Here is an essay on ‘Auditing Techniques’ for class 11 and 12. Find paragraphs, long and short essays on ‘Auditing Techniques’ especially written for school and college students.
1. Essay on Auditing Techniques: (Around 200 Words)
Q. Define auditing techniques.
Ans. The devices or methods available to the auditor for obtaining competent evidential matter. To an auditor, auditing techniques are the working tools used and applied for identification and examination of those evidences which have been traced by audit procedures.
We can draw distinctions between auditing procedures and auditing techniques as follows:
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i. An all inclusive list of audit procedures cannot be prepared as these are addressed to the varying audit objectives; but such list can be outlined for audit techniques.
ii. ‘Auditing procedures are ways of applying (auditing) techniques to particular phases of a particular audit’.
iii. ‘The procedures (of audit) adopted in different engagements result from the judicious application of the available techniques (of audit)’.
iv. Audit procedure, in fact, is concerned with the general assertions like: existence or occurrence, rights and obligations, completeness, valuation or allocation and presentation and disclosure that may be made regarding an account; whereas audit techniques are concerned with the examination of those evidences which have been traced as such by audit procedures.
2. Essay on Auditing Techniques: (Around 800 Words)
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Q. What do you understand by the term audit evidence?
Ans.: “Evidence, for auditing purposes, consists of nothing more than facts in some form which has an inherent objective proposition that tends to influence the auditor’s mind”. Thus, the term denotes that audit evidence should not be fictitious based on imagination. It should be a reflection of realities found during the course of an audit. It should be such that is complete, accurate and valid in all respects in relation to the data produced by the accounting system.
Although anything concerning the business operations of an organisation may influence the judgment of the auditor, the main types of audit evidence can be outlined under two categories:
1. Audit Evidence (analytical),
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2. Audit Evidence (corroborative).
Outline charts are given below:
Analytical evidence:
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Consists of general and special journals, general subsidiary ledgers, reconciliation statements, accounting data, allocation analysis sheets for the relevant period and any other records and analysis that substantiate the data appearing in the cost and financial statements, etc.
Corroborative evidence:
Consists of vendor’s invoices, confirmation cancelled cheques or similar documents and any procedures performed primarily by the auditor. It provides the auditor with information to determine whether a transaction is authentic, duly processed and reported.
There are several specific types of audit evidence the auditor may adopt while conducting an audit. Each type varies as to its degree of relevance depending upon the accounting transaction or the account being investigated. Arons and Lobbecke give a list of seven types of audit evidence: Physical examination, Confirmation, Documentation, Observation, Inquiries of the client, Mechanical accounting, Analytical tests.
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Prof. R. K. Mautz listed nine types of audit evidence which are as follows:
(1) Physical examination by the auditor of the thing represented in the accounts.
(2) Statement by independent third parties:
(a) Written and
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(b) Oral.
(3) Authoritative documents:
(a) Prepared outside the enterprise under examination,-
(b) Prepared inside the enterprise under examination.
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(4) Statement by officers and employees of the company under examination:
(a) Formal
(b) Informal.
(5) Calculation performed by the auditor.
(6) Satisfactory Internal control procedures.
(7) Subsequent actions by the company under examination and by others.
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(8) Subsidiary or detailed records with no significant indications of irregularity.
(9) Interrelationship within the data examined.
3. Essay on Auditing Techniques: (Around 400 Words)
Q. Discuss the various methods by means of which an auditor can obtain ‘Audit Evidence’.
Ans. The auditor obtains his ‘audit evidence’ in the course of his audit through the performance of compliance and substantive procedures by one or a combination of the following methods:
a. Inspection,
b. Observation,
c. Inquiry and Confirmation,
d. Computation and
e. Analytical Review.
The application of these procedures will, of course, depend partly upon the period of time during which such audit evidence is sought for and is available.
a. Inspection:
It consists of examination of records, documents or tangible assets. It therefore involves examination of the statements .by the third parties and of the authoritative documents prepared inside and outside the organisation, etc. and also physical verification of petty cash, cash certificates or tangible assets, e.g., plant and machinery, equipment, goods, etc. Inspection of records and documents, thus, provides evidences of varying degrees of reliability depending on their nature and source and the effectiveness of internal controls existing with respect to accounting systems.
Three major categories of documentary evidence, indicated below, provide different degrees of reliability to the auditor.
(a) Documentary evidence created and held by the third parties.
(b) Documentary evidence created by the third parties and held by the organisation.
(c) Documentary evidence created and held by the organisation.
Inspection of tangible assets does not necessarily provide evidence as to ownership and value.
b. Observation:
It consists of looking at a system or procedure being performed by the client’s personnel. For example, the auditor may observe the stock-taking of inventories by the client’s personnel or the performance of internal control procedures that leave on ‘audit trail or the actual disbursement of salaries and wages to client’s personnel, etc.
c. Inquiry and Confirmation:
It consists of obtaining appropriate information from the knowledgeable persons inside or outside the organisation. Inquiries may be of two type’s formal, addressed to the third parties and informal, generally oral, addressed to the insiders. Responses to such inquiries would provide the auditor corroborative evidence.
Inquiries and confirmation received from the company’s solicitor with respect to ownership of assets and properties can give reliable evidence. Similarly, the auditor may also obtain corroborative evidence as to book debts by requesting confirmation of receivables by direct communication with the debtors.
d. Computation:
It consists of checking the arithmetical accuracy of source documents and accounts or doing independent calculation so as to constitute a verification of the client’s calculations.
e. Analytical Review:
It consists of studying the significant ratios and trends, and investigating unusual fluctuations and items.
