What are Audit Procedures? 

Audit Procedures are methods and techniques performed by the auditor to determine the quality of financial information of clients, thereby expressing an opinion on true & fair view of financial statements and entity position. They are identified and applied at the planning stage of audit after determining audit objectives, scope, approach, and risk assessment.  

Auditors obtain sufficient appropriate audit evidence before giving an audit opinion in the audit report for which they need to design suitable audit procedures. 

Process compliance ensures that the company's procedures are designed to comply with internal and external policies. The auditee must inform the auditors about safety rules, requirements, and necessary personal protection equipment. 

Every Audit Procedure must state the assertion tested as below: 

Test Analogy Examples 
Classification Correctness in the classification of transactions in accounting and bookkeeping records Purchase records can be reviewed to check classification in Fixed asset account 
Completeness Check missing transactions in accounting records and disclosure in financial statementsBank Records of the client can be checked to see if any payments or receipts are not reflected in books 
Cut Off Recording transactions within the correct reporting periodIf goods are delivered before year-end, they should be included in the cost of goods sold and not inventory 
OccurrenceThe actual occurrence of a transaction as claimed  Invoice verification with ledgers 
Existence The actual existence of assetsPhysical verification of assets 
Rights and Obligations Actual ownership of assetsInquire if holding of actual stock by the client or on behalf of third party 
Valuation The correct value of assets recorded in books Check market price and book value of assets and securities 

Different Types of Audit Procedure to be followed: 

Type Analogy  Examples                     
Inquiry Verbal evidence from clients on financial informationInquiry about business process and management 
ConfirmationThird-party confirmation of client transactionLedger confirmation and account balances 
Inspection of documentsExamine client records Verification of expenses with invoices/vouchers 
Inspection of Tangible assetsPhysically examine assetsPhysically examine with fixed assets register 
ObservationReview of client procedures followedThe auditor may ask the client for actual stock counting 
RecalculationRe-computation by an auditor of work done by the client  Valuation/Depreciation of assets 
ReperformanceAuditor’s independent execution of procedures originally performed as part of entity’s internal control systemReperforming aging of debtors 
Analytical proceduresEvaluating financial information through trend and ratio analysisYearly/monthly trends 

Reason for Audit Procedure: 

APS is designed by auditors based on the risk involved in transactions & the auditor’s approach in response to the risks. Right AP helps in minimizing audit risk (detection risk). While designing AP, the auditor must make sure of 3 things as below : 

Write AP clearly Audit procedures should be written in a simplified way that can be understood by any other auditor other than the one performing the procedure as well. Avoid vague procedures like “check stock” which does not indicate whether to check amount, quantity, or description 
Reason for performing AP  Mention the reason for checking. The AP “check stock” does not explain why the inventory is to be checked. Hence clearly mention the items, quantity, and description of goods to be checked with purchase orders & stock register 
Usage of audit terminology  Use of words like casting i.e. totaling items,  trace i.e. matching information from records, trail i.e. step by step record by which accounting data can be traced to its source. 

Audit Procedure Methods to obtain Audit Evidence: 

Substantive AP: Tests performed at assertion level to detect material misstatement in regards to completeness, validity and accuracy of financial statements and accounting records of an entity. It involves: 

  • Review of document 
  • Testing high value and key items 
  • Sample testing of representative transactions 
  • Confirmation from third parties 
  • Reliance on internal audit work 

Factors to be considered for SAP: 

  • Availability of relevant data 
  • Degree of disaggregation i.e. break up of data 
  • Type of account 

Example: Bank account confirmation, account receivable confirmation, a physical count of inventory, examination of accounts payable, analysis of asset/ liability/ revenue and expenses, verification of fixed assets etc. 

Substantive Analytical Procedures: SAP is an auditing process of investigating differences in auditor’s expectation of accounting records of clients. Generally applicable to large volumes of transactions. It is performed when the risk of material misstatement is low and the internal control system is in place. Example: Matching customer order/funds collected with invoices. 

Test of details: To test audit assertions of 
a) Classes of transactions i.e. examining evidence of debits and credits to an account through vouching and tracing. 
b) Account balances i.e. examining account closing balance with ledger confirmation from the client. 
c) Disclosure of financial statements i.e. fair and clear disclosures following applicable financial reporting framework.  It is performed when the risk of material misstatement is high.  

Analytical AP : SA 520: AAP means evaluation of financial information through analysis of plausible (probable) relationships both financial (e.g. turnover, profit, revenue, expenditure, etc) & non-financial data(e.g. number of employees, environmental impact). It includes analysis of ratios & trends for comparison. 

Example: comparison of financial information of current year with the previous year, actual results of an entity vs budgeted forecasts, entity turnover or ratios vs industry averages. 

Purpose of Analytical Procedures :

  • To obtain relevant audit evidence 
  • To enable the auditor in forming an opinion on financial statements being consistent with the auditor's understanding of the entity. 

Timing of Analytical Procedures:                                                                                   

Required in planning, testing & completion stage. Factors to be considered in audit procedures are as follows: 

  • The objective of the analytical procedure 
  • Nature of the entity 
  • Knowledge gained from the previous audit 
  • Availability and Reliability of information 
  • Relevance of information 
  • Source of information available 
  • Compatibility of information available 

Commonly used Analytical Procedures

Comparisons involving a single component i.e. comparison of the recorded value of component with budgeted value and comparison of component’s current value with its value in the previous year. 

  • Comparison across components i.e. analysis of the relationship between different financial statement components. (ratio analysis) 
  • System analysis i.e. identification of anomalous items within an account balance 
  • Predictive analysis i.e. creation of expectation using operating or external data along with financial data independent of the accounting system 
  • Regression analysis i.e. statistical technique explaining the relation between several variables 
  • Business analysis i.e. macro-level analysis of financial statements involving ratios related to profitability, liquidity, debt, equity etc. 
Analytical Procedures that assist in conclusion:                                                         

Conclusions drawn from analytical procedures performed are intended to corroborate (support with evidence) conclusions formed during an audit of financial statements.  

A common set of accounting principles, standards, and procedures are issued by the FASB i.e. GAAP (Generally Accepted Accounting Principles); GAAP aims to improve clarity, consistency, comparability of financial information. 

Common Mistakes and Pitfalls 

  • Writing an Audit procedure without explanation of the reason 
  • Stating an assertion as a reason for the performance of AP 
  • Writing vague/incorrect/impractical/irrelevant procedures 
  • Quoting incorrect assertions 
  • Writing what the internal control system should do rather than stating the AP 
  • Including incorrect procedures 

Context and Applications  

This topic is significant for commerce graduation and other professional exams like Chartered Accountancy, Company Secretary, AICPA courses. Auditing is conducted regularly whether in banks or other organizations, hence audit procedures are useful in almost every organization under audit. 

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