Audit Process Bcom Notes

Audit Process Bcom Notes

Audit Process Bcom Notes

Audit Process Bcom Notes:- In this post, I am giving you the notes of Bcom 3rd Year auditing, which is going to be very useful in your examination and you should share this post to all friends and all your groups so that your friends also read this post. Could. Audit Process Bcom Notes

 

Audit Process

 

Audit Programme

The audit programme is a detailed statement giving full instructions, hints and guidance to the audit staff as to how they should proceed with the audit work and to prevent them from overlooking any of the steps to be taken. It is a planning of audit by the auditor so that he may be able to complete his work in a diligent manner and without loss of time. Just as an architect (a building engineer) draws the map of the house and builds it accordingly, similarly an auditor draws a plan of his work or prepares an outline of his programme and does his audit work accordingly.

An audit programme is prepared after a careful study of various considerations and requirements of the client’s business and also decides the distribution of work among the junior and senior audit staff. While preparing the audit programme of each audit, the auditor should also keep in mind the nature of internal control and its extent.

Stettler defines an audit programme as, “an outline of all procedures to be followed in order to arrive at an opinion concerning client’s financial statements.”

Walter W. Bigg defines an audit programme as, “A detailed plan of the auditing work to be performed, specifying the procedure in verification of each item in the financial statement and giving the estimated time required.”

Thus, we can say that audit programme is a written statement of the plan of action of the work to be done by the auditor. This plan is prepared by the auditor himself so that the accounts are checked properly and completed within a fixed time schedule and uniformity in the work of assistants is brought about.

Audit programmes are generally prepared with the columns provided for the name of the clerk doing the work, the type of work, the dates when he started and finished the work. It also enables the auditor to find out the extent of work completed and to be completed. Each audit assistant signs for the work he has performed so that the responsibility may rest upon him for the work he has done.

Audit Process Bcom Notes

Essentials of a Good Audit Programme

A good audit programme should contains the following characteristics:

(1) Written: An audit programme should always be in written form so that the audit staff should clearly know what each one of them has to do. It helps to avoid any chance of differences between the auditor and his staff in future.

(2) Clarity: All the contents of an audit programme should be clear so that the employee does not have to ask the auditor or the client about clarifications. There will be wastage of time and labour, if audit programme lacks clarity of instructions.

(3) Allocation of work according to department: A separate audit programme should be prepared for each department or sub-departments of an organisation according to the nature of work. It proves helpful to complete the audit work timely.

(4) Determination of responsibility of the staff: In an audit programme, responsibility of each member of the audit staff should be clearly fixed by the auditor. In this way, the auditor can hold a person responsible for carelessness on his part.

(5) Flexibility: The audit programme must be flexible so that new items may be included according to the changed circumstances. In the dynamic age of today, no programme can be rigid. To take the full advantage of audit programme, it should have the quality of flexibility.

(6) Checking of all accounting books from beginning to the end: The audit programme must be of such type that ensure checking of all account books from beginning to the end. For example, for the audit of purchase, the audit programme should contain activities starting from the demand paper to the payments.

Audit Process Bcom Notes

Advantages of Audit Programme

(1) Efficient distribution of work: It is prepared keeping in mind the level of competence and experience of individual members of the audit staff. While senior audit clerks are given relatively complex assignments, the juniors are made responsible for routine work. This makes for smooth and efficient execution of the work.

(2) Evidence against charge of negligence: It serves as a valuable evidence if at any time an action is brought against the auditor alleging negligence in the performance of his duties. He can produce the audit programme in defence as a proof that the work is carried on by him with reasonable skill and care.

(3) Fixing Responsibility of Negligence: In case of fraud or error the responsibility for negligence may be fixed on the clerk who had performed that work because initials of that clerk are put on the audit programme.

(4) Increase in efficiency: No employee has to waste time in unnecessary inquiries. Hence the efficiency of audit assistants. increases. The auditor can take up audit work of many organisations at the same time.

(5) Knowledge of the progress of work: It enables the auditor to keep constantly in touch with the work done and the general progress of the audit.

