Stages of Modern Audit Notes
Introduction
An audit can be carried out on the enterprises both large and small, and
both new and well established. The audit of smaller enterprises has
special features. This chapter describes the stages involved in the
audit of an established which is big enough to have a comprehensive
system of accounting and record keeping and a system of controls over those records
Outline of Stages
The stages that are involved in a modern audit consist of the following:
- Background research
- Audit plan preparation
- Review of the accounting system
- Review of internal control system
- Analytical review
- Preparation of the audit report
- These stages are explained here under.
Background Research
The most important aspect is that before the start of the audit, the
auditor must establish and discover as much as possible regarding the
following:
- The present and the future trends and prospects regarding the
industry into the client operates - The past history and the present condition and future prospects and
trends regarding the client - The management and key personnel of his client and any recent changes
- The products and manufacturing and trading
processes of the client and any recent changes - The locations of all his client’s operations
- Any difficulties encountered by the client in manufacturing,
trading, expanding, contracting, labour relations or financing - Any problems in accounting or in internal control systems
- Any problems in accounting measurement
- Any problems likely to lead to audit risk
- Any problems likely to be met in carrying out the audit
- Any changes in law or accounting practising which may affect the client
The background research is done through reading and interviewing:
- Previous years audit files
- Audit staff who have been previously engaged on the audit
- Published materials concerning the client company and the industry
- The company’s interim, internal and management accounts
- The management of the enterprise
Audit Plan
The auditor must arrange to plan his audit in some details. The plan
will involve preparation of a memorandum showing the following aspects:
- The staff members who will do the audit work
- The outline of the audit work to be done on each part of the
client’s system and financial statements - The location of the audit work
- The timing of the work to be done
- A budget of the time
- A budget of cost
The audit plan must conform to the client’s time requirements and
the clients ability to produce necessary analyses and summaries
Review of Accounting System
The auditor must:
- Ascertain by asking questions
- Record on paper
- Corroborate his record and confirm that the record is correct
- Review for adequacy and of planning of tests.
- Test to determine that it always works as it is supposed to.
- Evaluate
- Form a conclusion on the adequacy of the clients system for
documenting and recording the transactions, assets and liabilities
of the client in the book of account and other records. This is because: - The companies Act requires that the auditor investigates and reports
on the company are keeping of proper accounting records. - The books of account and other accounting records form the basis of
the preparation of the financial statements
Review of Internal Control System
The auditor is required to:
- Ascertain
- Record
- Corroborate the record
- Review
- Test
- Evaluate and
- Form a conclusion on the adequacy of the client’s internal control
system
The internal control system consists of procedures that ensure that all
the transactions, resources and liabilities are recorded correctly.
The main object of the review of both the internal control and
accounting systems is have the evidence that the client among other things:
- Maintains adequate books of accounts and records
- Has a system in place of internal control over processing and
recording of transactions to the extent that all transactions are
recorded correctly both in
principle and numerically - The accounting records can adequately be relied upon to form a basis
for preparing of financial statements.
It is important that the auditor vouches each and every transaction
recorded in the books of
accounts.
Substantive Testing in Auditing
Substantive testing is defined in auditing standards as “Those tests of
transactions and balances, and other procedures such as analytical
review, which seek to provide audit evidence as to the completeness,
accuracy and validity of the information contained in the accounting
records or in the financial statement” The reliability of records is
usually established by the auditor through investigation of the system
of recording transactions. It is also established through investigating
the system of internal control.
However, not all data can be verified through investing the systems of
internal and accounting. Some transactions and data must be verified by
use of direct evidence. This is usually referred to as substantive
testing. Substantive testing can be applied to the following situations:
- Where internal control system is weak and cannot be relied upon
- Unusual or extra – ordinary or one – off transactions
- All assets and liabilities at the balance sheet date
In practice the auditor has to consider the grounds of the effectiveness
and cost of whether to rely on the systems of control. In some cases
sufficient evidence can be got through analytical review. In some cases,
a combination of internal control reliance, substantive testing and
analytical review provides the necessary and required audit evidence.
Analytical Review
At the end of the detail audit work after systems testing and
substantive testing has been complete, the auditor needs to have the
audit evidence that:
- Proper books and records have been kept and form a reliable basis
for preparation of financial statements - The accounts have been properly drawn up the those books and records
- All assets, liabilities and transactions, balances and items in the
accounts and records have been confirmed indirectly by systems
investigations After this the auditor is required to subject the
financial statements to a thorough and overall analytical review to
establish whether: - Acceptable, consistent and appropriate accounting policies and
Generally accepted accounting principle have been applied - All the information contained in the financial statement is
compatible and consistent with all other information - All the items and information in the financial statements are
compatible with the auditor’s knowledge of the client’s enterprise
and its circumstances - There is adequate disclosure of all items and information that need
to be disclosed - The accounting requirement of the Companies’ Act Cap 486 and other
regulations and legislations have been complied with - The auditor has sufficient evidence to enable him give an opinion on
the truth and fairness of the financial statements
Preparation of Report
The main objective of any audit is definitely the audit report to the
client. The audit report is a formal statement showing the following:
- The name of the auditor who performed the audit work
- The name of the persons to whom the audit report is addressed such
as the client’s directors etc - The financial statement being reported on such as income statements,
statement of financial position and cash flow statements - A statement showing the opinion of the auditor whether the
statements give a true and fair view - A statement showing the opinion on whether the statement comply with
requirements of the Companies’ Act Cap 486 and other regulations and
legislations
