Over the course of time, there has been an increasing
pressure on organizations to ensure that they are able to operate in a fair
manner, in order to keep the interests of all the stakeholders intact.
Therefore, they are required to hire a group of independent auditors, that can report on various functions within the firm.
These auditors are selected by the shareholders and have the immense responsibility to ensure that they succumb to their duties and responsibilities in a free and fair manner.
There are a number of responsibilities that auditors have, which they have to bear in mind during their engagement with a certain client. These responsibilities are mentioned below.
Responsibilities of an Independent Auditor:
- Firstly, it can be seen that it is fundamentally important for auditors to ensure that they are satisfied with the overall level of compliance with established internal control procedures. In order to do this, they are supposed to examine records, reports, and any other relevant documentation that can help them to reach a certain conclusion.
- Secondly, they are also responsible to verify assets and liabilities by comparing them with the relevant documentation. This is an important part to ensure that neither the assets nor liabilities have been overstated.
- They should also complete audit work papers after properly documenting audit tests and findings. This can be for future reference purposes, or to back up claims that they put forth in the audit report.
- It is also important to create questionnaires that can help them gather reasonable evidence behind a certain claim.
- After carrying out the process, they are additionally responsible to prepare and present a final report, to discuss their findings with the relevant stakeholders.
Additionally, in exception to the responsibilities
that auditors have during the audit process, it is also fundamentally important
for them to ensure that they also abide by a few other terms and conditions.
- The audit process is mainly designed so that the auditor can gather evidence and obtain reasonable assurance as to whether the financial statements are free from any material misstatement.
- The auditor is also responsible to express an opinion on the financial statements. This is on grounds of completeness, existence, and overall assurance regarding conformity with the relevant governing body.
- The auditor is also supposed to report subsequent failure, on behalf of the company to maintain proper books of accounts.
- The auditor is also responsible to report indictable offenses, if any, that are discovered across the scope of the audit.
- Furthermore, the auditor is further expected to exercise professional integrity. This includes abiding by the standards that are generally accepted by fellow practitioners.
Therefore, it can be seen that the Auditor is
entrusted with the responsibility to carry the overall audit process with due
diligence and care.
This requires the auditor, not to only have professional skepticism, but also a proper framework in place before conducting the respected audit.
Having a proper mechanism, with sufficient documentation is an elementary process in this regard, and therefore, auditors should also go to extra lengths to obtain evidence that might be material enough to impact their audit opinion in the audit report, which is the primitive gist of the overall audit process itself.
Audit Trail can be referred to as a securely relevant and chronologically arranged set of records that can provide documentary evidence of the sequence of activities that have taken place within the company, pertaining to financial transactions, or transactions that might be material for other purposes and circumstances.
Trail can be best referred to as a paper, or an electronically based document
that covers and entails the overall transactions that occur within an
The main rationale behind this document is to provide the auditor with a plausible way to trace transactions from the general ledger to the original document. In other words, this provides an entire proof behind the occurrence of a certain transaction and the fact that it actually did take place.
the Audit Trail is created to trace the transaction, and ensure that the audit
assertion behind occurrence has actually been taken due care of.
of Audit Trail Creation:
the overall secrecy and importance of this particular document, it should
ideally be accessed in a privileged mode, and therefore, should not be easily
accessible by just anyone in the company.
a role-based security model is mostly adopted in case of audit trails, so that
these records cannot be tweaked or changed by users within the company.
Additionally, it can also be seen that creation, and subsequent presentation of the Audit Trail is proof of the fact that the firm has superior controls in place, and these controls can then subsequently be used in order to form the basis of objectivity within the audit.
of the overall Audit Trail process, it can be seen that it includes events
presented in a chronological manner, which reflects the steps that were taken
in order to bring a transaction from initiation to subsequent completion.
Depending on the nature of the transaction itself, the trail can be fairly simple, or it can be incredibly complex to follow. The initiation part of the audit trail is mostly the receipt of a certain invoice and is completed with proper proof (in most cases, electronically generated payment slips or checks) of payment.
a company’s perspective, it can be seen that Audit Trails can be an excellent
source of data management. This can be used for purposes of financial checks
Furthermore, from an auditor’s perspective, this respective documentation is a clear indication of transactions within the company being carried out in a seamless manner, with all fairness and honesty. This directly relates to the presence of internal controls and record-keeping within the organization.
Therefore, it can be seen that Audit Trail is an exceptionally important piece of documentation within the company, that is equally useful for both, the management, as well as the auditors.
the overall extent to which benefits and usefulness can be extrapolated from
this series of events is directly equivalent to existing security systems
presented within the organizations, that can mitigate the overall risk of these
records being tweaked, or changed in order to cover up a certain transaction,
or hide a possible fraud.
