WHAT IS AUDIT?
“Audit is an examination of accounting records, undertaken with a view to establishing whether the correctly and completely reflect the transactions to which they purport to relate.” Prof. Dickers
“Auditing is concerned with the verification of accounting data, determining the accuracy and reliability of accounting statements and reports.” R.R. Mautz
“Long range objectives of an Audit should be to serve as a guide to management's future decisions in all financial matters such as controlling, forecasting, analysing and reporting. These objectives help the business unit to improve its performance.” Arthur W. Holme
- Auditing is nothing but the systematic and critical examination and verification of the books of accounts. It can be undertaken throughout the year or periodically.
- The primary aim is to find out whether the financial statements exhibit a true and fair view of the business.
- Origin of the term audit is said to be in the Latin term audire which means to listen.
- Audit of accounts by a duty qualified chartered accountant is mandatory for the registered joint stock companies, public trusts, bigger co-operative societies and for income tax and VAT tax payers above a particular limit.
Objectives of Audit:
- To find the reliability of the financial position and profit and loss statement.
- To check whether the financial statements of the company present a true and fair view.
- To check whether the financial statements are kept as per the provisions of the relevant Act.
- Verification of the entries with the relevant documentary evidences.
- To check whether all the money received is accounted for or not and all the payments made have proper supporting documents.
- To conduct an independent review of financial statements.
- Auditor has to examine the prevailing internal control and internal check systems prevalent in the organisation and must check the arithmetical accuracy of the books of accounts.
- The auditor has to check the physical existence of various assets shown in the balance sheet and check whether they present a true and fair value.
- After checking the accounts the auditor has to express his or her personal judgement on the maintenance of the books of accounts.
- The company who audits its financial statements on a timely basis builds a good reputation and goodwill.
- Helps the stakeholders with decision making as audited accounts are considered more reliable.
- To detect and prevent frauds and errors.
Key Considerations While Audit Execution:
Executing an effective audit involves four fundamental phases: Planning, Fieldwork, Reporting, and Follow-up. A practical approach emphasizes a risk-centric view, continuous communication, thorough documentation, and leveraging technology to drive continuous improvement.
Phase 1: Planning and Preparation
The preparation phase sets the foundation for a successful and efficient audit, focusing heavily on understanding the scope and identifying risks.
- Define Objectives and Scope: Clearly outline what the audit aims to achieve (e.g., regulatory compliance, operational efficiency improvement) and the specific areas, processes, or systems to be covered. Engage key stakeholders to align audit objectives with business goals.
- Conduct a Risk Assessment: Prioritize audit activities based on areas of highest potential risk (financial, operational, compliance). This ensures resources are focused on the most critical areas.
- Develop a Detailed Audit Plan: Create a formal, written audit program that acts as a blueprint. This plan should include timelines, assigned responsibilities, required resources (personnel, technology, budget), and specific testing procedures.
- Gather Information in Advance: Request documentation from the auditee ahead of fieldwork using a “Prepared by Client” (PBC) list. This minimizes disruption during the actual audit and allows auditors to gain a foundational understanding of processes.
- Communicate with Stakeholders: Hold an opening meeting with department management to discuss the audit’s purpose, scope and timeline. Establish clear lines of communication and a single point of contact to manage expectations and foster collaboration.
Phase 2: Fieldwork (Execution)
This is the data collection and analysis phase. The key is to be systematic and objective while minimizing disruption to daily operations.
- Gather Evidence: Collect relevant data and documentation through a mix of methods:
- Inspection: Review documents, records, and physical assets.
- Inquiry: Conduct structured interviews with staff to understand their work processes and confirm written policies are followed in practice.
- Observation: Directly view processes and controls in action, in real-time, to verify they are operating as intended.
- Re-performance: Independently test controls and procedures to validate the outcomes.
- Analytical Procedures: Analyze data to identify unusual trends, patterns, or anomalies that require further investigation.
- Document Findings Systematically: Maintain meticulous and organized documentation of all evidence gathered, observations made and tests performed. This is crucial for supporting conclusions and maintaining transparency.
- Maintain Open Communication: Provide regular, informal updates to management throughout the fieldwork, discussing observations as they arise. This helps prevent surprises in the final report and allows for immediate clarification of issues.
Phase 3: Reporting
The goal of reporting is to clearly and objectively communicate findings and recommendations to stakeholders.
- Draft the Report: Compile a comprehensive report that includes an executive summary, detailed findings, the root cause of issues, the potential impact or risk and actionable recommendations.
- Obtain Management Response: Share a draft of the report with management for their review and input. Request their action plans and expected implementation dates for addressing the recommendations.
- Finalize and Distribute: Incorporate management’s responses into the final report. Distribute the final document to all relevant stakeholders, including the audit committee and senior leadership.
Phase 4: Follow-up and Continuous Improvement
The audit process is not complete until identified issues are resolved and improvements are implemented.