(6) No Loss of Continuity: Continuity in work is not lost even if the person on duty is changed. The new person can know what has been done and what remains to be done by consulting the programme.

(7) Satisfaction of a Complete Check: It provides a check against the possibility of certain important items requiring verification being omitted, and thereby ensures that the audit shall proceed in a systematic manner.

(8) Provide Guidance: It serves as a guide for the audit to be carried out by the auditor in the succeeding years. It also provide guidance to the audit clerk for the work he has to perform and an assurance to the auditor that the junior will not overlook essential points while checking the accounts.

(9) No need to give instructions again and again: With the help of audit programme, the auditor is saved from the botheration of issuing instructions to his senior and junior staff again and again.

(10) Helpful in Control: Due to his systematic working, the auditor may get more clients, and can maintain due control in his extensive working.

Audit Process Bcom Notes

Disadvantages of Audit Programme

Although, it is always good to work systematically, yet the streamlined working may affect the routine working of the auditor, and, therefore, we observe the following shortcomings in the system of auditing based on audit programme:

(1) Task becomes mechanical: Due to audit programme the auditor’s task becomes mechanical and the auditor’s staff losses his initiative which adversely affect the efficiency of the work.

(2) Rigidity: It prescribes a rigid routine for the performance of audit procedures within the stipulated time. This breeds monotony and boredom.

(3) Lack of original approach: As the audit staff has to stick to the programme in all cases, it does not think it necessary to do any independent thinking. As such, it does not display initiative in exploring new ways of performing the work in hand.

(4) No moral effect on the employees: Due to uniformity in audit work, the employees know before hand which items are to be audited. So, they work very cleverly and the moral effect of the audit has on the employees is lost.

(5) Lack of independent judgement: The assistants of the auditor work according to the prepared programme. They are unable to take independent decisions to do the audit work in changed circumstances.

(6) Hiding of inefficiency: Inefficient audit assistants may also hide their inefficiencies behind the audit programme. So their inefficiency remains unexposed.

(7) Uneconomic for the auditor: Auditing according the audit programme proves uneconomic for the auditor, because in this sort of systematic working his work is increased while comparatively less remuneration is received from the client.

In order to eliminate the disadvantages of an audit programme, it should make clear to the audit staff that this programme is only a guidance and they may use his initiative and intelligence during the course of audit. The audit staff should be encouraged to make suggestions from time to time and made audit programme up-to-date according to their experience and changes made in the business.

Audit Process Bcom Notes

An Audit Programme to be Serviceable must be Elastic

Success of audit programme depends upon its elasticity. It means that what is the scope of making changes in the audit programme according to the changed circumstances and environment. If there is no possibility of making changes in the audit programme then it will lost its utility.

Therefore, it should be prepared in such a way that the modification is possible due to changed circumstances without changing the whole programme.

This will therefore, leave some scope for modification to be made in the audit programme whenever necessary. It is well said that “An Audit Programme to be serviceable must be elastic.” A flexible programme can provide an opportunity for clerks to exercise their intelligence and initiative. The programme should be prepared and made up to date in accordance with the nature and character of a business

Elastic audit programme provides the following advantages:

(1) It helps the staff of the auditor to take independent decisions.

(2) The staff of auditor can not be able to hide their inefficiencies.

(3) It increases the efficiency and moral of the audit staff.

(4) It provides opportunity to the staff to show their intelligence, ability and efficiency.

(5) The audit work will not become mechanical and boredom.

Audit Process Bcom Notes

Routine Checking

Checking of arithmetical accuracy of books of original entry and ledgers in order to detect clerical errors of principle or frauds is termed as “Routine Checking.” Routine checking is common to all type of business organisations. It is a type of simple checking though have a significant part of the auditor’s duty. It verifies the arithmetical accuracy and ensures that no alterations are made in the figures after they have been checked and ticked accordingly. Routine checking involves mainly four types of checking as follows:

(i) Checking of casts, subcasts, carry forwards and calculations in the books of original entry;

(ii) Checking of postings into the ledgers; other

(iii) Checking of casts and balances of various accounts in the ledger; and

(iv) Checking of transfer of balances from the ledger on the Trial balance.