What is An Audit
An Audit Report can be defined as an opinion about the financial statements of the company. Issued by the auditors, the main purpose is to convey the overall opinion about the integrity, and completeness of the financial statements, of the engaging party.
The Audit Report is supposed to be published with the Annual Report of the Company. The main parties interested in Audit Reports, and the overall opinion presented are investors, analysts, Company’s Management, and lenders.
This is because it shows the overall performance and the manner in which operations are being carried out at the respective organization.
The overall necessity to have a properly structured Audit Report lies in the realms of assurance, and a guarantee, per se, regarding the overall free and fair reporting of financial position of the said organization, and the overall extent to which they have complied with internationally acclaimed accounting standards.
Therefore, the Audit Report is basically a proof, given by the auditor, after a thorough review of the financial statements, and other respective assertions.
What are the
General Contents in the Audit Report?
An Audit Report should ideally
have the following contents.
This is generally addressed as ‘Independent Auditors
Given the fact that Auditors are appointed by the shareholders of the company, the Audit Report is addressed to them, and it is subsequently declared so.
Furthermore, since they are the most important stakeholder group for which Audit Report matters, the Audit Report is addressed to the shareholders.
Responsibility – (Responsibility of the Management, as well as the Auditor)
This clearly mentions the overall responsibility of
the auditor to give a free and fair opinion about the financial statements, and
it also stresses upon the management’s responsibility to cooperate with the
The Scope of the Audit
The Scope of the Audit part of the Audit Report mentions that the audit has been conducted bearing in mind the overall accounting and auditing standards in the specific country.
In the same manner, it also talks about the role of the auditor in ensuring that there are no material misstatements, and all internal controls tests have been performed in order to determine the correctness of the financial statements.
The Opinion of the Auditor
The Opinion of the Auditor is the main crux, not only of the Audit Report but also of the overall auditing process that had been carried out. The Audit Opinion can be qualified, unqualified, adverse, or disclaimer of opinion, depending on the eventual outcome of the audit.
Basis of Opinion
This is an extension that explains the basis on which the auditor issued the particular judgment. It explains sufficient reasoning behind the judgment that was made.
This is duly signed by the auditor, as proof that he is well aware of his work, and it is accountable and responsible for the opinion that he has turned on.
Date of the Signature and Date of the Audit Report
Emphasis of Matter
Additionally, the Audit Report can also contain a part titled Emphasis of Matter. This is to bring attention to certain parts within the organization where the auditor believes attention should be drawn.
The audit report should also report the financial statements that the reporting is issuing. Those include the income statement, balance sheet, statement of change in equity, and note to financial statements.
A Special Audit can be defined as a tightly defined the type of audit that is conducted in order to probe into a specific area of the organization’s activities. As a matter of fact, it can be seen that this type of audit is mainly initiated by a third party, like a government agency or the tax authority.
However, it can also be authorized by any other relevant entity, including any internal authorities that might be in a position to do so. Examples of special audits include Compensation audits, control audits, cost audits, fraud audits and royalty audits.
Need for A Special Audit
Special Audits are mostly needed when some abnormal behavior is suspected within the organization.
Mostly, they are called for when it is suspected that the laws and regulations have been overlooked pertaining to finances, or financial management within the organization. However, they are not only restricted to cases pertaining to fraud.
They can also be conducted when there are other institutional violations that might include pertaining to duties, authorizations, internal control procedures or responsibilities of the Senior Management. In the same manner, Special Audits can also be related to corporate reorganization or bankruptcy.
of Special Audit
As mentioned earlier on, it can be seen that a special audit is conducted out of routine, with a specific or a special purpose. However, these special purposes are quite varied in their nature, and the overall outcomes based out of those special audits.
- Compliance Audit – This is mainly conducted when there is a need to examine the policies and procedures to check if they follow internal or regulatory standards.
- Construction Audit – This analyzes the costs that occur for a given construction project. In the same manner, this also tracks down the actual amount that is paid to contractors, suppliers, and other reimbursement that takes place in this regard.
- Information Systems Audit. Information System Audit is mainly conducted when there is a need to review the overall controls present in software development. Additionally, it also involves a review of controls regarding software development, data processing and the overall access to computer systems.
- Investigative Audit. Investigative Audits take place when there is a need to find details of a specific event or an incident within the company, that was suspicious.
- Tax Audit. This Audit is mainly initiated to analyze the overall tax returns that are submitted by an individual or business entity. The main rationale is to see if the paid tax is actually valid.
