Definition:

Audit procedures are the processes, techniques, and methods that auditors perform to obtain audit evidence which enables them to make a conclusion on the set audit objective and express their opinion. Sometimes we call audit procedures audit programs.

These two terms are referring to the same thing.

Auditors normally prepare audit procedures at the planning stages once they identified audit objectives, audit scope, audit approach, and audit risks.

Auditors design audit procedures to detect all kinds of risks that they identified and ensuring that the required audit evidence is obtained sufficiently and appropriately.

Normally, audit partners need to approve on audit plan and audit procedures before the audit team could perform their testing. This is to make sure that all concerns or risks are address in the procedures.

Audit procedures might be different from client to client, and period to period. This is because internal control over financial reporting is different from one client to another and the control might be change from time to time.

The auditor might need to update audit procedures from time to time event thought current financial statements had been audited by its firm or team.

Typically, there are five audit procedures that normally use by auditors to obtain audit evidence. Those five audit procedures include Analytical review, inquiry, observation, inspection, and recalculation.

List of Five Types of Procedures:

1) Analytical Review:

Analytical review is not the procedure that uses to obtain audit evidence, but it is the procedure used to assess the unusual transactions or events as the principle or basic to perform other procedures.

For example, when auditor found there is unusual transactions or event as the result of using analytical review, then the auditor will use other procedures that are applicable to obtain evidence.

The analytical procedure could be used for the types of transactions or events that occur regularly or have a connection with others’ transactions or events.

For example, we can use the analytical procedure to assess the reasonableness of depreciation that records in the financial statements. The main reason is that depreciation expenses are calculated systematically and occur regularly.

2) Inquiry:

Auditors inquire accountant and related management to gather information and obtain an explanation on the mater that found by auditors.

Sometimes auditors inquire about management about the business process and the ways how financial transactions are recording as well as the major control on business transactions.

The inquiry is also one of the most important audit procedures and it could be used in different stages.

For example, the auditor might inquire management at the planning stage and the auditor could also inquire management to confirm the consignment liabilities at the end of the audit work.

Audit inquiry is sometimes used by the auditor to obtain the audit evidence and sometimes is used to obtain an understanding of some nature of business or accounting transactions in order to gain enough knowledge to design and perform testing.

However, information from inquiry sometimes hard to be used as audit evidence.

The audit evidence that you found as the result of your testing after an inquiry is strong to be used as audit evidence rather than information from the inquiry itself.

Related article  Advantages and Disadvantages of Statutory Audit

3) Observation:

Observation is one of the audit procedures that auditors use to obtain an understanding and gather audit evidence mainly to the real process or the ways how clients have done some specific business process.

This kind of audit procedure is mainly to confirm the process that the client told, physical confirmation, or some time used to obtain audit evidence in order to make their own projection which will be used for comparison with the client figure.

For example, auditor joins client stock take at the year-end and observe whether the way that they count are in the correct procedures or not.

In this procedure, the audit is not confirmed whether the client counts their inventories correct or not, but it confirms whether the client counting procedure is correct or not is one thing.

Another thing is the auditor tries to confirm whether the counting has really existed.

However, in practice, sometimes the auditor is not only observed how the client counts but they also jointly perform counting inventories.

Sometimes auditors using observation are not only for observing in counting fixed assets or inventories but also using to test the reasonableness of revenue. Here is how,

For example, the auditor performs the reasonableness testing of revenue recording in the restaurant, and based on the accounting record fact check with their understanding, the revenue seems not completely records.

In this case, the auditor might perform one week or two weeks observe in the restaurant and then make their own estimate of whether or not the revenue is reasonable.

4) Inspection:

Inspection refers to verification or vouching documents. This is one of the most important and it can be 60% of audit work involve with the inspection of documents.

For example, the auditor examines the sales invoices that record in financial reports.

The auditor might examine whether the invoice issued by the client is really based on the goods that receive. And the goods that received is actually the one the company makes an order.

The auditor might also examine the payment voucher against the authority that approves the payment vouchers.

The auditor might also inspect the supporting documents recording the inventory’s movement during the year. This is including the documents related to purchasing raw material.

5) Recalculation:

Recalculation is the type of audit procedure that normally done by re-performing the works performed by the client in the purpose of assessing if there any difference between the audit’s work and the client’s work.

For example, the auditor might re-perform depreciation calculation and assess if there any difference between auditor calculation and its client’s calculation.

The auditor might also perform the recalculation on monthly salary expenses that prepare by the payroll and finance department to ensure that the net salaries that paid to the employee are correct.

Recalculation is the procedure that use to confirm the accuracy of transaction that involves calculation.

Financial Assertion and Audit Procedures:

Audit procedures above normally designed to confirm the financial assertion of transactions or events in the financial statements.

