Learning Auditing Practically
Auditing is taken as a theoretical subject by commerce students but in reality it is a practical subject and to make it more real – we have brought with us Partner of one of the Big 4 who has herself told the entire procedure of Statutory Auditing. Further I have taught the entire practical auditing procedures with real work papers – Join here
What All Things Will Be Discussed ?
1) Understanding the client – Management, its business, process, accounting, IT controls, systems, reporting requirements etc.
2) Identifying risk and those having financial impact
3) Determining materiality for the audit (overall and performance)
4) Identifying material account balance and mapping the identified risk
5) Deciding on the audit approach/procedure, team, budget, timing of audit procedure considering reporting timeliness
6) Performing the audit (planned audit procedures). it is understood that based on audit evidence obtained – if any change in planning is necessary then it would be done so that procedure help auditor to obtain sufficient and appropriate audit evidence which would enable auditor to frame his opinion
7) Reviewing compliance with AS, Tax & laws as applicable
8) Evaluating the audit result/evidence obtained
9) Concluding the audit – framing audit opinion
Auditing Steps In Detail
(I) Obtaining Client Understanding (also referred as pre-planning activity):
It starts with a very high level understanding obtained from the prospect before making decision about whether the auditor has capabilities and ability to accept the assignment. However, once the engagement is confirmed and the CA is appointed as auditor, he will have to deep dive and get detailed information from the client to gain proper understanding and to confirm the initial understanding.
This would primarily include –
a) Understanding the client management/owner (include who are the owners, their profiles, expectations – are they directly involved in day to day management or business is managed by professional/employees, their style of working aggressive/ risk taker, conservative – low risk taker, any litigation history (including personal background) etc.
b) Understanding the client business (includes customers, vendors, market position/industry outlook, employees profile, government policies / regulations, compliance requirements etc.)
c) Understanding the client systems (management style involvement, accounting system / process, IT systems financial/operational, internal policies etc.. whether any process are out sourced to third party service providers)
The question come how to gain this understanding – Its a multi fold approach:
1) Seek information from the Client (person coordinating with auditor) as a starting poin
2) If existing business review past year audited financial statements, read minutes of AGM / Board meetings (in case of company), income tax and any other government filings, etc
3) Meet key people at Client (owner management, Head of Department, CFO / Finance person
4) Visit and have round of the factory / office where the business is conducted to observe how things are happening
5) Online search for information available in public (including company website
The next question come what is the benefit of above or why auditor need to seek such information:
1) The purpose is straight without understanding the above it would not be possible for auditor to apply his judgement while planning the audit procedures best suitable, evaluation of audit evidence obtained from the audit and framing opinion on completion of the audit.
2) Identifying risk i.e inherent risk, control risk and detection risk. Also the audit would be able to understand risk faced by the business, impact of that on financial reporting (audit) including going concern risk
3) This are also referred as (risk assessment procedures)
What to document :
Any audit procedure would not be complete unless it is documented. the above information can be documented through use of checklist, writing memo, ppt, etc.
In summary just like when you attempt a 20 marks question in exam you should identify each section and summarize the information collected and at the end of the document one should summarize in brief auditor conclusion about the Business / management / controls and judgement as to likely impact on the audit
(II) Make summary of identified risk (what can go wrong), impact area (what would be effected) and account balance & assertion that would be impacted.
(III) Identify / Map all the balance (TB) line items (this is the start of audit planning):
Remember pre-planning activities and planning activities may not be identified separately and some auditor would treat all this activities as planning only. In my view this are different as in pre-planning the focus is on collection of information that would help planning the audit and when you start using the information for deciding on the audit procedures that would be performed for the audit, allocating appropriate audit team, estimating time/ efforts that would be spent for completing the procedure, etc. are the planning activities.
For full discussion and becoming member of our Practical Auditing community – Join here
YOGESH VERMA 