to excel, certifications in audit and IT fields, etc..
- 9. Audit Planning - APM Auditors shall establish an overall audit strategy for the scope, timing and direction of the audit to guide the audit plan. The RAMP or ORC concepts can be used to develop the Audit Planning Memo RAMP ORC Risk Objective Approach Risk Materiality Controls Procedures
- 10. Audit Planning - AWP Audit Work Program can be referred to as an Audit Work Break Down Structure. It extended from the audit planning memo to set out how the audit would be executed. Audit program is a detailed plan of action, indicating the work to be done, the procedures to adopt in obtaining evidence for the subject matter in line with the audit objectives. Contents of an Audit Work Program: • Audit Area • Audit Objectives • Inherent Risk • Existing Controls • Test Procedures • Result of Audit Tests
- 11. Audit Tests/Procedures IAS 8 requires auditor to obtain sufficient and appropriate audit evidence through compliance and substantive procedures to enable the formulation of an audit opinion. Audit evidence typically refers to the source documents and related corroborating information from other sources. Approach Description Observation Seeing real live action or procedures. Inquiry Seeking information from varied sources. Inspection Examination of records or tangible items. Confirmation Independent verification from third parties. Re-computation Checking the arithmetic accuracy. Analytical Procedures Examine the cause and effect relationships between class of accounts.
- 12. Overview of Audit Tests
- 13. Audit Test procedures - Compliance Test Compliance test is a test of adherence to stated criteria. It is referred to as the test of controls. It is intended to render assurance about the adequacy of internal controls to ascertain the level of reliance and extent of substantive tests to deploy. The following can be used for the test of controls: • Observation • Inquiry • Inspection • Confirmations • Computations
- 14. Audit Test procedures - Substantive Test Substantive test is a test of the details of a transactions at the level of assertions or class of accounts. For assertions at transactions level, auditors ascertain: Occurence Completeness Accuracy Authorisation Classification Cut off For assertions at Account balance, auditors ascertain: Existence Rights and Obligations Value/Allocations Completeness
- 15. Substantive Test - Vouching Vs Tracing
- 16. Audit Test/Procedures - Audit Journal Research showed that fraudulent financial reporting involves recording of fraudulent journal entries. Auditors are expected to design test procedures to test the appropriateness of the journal entries recorded in the general ledger and other adjustments posted directly to financial statements. Violation of the required journal entries may lead to: • Unauthorised postings • Over-ride of controls • Exceeding expenditure limits • End period manipulation of adjustments
- 17. Audit Test/Procedures - Audit Journal (The 5Ws) Audit test over journal entries start with the following movements: Transaction>>Journal>>Ledger>>Financial Statements The industry approach to testing journal entries is the 5Ws: 1. WHAT transactions was entered 2. WHO entered the transactions 3. WHEN was the transactions entered 4. WHERE was the transactions entered 5. WHY was the transactions entered The objective of the test is to ensure only authorised entries are made to the ledgers and that the financial statements does not concede fraudulent transactions.
- 18. Other Audit Test Procedures Test Procedures Description Circularisation Inquiry from third parties of the validity of account balances and assertions. Walk Through Approach from inception to termination to understand processes and controls. Stock Count Verification of the quantity and value of stock in the book against the floor. Fixed Asset Verification Verification of the existence, condition and location of assets. (‘CAVEBOP’)
- 19. Audit approach - incomplete records The following may be adopted in situations where records are incomplete or destroyed. • Interview management and understand the reasons why the records are incomplete, destroyed or non- existent • Obtain representation from management that the documents are not available, incomplete or destroyed. • State the condition as a limitation of scope in the audit report. • Qualify the audit report by stating that the original documents were not available. hence the audit was based on the financial statements prepared from the reconstructed accounts presented by management.
- 20. Audit approach - incomplete records cont.. The auditor should work with the management team and advice on the following: • Draw up the opening entries for the balance sheet. • Prepare summary cash and bank balances. • Prepare schedule of debtors and creditors. • Ascertain the quantity and value of inventory. • Ascertain the make provisions and transfers. • Seek other corroborating information from others • Prepare the reconstructed financial statements from the information enumerated above.
- 21. Audit Documentation/Working Papers Audit work papers are the foundation of the audit engagement and evidence obtained. It includes appropriate documentation across the cycle of a typical audit process. Significant findings, logical analysis and solid conclusions could be rendered useless in the absence of adequate working papers. The audit working paper should contain sufficient information and documents to enable an experienced auditor having no previous connection the the audit reach the same conclusion. Audit work papers should be reviewed, properly kept, cross referenced and safe guarded.
- 22. Audit Working Papers - Types and Features The documentation for an audit is done through a permanent (PAF) and current (CAF) audit files. The working papers should have the following features: Complete and Accurate Clear and Understandable Relevant to the subject matter Legible and neat Indexed and cross referenced Key legends and Tick marks
- 23. Audit Working Papers - File Structure Audit working papers should at a minimum contain: Ref: File Section Description A. Reports Contains final report, draft report, preliminary observation sheets.. B. Reviews Contains check list, sampling sheet, test procedures, review sheets.. C. Adminstration Contain records of correspondence, letters, team structure, resources.. D. General Audit Supervision sheet, records of meetings with the clients.. E. Audit Plan/Programs Audit planning sheets, notification memo, audit work programs..
- 24. Reporting the result of an audit Auditors are expected to communicate the results of an audit engagement to senior management and the board. The result of an audit engagement could be obtained from the following documents: • Audit Work Program • Audit Work Evaluation Sheet • Preliminary Observation Sheet • Debrief Records
- 25. Reporting the result of an audit - Writing the Report The draft/final audit report should be written in reference to the available working papers and management response. At a minimum it should contain: • Executive Summary • Findings and Recommendation • Action Timeline and responsible personnel An effective audit report can be written following the “OC3ER” concepts: • Objective • Criteria • Condition • Cause • Effects • Recommendation
- 26. Conclusion Audit has evolved over the years and now governed by standards, and also a regulatory requirements in most countries. Auditors with the right attributes are better positioned to conduct a successful audit engagement. Auditors should adopt relevant tests procedures to obtain appropriate and sufficient evidence to render a reasonable and independent opinion on the subject matter examined by them.