For example, the auditor may test the occurrence of sales revenues that records in the income statement for the period. This test is to confirm whether those transactions have really occurred or not.

Related article  What are the auditor's liabilities?

The auditor might also test whether the sales revenues that recording is completely records or not by testing the completeness.

Understand financial statements assertion could help the auditor to not only tailor actionable and effective audit procedures but also help to perform their testing more efficiently.

This will also help them to redesign audit procedures when the existing procedures are not practical.

The following is the list of the financial assertions that auditors normally test:

Transactions and events: ( in P&L)

  • Occurrence: The transactions that record in the P&L have actually occurred and for the business-related purpose only. The transactions that have not occurred but records should be adjusted out or remove.
  • Completeness: Any transactions that occurred during the period are completely recorded. If it is occurred but has not been recorded should be records or adjusted. This assertion help management to assure that financial statements completely captured all of the transactions.
  • Accuracy: This assertion concern the correctness of the amount or value of transactions or event that occurred and records in the financial statements. For example, the rental expenses amount $10,000 should accurately record as it is, $10,000>
  • Cutoff: The transactions and events should be records in the financial statements of an entity in the period that it occurs. For example, sales transactions that happen in 2020 should be recorded in 2020. They should not be recorded in 2019 or 2021.
  • Classification: Classify the transactions or event in each element correctly are really important because its help entity to avoid the overstatement of any class or element of accounts. For example, inventories should be classed as current assets and they are classified as expenses only if they are sold or used.

Account balances (BS items)

  • Existence: It is concerning the existence of assets account. For example, the PPE that being recorded in the entity’s financial statements as of 31 December 2020 really exists. The same as other assets accounts like cash or cash equivalent, inventories, and trade receivables.
  • Rights and obligations: It is concerning the right and obligation of assets and liabilities that reporting in the financial statements. For example, the entity has the legal and economically right to use the assets that it is recognizing in the financial statements.
  • Completeness: Any transactions that occurred during the period are completely recorded. If it is occurred but has not been recorded should be records or adjusted.
  • Valuation and allocation: It is concerning the valuation of assets or liabilities that being records in the financial statements. For example, the valuation gross or net of inventories.

Presentation and disclosure

  • Occurrence: The transactions that record in the P&L have actually occurred and for the business-related purpose only. The transactions that have not occurred but records should be adjusted out or remove.
  • Rights and obligations
  • Completeness: Any transactions that occurred during the period are completely recorded. If it is occurred but has not been recorded should be records or adjusted. This assertion help management to assure that financial statements completely captured all of the transactions
  • Classification: Accounting items are correctly classified accounting to their nature.
  • Understand-ability: Financial statements should be prepared in a form that lets their users understand the nature of accounts balance or transactions. The nature of the transaction should sufficiently be disclosed.
  • Accuracy and valuation: This assertion concern the correctness of the amount or value of transactions or event that occurred and records in the financial statements.
Related article  What does sufficient and appropriate audit evidence mean?

How to design the audit procedure?

Audit procedure normally design by auditors based on the characteristic of target transactions or event’s risks that associate with and the approach that auditor responds to those risks.

Risk assessment contributes significantly to auditors to design the right audit procedures.

Right audit procedures do not only help the auditor to perform their work more effectively but also contribute to the auditor in minimizing audit risks (detection risk).

When designing the audit procedure, the auditor must make sure that all of that procedure contain and address three important things.

  • The assertion that auditor want to confirm
  • Procedure to test that assertion
  • Reason to perform the procedure

After performing a risk assessment, the auditor will be identified that risks that they think might happen to financial statements.

For example, the auditor might things the inventories that reporting in the financial statement might not exist. In this case, existence is the assertion that the auditor wants to test.

Therefore, inventories observation is the procedure that should be included in the inventories’ audit procedure.

The way how to perform, the number of inventories to be observed needs to be stated clearly to make sure that the auditor in charge of this cycle could understand.

Can audit procedures be revised during the substantive testing?

Audit procedures are initially prepared at the planning stage based on the risks assessed according to the internal controls environment as well as internal control over financial reporting.

The auditor’s understanding of the client internal control over financial reporting or the information that they obtained at the time of planning might not be corrected as well as insufficient.

Therefore, if during the substantive testing, the auditor notes that the audit procedures are not addressing the possible risks of the procedures are not sufficient to address the risks, then auditor procedures could be revised. The revision might need to get approval from the audit partner.

Auditors can also assess if the procedures that perform in the substantive testing is correct or sufficient or not while they are in the conclusion stage.

If the procedures are not sufficient or incorrect, then the procedures are needed to be revised and then additional works are needed to be done.

Before the execution of audit procedures, auditors need to get those procedures approved by audit partners first. The revision of audit procedures in all stages: planning, substantive as well as conclusion are also need to be approved by audit partners.