Audit Process Bcom Notes

Advantages of Routine Checking

(1) Verification of arithmetical accuracy: Routine checking helps in the verification of arithmetical accuracy of the entries. It also reveals the errors and frauds of a simple nature.

(2) Knowledge of Alteration in figures: During routine checking, an auditor use various type of ticks for checking. If any alteration is made in the figures, it can be caught easily by the auditor.

(3) Simple Job: Routine checking is a simple job which can be done easily by a person with an ordinary knowledge of accounts. It is the simplest device for audit work.

(4) Helpful in checking of Final Accounts: The checking of castings and postings done in routine checking is the very basis upon which the final results of audit depend. Hence, it helps in the checking of final accounts ultimately.

(5) Checking of posting accuracy: Accuracy of matters taken from records made in the books of original entry to the ledger can be checked easily with the help of routine checking.

Audit Process Bcom Notes

Disadvantages/Limitations of Routine Checking

(1) Mechanised Work: Routine checking is practically a mechanical process and hence can cause monotony to those who are entrusted with this task. Auditor’s staff do not take much interest in this work.

(2) No detection of Planned Fraud: Only minor cases of fraud can be detected by routine checking. Major items of fraud cannot be brought to light.

(3) Fail to detect the errors of principles and compensatory errors: Routine checking is done by a person with an ordinary knowledge of accounts. Therefore, there appears to be a lot of difficulty in tracing out compensating errors and errors of principles.

(4) No use where self-balancing system is adopted: Routine checking is not always considered important in the audit of a business where self-balancing system is used.

Audit Process Bcom Notes

Test Checking

In test checking the auditor does not check all the records made into the books of accounts but selects a few items through a process of sampling and if they are found correct, he presumes that the remaining entries would also be correct likewise. Thus, test checking is based on a simple principle that “if a representative number of transactions, so selected at random by the auditor for test checking, is found to be correct, the remaining ones would also be correct.”

Test checking is an accepted auditing procedure, wherein instead of checking all transactions only a part of it is checked in detail to form an opinion on the whole.

According to Prof. Meig, “Testing and Test Checking means to select and examine a representative sample from a large number of similar items.”

If the system of internal check is satisfactory, test checking can be of immense help to the auditor. It reduce the volume of work involved in audit. But it should be applied and carried out intelligently and carefully otherwise it may lead to dangerous consequences.

Precautions to be taken while Applying Test Checking An auditor should take the following precautions while adopting test checking technique:

(1) Classification: The transactions of the concern should be classified under appropriate heads and may be stratified if wide variations exist between transactions of the same kind.

(2) System Study: Systems and procedures for entering into and processing a transaction right from the beginning to the end should be studied in a sequential order.

(3) Scientific Sample Selection: The auditor should select sample items in such a way that the sample can be expected to be representative of the population. Sample transactions should be selected from every book or ledger covering the whole of the period under audit.

(4) Thorough checking of entries pertaining to the first and the last month: The entries pertaining to the first and the last months of a year should be thoroughly checked as fraudulent manipulations are usually made during these months.

(5) Checking of work done by every employee: Test checking should be organised in such a manner that work done by every employee is checked.

(6) Thorough checking of cash book: Mostly frauds are made in the cash book, therefore entries of cash book should be thoroughly checked. Test checking should not be applied in this case.

(7) Secrecy of Sample: While selection of transactions for test checking is made by the auditor no consultantion should be made with the staff of the client.

(8) Selection of Accounts from different periods: Entries and their periods selected for test checking should be different at the time of each audit. For example, ifin 2008 credit sales for the months of July and December have been selected for test checking, in 2009 other two months should be selected.

(9) Depth checking of doubtful transaction: If some transactions seems to be doubtful during test checking, then full checking should be taken up

Audit Process Bcom Notes

Advantages of Test Checking

Test checking can be of immense helpful to the auditor in the following ways:

(1) Saving of time and energy: Test checking reduce the volume of work involved in audit, thus it saves time and energy.

(2) Reliable Results: Results of test checking are often correct. The staff knows that any accounts from their books can be checked. So, they remain alert.

