Audit Procedure for Provision: Procedures, Risks, and More

What is an audit procedure?

Audit procedures also referred to as audit programs involve the procedures, methods, and strategies that auditors implement in order to achieve audit confirmation. It assists them to deduce if the audit objective was fulfilled according to the given data. 

Auditing is carried out in three steps:

Step 1 – Recognize the statement claim being tested

Audit procedures are carried out in order to test financial statement claims. Hence, the initial step in the auditing procedure is to recognize the statement claim that would be tested.

Step 2: Planning the audit procedure

Planning the audit procedure before performed helps avoid any risks.

Step 3: Important aspects to consider while finalizing the audit procedure

  • Be Clear – Every step performed should be clear so that a junior auditor can also benefit and be able to comprehend the audit process.
  • Provide Reasoning – Along with the procedure, there should be solid reasoning of the chosen audit procedure. It assures the that the entity has gained goods from an approved purchase order.
  • Practice audit terminology – The terms associated in the audit language can be used like ‘trace’, ‘cast’, ‘agree’, etc.

What is provision?

A provision is a control against profit and it is not an assumption of profit. It is debited to profit and loss. In order to meet a liability, a provision is made. It’s known but the amount of it cannot be precisely calculated. One of the best examples of this can be provided for depreciation.

To calculate the real profit and loss, it is required to make provisions. All the provisions are debited to the profit and loss account regardless of the amount of profit or loss. If the amount or the payment timing is undefined then the provisions come under the form of payable, which is harder to audit. In such cases, the auditor needs to:

  • Verify with a discussion with the client whether the obligation truly occurs giving rise to the provision. 
  • Attain approval of the clients’ lawyers to reach the possible consequence and chances of doing payment eventually.
  • Examine following procedures so the issues settle while the audit is taking place.
  • Get a letter of representation from the client, as the matter is centered around decision and doubt
  • Recalculate the provision if possible, e.g. assurance of repairs provisions.
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Examples of provisions include:

  • Provision for corrupt and uncertain debts
  • Provision for income tax
  • Provision for conditional liability
  • Provision for unpaid liabilities, etc.

Audit procedure for provision

Auditors should get adequate audit data to determine whether an accounting estimation is valid and that release is suitable. In order to fulfill the task they should follow these steps:

  1. Assess and evaluate the procedure taken by management to progress the estimation
  2. Check the agreements or guidelines for the terms of the contract to achieve a satisfactory responsibility
  3. Analyze messages with clients during the time period to achieve an understanding of the statements previously evolved during the year
  4. Execute reasoned trials to associate the level of contract provision year on year, and equate the budgeted to real provisions
  5. Re-evaluate the warranty provision
  6. Approve the percentage functional in the calculation to the indicated accounting plan of the client
  7. Appraise board minutes to discuss the current warranty assertions, and get the endorsement of the amount delivered

Responsibilities of the auditor during the audit procedure of provisions

It is the responsibility of an auditor to make sure that all the provisions are completed during the year with caution. The following is the significant part of auditors that they perform during verifying provisions:

  • Confirm that provisions are performed with respect to all obligations and contingencies.
  • Make sure that the sum provided is acceptable.
  • Inspect the minutes of the meeting of the panel of executives and the requirements of Articles of Association concerning the provisions to be prepared.
  • Certify that all provisions are performed in consideration to debiting the profit and loss account.
  • Certify that the provisions are consumed only for the aim of which they are produced.
  • Ensure that the financial statements have all the appropriate  provisions
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A company reaches profit only after making essential provisions. If the provisions are insufficient, the profit may be exaggerated and thus surplus may be paid out of capital. On the other hand, if additional provisions are made, the account may not demonstrate the actual and reasonable condition of the dealings of the business.