Audit procedures can be a challenging thing to define and approach. Whether it’s a financial audit or any other type, designing customized audit procedures takes time as well as an entire set of skills and wealth of knowledge. Therefore, how do you approach audit procedures? Here are the crucial steps.
#1. Identifying the assertion that you need to test
The underlying idea of an audit is that it’s a procedure that needs to test a particular assertion, made by a company or a private person. For example, if we were to talk about a financial audit, then the auditor needs to test what a company has declared about its finances to see if they were correct in what they stated or not.
Another example is that of the software audit. A company claims that it has an X number of computers on which it runs an X number of pieces of software. The auditor must check and see if what the company stated regarding this aspect is valid or not. This is the assertion that needs to be tested explained briefly for your consideration.
When it comes to the original assertion an audited entity makes, there are a few key notes the auditor or auditing team needs to hit prior to commencing the assessment itself.
- Completeness – the audit procedures aim to find out if the data flow is complete. Otherwise, the procedures will have no point, and the audit itself will not be conclusive.
- Occurrence – did the statements actually take place? Or were they falsely presented by the entity that’s being audited?
- Classification – was all the information submitted classified correctly? If not, then a consultant or the auditor himself can help you with that. Not correctly classifying a piece of information is considered a huge ‘bump in the road’ in the auditing world. It can sidetrack and delay the entire process. Apart from that, the auditor might consider you did it on purpose, as means of hiding something.
- Understandability – is all the information presented in such a way as for the auditor to understand it? You must take into account the fact that, even if the auditor does know your line of business, he or she doesn’t know your business per se.
- Accuracy – all the info on your assets must be accurate and up to date.
- Rights and obligations – make sure you know your rights as well as your responsibilities when it comes to audit procedures.
#2. Identifying the audit procedures you need to use
Although there are many already predefined audit procedures available for use, sometimes one has to design a personalized one so that he or she can correctly assess a company’s situation. Here is how to create a substantive procedure related to valuation.
One must first identify and choose the assertion which will be tested. Then you must strive to determine the risk that might be the root of a material misstatement somewhere along the process. Design a line of audit procedures that, when performed, will help you avoid the risk mentioned.
However, should you choose not to create a personal approach to an examination process, there are some already established, as follows.
- Analytical procedures
- Performing an inquiry and asking for confirmation from a third party about the information itself.
- Inspecting the records, as well as the statements.
- Reperformance and recalculation
#3. Keeping track of the following when constructing your audit procedures
- You must remember to write the audit procedures as clearly as possible. Do not leave any ‘wiggle’ room and do not write sentences and steps which might be difficult to understand or ambiguous.
Think about the fact that all audit procedures should be formulated in such a way that even an entry-level auditor would comprehend them. Do not use general terminology such as ‘check item X.’ That could mean a number of things from it quantity to its quality, price, the person who worked on it, where it came from and so on. Be as accurate as possible in your outlining the procedures.
- Why is this audit being performed in the first place? What are you trying to find out? If you do not have a clear reason in mind as to why this assessment is taking place, then it will be extremely challenging to construct the audit procedures, let alone to get the desired results. Having a clear purpose in mind from the beginning means having half the work already done. All you need to do afterward is to define a material way in which you could achieve your goal.
- Keep in mind that you must use terminology related to an audit. The reason is that you will outline a unique mindset and make the procedure look a lot more professional. You can use words such as the following.
– internal auditing
Mistakes You Need to Avoid when Approaching Audit Procedures
Naturally, there are a set of errors that must be avoided at all costs when it comes to audit procedures.
- Never write any audit procedures without the reason why you are doing it. As detailed above, the process will have no goal and, therefore, no meaning.
- Never consider the assertion as the sole reason for the audit.
- Never propose a precise course of action for the audited company’s internal regulation system instead of stating the audit procedures.
- Do not build your audit procedures based on vague wordings.
- Never, under any circumstances, should you quote incorrect assertions or the ones which are incomplete.
- Do not include audit procedures which you know cannot be carried out or performed in a natural and objective way. Procedures that are impractical will make you come out as being unprofessional.
For example, asking for or even suggesting to the company that is being reviewed a duty segregation between the employee that authorizes petty cash vouchers, records the petty cash vouchers, and dispenses them.
- Do not write or use, for that matter, audit procedures which are irrelevant to the entire process or the company itself. As an example, if you are being required to write an assessment method that centers on the depreciation of a non-current asset, then you shouldn’t use general audit procedures when it comes to non-current assets. It’s inappropriate and, evidently, irrelevant.
Audit procedures are a vital clog in the entire auditing machine. Knowing how to write and construct them takes years of practice and knowledge that you must acquire from more than one domain. However, you can start on this sinuous road by reading our guide to audit procedures and how to approach them.
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