(3) Make possible to take up audit work of several business houses simultaneously: The auditor can take up audit work of several business houses simultaneously because by this check more work can be done in less time.

(4) Moral effect on the employees: Test checking put a great moral effect on the employees of the client, as they do not know which work would come under checking. So they do their work very carefully.

(5) Special attention to Internal Check System: More and special attention is paid to the internal check system because test checking is applied only where internal check system is effective and satisfactory.

Audit Process Bcom Notes

Disadvantages of Test Checking

The disadvantages which may be arise due to test checking can be summarised as follows:

(1) Increase the responsibility of the Auditor: Although volume of work is reduced by test checking, but it increase the responsibility of the auditor. Suspicion and doubt will remain in his mind although the whole of the work is checked by him through test checking.

(2) Possibilities of Frauds and errors: Cleverly planned frauds and errors cannot be detected as only a small number of accounts are checked in test checking.

(3) Carelessness in work: Employees of the client do their work carelessly as they know that their work will not be checked in detail.

(4) Report prepared on test checking is not satisfactory: Report prepared on the basis of test checking is not satisfactory because it has not been written on the basis of thorough and intensive checking of all accounts.

Audit Process Bcom Notes

Audit Working Papers

Working papers refer the papers prepared by the auditor for audit work as well as the documents, statements and recorded information obtained by the auditor from his client and other persons connected with the business.

According to Arnold. W. Johnson, “Audit working papers are the written, private materials, which an auditor prepares for each audit. They describe the accounting information which he receives from his client, the methods of examination used, his conclusions (and reasons thereof) and the financial statements.”

Audit Process Bcom Notes

Object of Keeping Audit Working Paper

The following are the important objects of keeping working papers:

(1) Permanent Record

(2) Support for auditor’s opinion

(3) Basis for review and revision of internal control

(4) Basis for evaluation and training of audit staff

(5) Serves as a guide

Audit Process Bcom Notes

“Audit working papers are the personal asset of auditor”

The working papers, prepared by the auditor or his staff to carry out the assignments are his property and the client has no claim on such papers. These papers are collected by the auditor to do his work conveniently and smoothly and to defend himself if a suit is filed by the client against him for negligence in the performance of his duties. It was held in the case of Soekockinsky Vs. Bright Graham and Co. in England that the working papers belonged to the auditor because they were independent contractors and not agents of the clients.

 

Audit Note Book

During audit, every auditor keep a diary or register for his personal use to write important informations concerning audit. This diary or register is called Audit Note Book. This note book is by the auditor or his staff to note down errors, doubtful maintained queries and difficulties which need clarification. A clerk comes across several difficulties or new points during the course of audit which he has to discuss with his senior or the auditor. It is not possible to remember all these points so he notes down these in a book which is called Audit Note Book or Audit Memorandum. It is a written record of queries made, replies received thereto and correspondence entered into, etc. It may be of great help to the auditor preparing his Audit Report from such a record. A separate Audit Note Book is maintained for each concern.

Audit Process Bcom Notes

Advantages of Audit Note Book

(1) Evidence in the Court of Law

(2) Helpful to recall the important matters

(3) Make the work of audit convenient

(4) Helpful to evaluate the efficiency of the audit staff

(5) Helpful in the future audit

(6) Helpful in preparing the audit report

 

Contents of Audit Note-Book

The following are the main contents of Audit Note Book:

(i) Routine querries not cleared, i.e., missing receipts and vouchers, etc.

(ii) Details of mistakes and errors discovered.

(iii) The points arising during the course of the audit, to which the attention of the auditor must be drawn, i.e., failure of the company to comply with the provisions of the Companies Act or of the Memorandum of Association and other legal requirements.

(iv) Contracts and other correspondence with various government agencies, financial institutions, debtors and creditors etc.

(v) The points to be incorporated in the audit report.

(vi) The points which need further explanation and clarification e.g., a change in the basis of valuation of finished stock or in the computation of depreciation, etc.

(vii) Dates of commencement and completion of the audit.

(viii) Important matters for future reference and

(ix) Special points requiring consideration at the time of final accounts.

 

Audit Process Bcom Notes
Audit Process Bcom Notes

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