Practical approach to auditing is a presentation intended to help new auditors to quickly grab the skills and approach to audit engagements. The material touched on the attributes of auditors, audit planning, work programmes, audit journaling, working papers, audit test procedures, compliance and substantive test, elements of an audit report, file referencing etc..
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
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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.
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
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.