Planning of an Audit Work: 3 Essentials | India | Planning | Auditing

The following points highlight the three essentials required for planning of an audit work. The essentials are: 1. Division of Work 2. Audit Records or Working Papers 3. Method of Work.

Essential # 1. Division of Work:

An auditor’s establishment consists of himself and his partners, supervisors, a few senior clerks and a number of junior clerks. It is only natural and necessary for smooth, efficient work that there should be some division of labour as well as division of responsibility among the members of the staff.

In practice, the auditor prepares a pro­gramme and distributes work among the clerks. Each senior clerk is assisted by a number of junior clerks who work under the supervision of the former and are directly responsible to him. The senior clerks in their turn are responsible to the auditor himself.

The junior clerks are allotted mechanical and routine work requiring less technical knowl­edge, e.g., checking books of original entries with vouchers, postings from subsidiary books to ledgers, castings, transfer of ledger balances to the trial balance and the like.

The more responsible and intricate types of work are entrusted to the senior clerks, e.g., veri­fication of journal entries re-outstanding, prepaid and accrued items, depreciation, provision for bad and doubtful debts, check­ing of the cash book, valuation and verifi­cation of assets, capital and revenue items, adjustments, appropriation, reserve etc.

The auditor himself or his partner(s) is/are in charge of general planning, administration and overall supervision of the work of his subordinates and it is he who signs the final accounts.

Approved firms of auditors may have a few articled clerks who also do a lot of work, particularly after they have gained a fair knowledge of the nature and technicali­ties of the job. It is definitely useful to arrange for conferences and discussions at regular intervals between the principal and his assistants to review the progress of different audits and to discuss the problems arising there-from.

Essential # 2. Audit Records or Working Papers:

Actual audit work is greatly aided by the maintenance of certain records and papers which not only provide permanent historical data covering all aspects of an audit but also comprise a source of information for the preparation of the final audit report as also for future reference.

There should be ad­equate working papers to show what work was done and by whom; what information and explanations were obtained and from whom; and what- decisions were taken on different matters and by whom.

The main audit records or working papers are:

(i) Record of Engagements:

As soon as an auditor is appointed by a firm the terms of engagement should be entered in this book for future reference and guidance of his staff. This record proves valuable in the event of any dispute arising in respect of the actual scope and limitations of an auditor’s investigations.

(ii) Permanent File:

This record in­cludes all documents and information of a permanent nature and required for subse­quent recurring audits of a particular or­ganisation; these are mostly collected in course of the first audit of a client’s accounts and comprise memorandum and articles of association, regulations and bye-laws, or­ganisational and management procedure, nature of activities, accounting policies, methods and procedure, internal control and checking systems etc.

(iii) Audit Programme:

It may be defined as a detailed plan of work or steps to be taken in respect of audit work indi­cating the procedure for verification of each item in a financial statement and the antici­pated time therefor.

Before starting actual work, an auditor should compile a basic programme setting forth the outlines of general work to be covered by the principal and his assistants in respect of each audit for every year or financial period. Everybody engaged in a particular audit should be guided by that programme.

For this purpose a separate book should be maintained for each audit and it should be appropriately ruled with columns for each type of work to be done, e.g., vouching of cash book, journal and ledger; checking of postings and costing etc. in order that the man performing each part of the audit work may put his initials as and when he completes that part.

Speci­men formats of General Audit Programmes are shown in Appendix B. It should be remembered that there cannot be a single form suitable for all audits, because no two audits would present exactly the same prob­lems and, as such, it is of outmost impor­tance to have a programme prepared in such a way as to suit the distinguishing charac­teristics of each particular case.

There is a good deal of controversy about the desirabil­ity of using a fixed audit programme. The advantages and disadvantages thereof are:

Carefully judging both sides it may be concluded that in consideration of the ben­efits derived from an audit programme its drawbacks may be ignored. Moreover, they may well be avoided.

It should be impressed upon the assistants that the programme is not meant for a too literal execution, that it only provides a framework on which to base the details of work and that there is always room for individual intelligence and initiative; in fact, they are to be encouraged to go beyond the programme and to suggest improvements in the scheme, if necessary. The programme may also be subjected to periodical review and modifications by the principal as may be considered necessary.

