Introduction to Audit Procedures

Introduction to Audit Procedures

If you are running a business, you probably have heard of the word “audit”, and you may wonder how the audit firms in Johor work. When the auditors are performing audits, they need something called the audit procedures. Audit procedures are the methods, technique, as well as the processes which auditors conduct to acquire audit evidence that allows them to draw a conclusion on the fixed audit objective as well as show their point of view (Also see Audit Procedures – Its Methods, Benefits and Restrictions).

Typically, the preparation of audit procedures starts at the planning stages as soon as the auditors have determined the audit scope, audit objectives, audit approach, as well as audit risks.

Auditors plan for audit procedures so that they can detect all the risks they have determined and make sure that they have acquired the necessary audit evidence sufficiently and adequately.

Usually, before the audit team starts conducting the testing, audit partners have to permit the audit procedures and audit plan. This is to ensure that all the risks or concerns have been addressed in the procedures.

Audit procedures may vary from customer to customer, as well as from period to period. The reason for such a situation to occur is because each client may keep different level of bookkeeping quality (Also see Practices That You Should Avoid in Bookkeeping) and have different internal control over financial reporting, and the control may change occasionally.

The auditor may require to keep their audit procedures updated from now and then even though its team or firm has audited current financial statements.

Typically, the auditors will use five common audit procedures to acquire audit evidence as follows:

1) Analytical Review:

The auditors will not use the analytical review to obtain audit evidence. However, they will use it to determine the uncommon events or transactions as the basis to conduct other procedures.

As an example, when an auditor discovered that there is an unusual event or transaction by implementing an analytical review, he will use any other procedures which he can apply to get the evidence.

The auditors may use the analytical procedure for the events or transactions which happens regularly or possess a relationship with other events or transactions.

As an instance, an auditor may use the analytical procedure to examine the reasonableness of the depreciation an organisation has recorded in its financial statements. The primary factor is that one can calculate the expenses for depreciation regularly and systematically.

2) Inquiry:

To collect information and get explanations on the issues that the auditors have found, they may ask the relevant management as well as the accountants. 

Occasionally, the auditors will ask the management about the operations of their business as well as how they are recording the financial transactions. The auditors may also ask about the major control on the firm’s business transactions.

The auditors may use audit inquiry sometimes to gain a better understanding of the nature of some business or accounting transactions so that he has sufficient knowledge to plan for and carry out testing. Nevertheless, it can be hard for the information one has obtained from the inquiry to become audit evidence.

3) Observation:

Observation is among the audit procedures that the auditors would use to acquire an understanding as well as collect audit evidence mostly to the real process or the methods that the customers use in getting certain business processes done.

The objective of carrying out this audit procedure is to validate the process which the customer has described or to carry out physical verification. Sometimes, the auditors do this to acquire audit evidence to make their own estimation that they will use it to compare with the figure that their customer has provided. 

For instance, an auditor participates in the customer’s stock-taking process as well as monitors whether they have used the correct procedures in counting.

In this procedure, the audit is not to confirm whether the customer has counted their inventories correctly. Instead, this is to make sure that the client is using the correct counting procedure.

Sometimes auditors use observation to test whether the revenue of their client is reasonable. For instance, an auditor carries out the reasonableness testing on the revenue that a restaurant has recorded. According to the accounting record fact check and their understanding, it seems that the recorded revenue is not reasonable.

In such a situation, the auditor may have to observe the restaurant for one to two weeks before estimating whether its revenue is reasonable.

4) Inspection:

Inspection stands for the process of vouching or verifying documents. This is among the most significant procedure, and it may involve over half of the audit tasks.

As an instance, an auditor checks the sales invoices that a company has properly recorded in its financial reports. For illustration, whether the double entries (Also see Advantages of double entry accounting) for a transaction were correctly posted into the relevant accounts.

The auditor may inspect whether the invoice the clients have issued is according to what they have received, as well as the goods that they have obtained is the one they have ordered.

Also, the auditor may inspect the payment vouchers against the authority which approves them.

Besides, the auditor may examine the supporting documents that record the movement of inventory throughout the year. This includes documents that are related to the purchase of raw material.

5) Recalculation:

Recalculation is an audit procedure where an auditor will reperform the works that the client has completed. This is to examine if there is any dissimilarity between the work the auditor has done and the client’s work. The purpose of this process is to examine whether the transaction which involves calculation is accurate or not.

As an instance, the auditor may reperform the calculation of depreciation and check if there is any difference between the calculation done by the auditor and its client.

The auditor could also recalculate the monthly salary expenses that the finance and payroll department has prepared to make sure that the company is paying its employees the right net salaries.