Definition:

Audit procedures are the processes, techniques, and methods that auditors perform to obtain audit evidence, enabling them to conclude 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 identified and ensure that the required audit evidence is obtained sufficiently and appropriately.

Normally, audit partners need to approve audit plans and audit procedures before the audit team performs 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 even though its firm or team had audited current financial statements.

Typically, five types of audit procedures 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. Still, the procedure is 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, the auditor will use other applicable procedures to obtain evidence.

The analytical procedure could be used for the types of transactions or events that occur regularly or connect 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 about an accountant and related management to gather information and explain the matter found by auditors.

Sometimes auditors inquire about the business process and how financial transactions are recording and 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 about management at the planning stage. 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 understand some nature of business or accounting transactions to gain enough knowledge to design and perform testing.

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

The audit evidence 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  How Do I Audit PCI DSS? (Assessment, Procedure and Reporting)

3) Observation:

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

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

For example, an auditor joins client stock take at the year-end and observes 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 correctly 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 not only observes how the client counts but also jointly performs counting inventories.

Sometimes auditors using observation are not only for observing in counting fixed assets or inventories but also for testing 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 60% of audit work involves 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 received. 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 normally done by re-performing the works performed by the client to assess if there is 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 prepare by the payroll and finance department to ensure that the net salaries 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 are normally designed to confirm the financial assertion of transactions or events in the financial statements.

Related article  Physical verification of fixed assets and inventories

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

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

Understand financial statement assertion could help the auditor tailor actionable and effective audit procedures and help 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 business-related purposes 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 helps 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 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 concerns the existence of assets account. For example, the PPE 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 concerns the right and obligation of assets and liabilities that report in the financial statements. For example, the entity has the legal and economically right to use the assets that it recognizes 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 concerns the valuation of assets or liabilities that are being recorded 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 business-related purposes 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 helps management to assure that financial statements completely captured all of the transactions.
  • Classification: Accounting items are correctly classified, accounting for 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  [Update 2017] Summary of ISA 720: The Auditor's Responsibilities Relating to Other Information

How to design the audit procedure?

Audit procedures normally design by auditors based on the characteristic of target transactions or event’s risks associated 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 help the auditor perform their work more effectively and contribute to the auditor in minimizing audit risks (detection risk).

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

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

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

For example, the auditor might things the inventories that are 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.

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 and internal control over financial reporting.

The auditor’s understanding of the client’s internal control over financial reporting or the information they obtained at the time of planning might not be corrected and 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 are 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, and conclusion also need to be approved by audit partners.