(iv) Audit Notebook:

Maintenance of a separate book for each particular audit in order to enter therein all matters of impor­tance with regard to that audit has been an accepted practice within the accountancy profession. But there is some controversy as to the nature of notes to be made in course of an audit. It is, however, obvious that the practice of making notes should not be carried too far.

All ordinary errors and queries should be cleared and disposed of as and when they occur. But it is advisable to have detailed notes of all important errors detected and set right, queries raised but not cleared, vital matters which require discus­sion and which should be remembered for subsequent visits, missing or duplicate vouchers and papers and the various in­structions, information and explanations ob­tained from the management.

Properly kept notebooks are of great significance for future reference and if, after many years, the auditor is held liable for negligence in his work, he may defend himself and establish by producing the note book that he exercised all the care and skill that could be expected from a man of ordinary prudence and that he made queries of all doubtful matters and had them ex­plained by the management. Besides, the information contained therein may be very helpful in preparing the audit report.

(v) Schedules and Miscellaneous Pa­pers:

This group includes draft trial balance, supporting schedules, confirmation of bal­ances, client’s certificates, extracts from min­utes of meetings, copies of correspondence, calculations etc.

All working paper or audit records should be properly arranged, filed and indexed so as to be readily accessible for reference whenever necessary.

These records are the permanent property of the auditor and are confidential in nature and should not be made available to anybody with­out the authority of the clients. Even the clients should not be given access thereto; copies may, however, be furnished to the clients on request and at the discretion of the auditor.

Essential # 3. Method of Work:

There is no uniformity so far as the actual manner of conducting an audit is concerned; each auditor has his own method of work. But there are certain practices which are and should be followed by all.

Auditors use different types of ticks or symbolic marks for checking various classes of transactions, e.g., special ticks for postings, castings, vouching etc. The meaning of these ticks should be kept secret by the clerks of the auditor and should not be divulged to the client’s staff, nor should the actual system and programme of work be discussed with them.

Some auditors use different coloured pencils or inks for ticking entries of different types. When comparing figures with a colleague the audit clerk should speak distinctly, oth­erwise mistakes may be overlooked. All bad and altered figures should be carefully veri­fied and, as a rule, erasures should not be allowed; special ticks may be used for such figures. A better method would be for the auditor to put down the correct figure be­side the original one and initial it.

No books should be examined unless they are written-up in ink and completed for review. Each part of the work for a particular period should be completely done at one sitting with a view to preventing any alteration effected after the audit.

When the volume of transactions is too large to permit a detailed checking of each and every entry, the auditor adopts a meas­ure known as test checking, i.e., sampling verification involving the selection at ran­dom and verification of certain percentage of representative entries of each group or section of accounts handled by different members of the client’s staff, checking the same thoroughly and taking the results thereof as applying to the whole set of transactions.

This is analogous to random sampling as adopted for statistical surveys. Sampling or selection of entries for test checking should be fairly representative of different groups or classes of transactions, of different periods and of the work of differ­ent individuals. Larger proportion of entries relating to the opening and closing months of the financial period should be checked.

There should be no test checking with re­gard to cash transactions. The sampling should be very carefully done; otherwise the entire process of audit may be vitiated. An auditor adopting test checking cannot avoid ultimate responsibility which, however, is minimised by an effective internal control system.

“In depth” auditing should be an inte­gral part of test or selective checking. It means detailed checking of the transactions selected at every stage from the beginning to the end. Each and every voucher in support of every such stage must be thor­oughly examined, so as to have a clear and total idea about the transaction.

Audit Evidence:

An auditor may gather evidences by applying different methods as briefly described below to help him form opinion about the accounts audited by him:

(a) Inspection:

Which means scrutiny or examination of records, docu­ments or physical assets. Such evi­dence may originate in and/or held by client’s enterprise or third par­ties.

(b) Observation:

Signifying study of a procedure or process of work done by others, e.g., stock taking.

(c) Inquiry:

Which refers to asking for requisite information from inside or outside the client’s enterprise. These queries may be formal or informal, verbal or written.

Answers to the queries provide confirmation or otherwise of infor­mation gathered from records, e.g., debtors’ balances.

(d) Computation:

Comprising audi­tor’s own calculations or verifica­tion of documentary data.

(e) Analysis:

Meaning review through study of ratios, comparison of data etc.