- Monitor Corrective Actions: Track the progress of management’s action plans to ensure they are implemented effectively and within the agreed timelines.
- Verify Resolution: Conduct follow-up reviews or re-audits to confirm that the corrective actions have adequately mitigated the original risks or deficiencies.
- Debrief and Refine: Hold a post-audit meeting with the audit team and auditees to discuss lessons learned and identify ways to improve the audit process for future engagements. Use insights gained to shape future audit planning and training.
Audit of various financial statements of a company is quite a multifaceted activity, it needs to be process driven to execute is effectively and ensuring accuracy. The auditor has to take into account many components whithin the business starting from the functioning of the internal management, the workforce, accounting practices followed, work ethic, nature of the business, the accounts kept by the internal auditors, the company’s policies and ensuring whether the company is a adopting a true and fair approach in its dealings…
The key phases in the audit execution stage are Execution Planning, Risk and Control Evaluation, Testing and Reporting.
Execution Planning:
Prior to the commitment of an audit program it is of vital importance to have a road map of audit execution to ensure a timely and quality audit result. The auditors need to plan their work in order to carry out the audit in an effective, efficient and timely manner. A detailed audit program is prepared laying down the all the objectives, scope and audit approaches.
The workforce requirement, professional audit team qualifications and the time allotment are some of the major considerations while executing an audit plan. Effective audit needs the effectively planned code of conduct and accurate data driven information. In order to plan effectively, the auditor may need some more information about the audit area. Using various forms of statistical data driven information and collection of primary and secondary data will definitely provide the auditor with accurate financial and non-financial data.
Risk and Control Ascertainment:
For each stage of audit, the auditor should conduct a detailed risk and control evaluation that ascertains the list of risks that must be reviewed in that specific area, take into consideration risk controls that exist or those that are needed to protect against the risk and show for each control, the work steps required to test the effectiveness of the controls. While establishing a risk and control assessment it is quite necessary to borne in mind the materiality levels as the same is linked with audit risks.
Testing:
Once a comprehensive understanding is acquired of the key risk factors and the control systems to be evaluated in a given audit area, the auditors should test the operating effectiveness of the controls to determine whether controls are operated as per the standard expectations. There are multiple test methods which can be put to use to reach the conclusions on the effectiveness of the control systems. Deviations, if any, can be fixed with the right strategies and framework.
Deviations refer to the differences between the standard estimates and the actual outputs.
Reporting:
SA 700, “Forming an Opinion and Reporting on Financial Statements” establishes standards on the form and content of the auditor’s report to be issued as a result of an audit performed by an auditor of the financial statements of an entity. The auditor should review and assess the conclusions drawn from the audit evidence obtained as the basis for the expression of an opinion on the financial statements. The review and assessment primarily involves considering whether the financial statements have been prepared in accordance with an acceptable financial reporting framework applicable to the entity under audit. It is also quite necessary to consider whether the financial statements comply with the relevant statutory requirements such as the compliance of Provisions and Enactments of the Company Law, Accounting Standards framed by ICAI, etc.
The auditor’s report should contain a clear cut written expression of opinion on the financial statements taken as a whole. A measure of uniformity in the form of content of the auditor’s report is desirable because it helps to promote the readers understanding of the auditor’s report and to identify unusual circumstances when they occur.
Other Vital Consideration:
In addition to the above mentioned stages, the auditor has to take into consideration this practice while executing the Audit, which is:
SA 600- Using The Work of Another Auditor
When the auditor delegates work to assistants or uses work performed by other auditors and professional experts, he/she will continue to be responsible for forming and expressing his/her opinion on the stated financial information. However, the auditor will be entitled to rely on the work performed by the other auditors and professional experts, provided that he/she exercises adequate professional skill, expertise, data driven analysis and care and is not aware of any reason to believe that he/she should have not so relied.
In the case of any independent statutory appointment to perform the work on which the auditor has to rely in forming his/her opinion, such as in the case of the work of branch auditors appointed under the statutory framework of the Companies Act, the auditor’s report should completely disclose the fact of such reliance.
It is to be noted that auditor who uses the work performed by other auditors and professional experts is known as the Principal Auditor.
Principal Auditor means the auditor with the responsibility for reporting on the financial information of a company when that financial data includes the financial information of one or more components audited by another auditor or professional expert.
Other Auditor means an auditor, other than the principal auditor, with responsibility for reporting on the financial information of a component which is included in the financial information audited by the principal auditor.
Component means a division, branch, subsidiary, joint venture, associated enterprises or other entity whose financial information is included in the financial statements audited by the principal auditor.
When the principal auditor uses the work of another auditor, the principal auditor should determine how the work of the other auditor will affect the audit reports.
The purpose of SA 600 (Using the work of another auditor) is to:
SA 600 (Using the work of another auditor) has put in place statutory standards to be applied in situations where the Principal Auditor uses the work of other auditor with respect to the financial information of one or more components included in the financial information of the company.