Therefore, it can be seen that Special Audits are mainly conducted in order to investigate a special cause or to justify something that is not normal within the organization.
The main reasoning behind such an audit is to ensure that the overall functioning within the organization is normal, and there are no productivity losses involved.
This greatly helps them to be able to identify relevant areas of improvement, where they are able to trace weak links and ensure that they are corrected for optimal performance within the organization.
An agreed-upon procedure is the type of audit where the procedures are prepared or set out by the company for the auditor, who is an external party when they are to perform an audit on a specific business process.
The audit procedures are mainly set and designed by the given entity, who conducts the audit, who is part of the audit (the client) and any relevant third party who might remotely be involved in the overall audit process.
During the agreed-upon procedure engagement, the qualified accountant is supposed to discuss and decide on the procedures depending on the overall scope of the audit, and the relevant areas to be investigated.
How should the Agreed Upon Procedures be decided?
The manner in which overall Agreed Upon Procedures is decided is highly dependent on the overall scope of work.
However, they should be detailed enough in order to ensure that there is proper clarity, and no ambiguity amidst the overall process.
Furthermore, these procedures are to be discussed well in advance with the engaging party, so that the overall work can be carried out in a proper manner, without any difficulty.
Additionally, it is also imperative that the outcomes of these procedures are subsequently used in a productive manner so that the company can improve on areas that are to be improved.
Importance of Agreed-Upon Procedures:
The overall importance and value of Agreed-Upon Procedures are mainly derived from the practitioner’s ability to deploy his expertise when carrying out the process itself.
Therefore, the main rationale is to save the client, or the engaging party to carry out these procedures themselves.
However, regardless of ‘outsourcing’ this part to an external party, the engaging party should always have a proper understanding and knowledge to identify the area or matter which needs to be focused on and further understand the motive behind all the identified procedures to be performed. This can then be used by the engaging part to interpret their findings in their own decision making.
Furthermore, it can also be seen that the Agreed Upon Procedures can be an immensely powerful tool, which can be a chance for collaboration between the engaging party and the auditor with regard to assertions for which sufficient work cannot be performed, or evidence cannot be duly obtained.
Therefore, this can be seen as a relationship-building tool, which removes any misunderstandings between the practitioner and the engaging party with regard to issues that might otherwise occur and deter their working relationship.
This bridge is created as a result of the practitioner effectively proposing an Agreed Upon Procedure engagement based on the forecasts, followed by testing of relevant existing control procedures, and agreed upon committed future transactions for purposes of securing documentation.
Therefore, it can be seen that Agreed Upon Procedures can be regarded as a very important and fundamental step for an organization since it helps them to prepare well in advance to facilitate a smooth audit engagement process.
Additionally, this process highlights possible areas of improvement pertaining to controls that should be present within the organization, so that there is no confusion, whatsoever.
The horizontal audit is the performance of audit procedures or activities, processes, and evaluations to exactly the same to examine across the different functions or departments.
The purpose of performing a horizontal audit is to examine and observe whether there is the same standard of control to the different departments. It is also called “Peer Audit”.
This is very important for the auditor to understand the horizontal audit that its audit processes could be shown the flow of information or figures or essential documents across from one area to another areas.
Understanding the horizontal audits or the processes of organizations are very vital for the auditor to conduct their operational audit and it also assists operational staff to do smoothly for their work.
As the short illustration meaning, the horizontal audit is defined as an examination of the audit activities, processes, and evaluation in the same activities across functions/departments or organizations.
Normally, there are two types of audit methodologies that are commonly used in examination or auditing function or department as Horizontal audits and Vertical audits.
For Vertical audit, it differs from the horizontal audit which is deeply conducting the examination on the specified audit area in function or department.
Moreover, horizontal audits could be illustrated as the audit approach to produce for detection and checking on whether the audit activities, processes, and the evaluation are correct and ensure the existing workflow continues with effectively implemented.
From the practical perspective, here is the example of horizontal audits on the examination of the process workflow of purchasing IT/office equipment.
To be more simplified about the horizontal audits, here is an example of the purchasing IT or office equipment.
The Purchase Request (PR) document is made by Sale or requester team with the appropriate approval; it is identified the status of approval then documents required to submit to budgeting and finance team to verify before there are other further steps that relevant to procurement team to create Purchase Oder (PO) documents.
After that, all documentation is submitted for authorization. All documents are completed and sufficient filing for the accounting team and designated location after the flow of documents is completed and satisfied to pay out by the accounting team.
Horizontal audits is a suitable assessment tool for the auditor to conduct the work through and examine the documents flow in cross-functional departments and to identify the risks or weakness of control.