4. Essay on Auditing Techniques: (Around 300 Words)
Q. Prepare a list of auditing techniques corresponding to the auditing objectives (to be identified) of: (A) Cash, (B) Receivables and Sales and (C) Inventories of an organisation.
Ans. (A) Audit of Cash:
Auditing Objectives:
1. Verification of cash balances.
2. Classification of cash items on the balance sheet.
3. Accuracy as to procedures for recording cash transaction and cash handling.
4. Internal control procedures — evaluation of effectiveness.
Auditing Techniques:
1. Written confirmation and physical inspection.
2. Written confirmation, physical inspection, oral inquiry and scanning.
3. Vouching, verification, comparison, oral inquiry, accounts analysis and scanning
4. Oral inquiry, followed by the techniques suggested against 3 above.
(B) Audit of Receivables & Sales:
Auditing Objects:
1. Verification of receivable balances
2. Determining net realisable on the balance sheet.
3. Classification of receivables on the balance sheet.
4. Determining any pledged or discounted portions.
5. Determining existence of ownership and value.
6. Reasonableness of Sales total.
7. Internal Control Procedures evaluation of effectiveness.
Auditing Techniques:
1. Written confirmation, vouching and comparison.
2. Scanning, written confirmation, comparison, oral inquiry, and vouching.
3. Written confirmation, comparison, oral inquiry and scanning.
4. Written confirmation, vouching, scanning, oral inquiry and verification.
5. Written confirmation, vouching, physical inspection, oral inquiry, and scanning.
6. Comparison.
7. Receivables: oral inquiry; Sales: vouching, verification, oral inquiry, comparison, accounts analyses and scanning.
(C) Audit of Inventories:
Auditing Objects:
1. Inventory-taking procedures – evaluation.
2. Determining existence, ownership, accuracy and propriety in the valuation of inventory balances.
3. Determining a proper cut-off with respect to receipts and issues.
4. Inventory valuation, necessity considerations.
5. Internal Controls evaluation.
Auditing Techniques:
1. Physical inspection and oral inquiry.
2. Physical inspection, written confirmation, vouching, comparison, verification, and scanning.
3. Vouching, comparison and oral inquiry.
4. Physical inspection, vouching, oral inquiry, comparison and scanning.
5. Oral inquiry.
5. Essay on Auditing Techniques: (Around 300 Words)
Q. What is ‘Periodical Audit’?
Ans. An audit that is carried out through completion in one continuous session at the end of the accounting period. It is also termed as: Final audit, complete audit, detailed audit. In the case of periodical audit, the auditors carry out their examinations only once in a year, (generally immediately before and after the close of the financial year).
Advantages of Periodical Audit:
1. It is suitable for small concerns as it is less expensive.
2. It eliminates the possibility of alteration of audited figures as the audit work is performed in one continuous session.
3. It does not cause inconvenience to the client staff and to the preparation of annual accounting schedules as the examination is conducted at one time.
4. It minimizes the chances of collusion between the auditor and audited management.
5. It makes both the management and client staff serious as the auditor can exercise his own discretion to the extent of detailed work.
Disadvantages of Periodical Audit:
1. It is not suitable for large concerns as it puts a strain on the client staff and audit staff.
2. It usually results in delay in finalising the audited accounts. Due to this, it is generally subject to criticism from the shareholders.
3. It does not ensure detailed examination and so, errors and frauds are likely to pass over unnoticed.
4. It makes the auditor dependent on the company management as the former has to rely on the certificates furnished by the management, due to time constraints, in regard to some key areas. This way, the auditor runs the risks of being negligent and carelessness in his duties.
6. Essay on Auditing Techniques: (Around 250 Words)
Q. What is ‘Interim Audit’? Explain its purpose.
Ans. Interim audit is an audit conducted in between the two statutory annual audits with reference to a particular date within the same accounting period. This audit is undertaken by the auditor under the specific instructions of the client. It covers a part of the accounting period, e.g., quarter or half-year.
Its purposes are:
1. To find out the profits for an interim period after having the relevant data of turnover and expenses duly audited; and
2. To certify the interim profits on the basis of which the management decides to declare an interim dividend.
Advantages of Interim Audit:
1. It provides the management authentic data relating to the receipts, expenses and profit, the essential ingredients to assess the financial position of a business.
2. It helps to detect and prevent errors and frauds occurring during the chosen period.
3. It facilitates early completion of the final audit to be conducted at the close of the financial year.
4. It acts as a moral check on the client staff as the accounts are examined and the assets and liabilities are verified.
Disadvantages of Interim Audit:
1. It involves an extra work for the auditor.
2. It requires the audit staff to keep notes for necessary follow-up measures at the time of final audit at year-end.
3. The final audit is likely to be affected if the audited figures are altered.
7. Essay on Auditing Techniques: (Around 350 Words)
Q. What do you understand by balance sheet audit?
Ans.
Financial Statements are Balance Sheet, Profit and Loss Account or Income and Expenditure Statement.
Lead Schedules are sub-accounts of assets, liabilities.
Detail Audit Schedules are analysed accounts of various operating expenses and incomes.
In a balance sheet audit, the auditor considers the financial statements at the apex and identifies the individual items to a stage at which these can be effectively audited. He then refers to the ‘audit trial balance’ as a step downwards. Since the total accounts balances in the financial statements are difficult to be audited, the auditor refers to the ‘lead schedules’.
The significant sub-accounts schedules are thereafter subjected to audit tests via ‘detailed audit schedules’. Thus, this audit commencing from the balance sheet works back to the books of original entry and their documentary evidence.
For the conduct of the balance sheet audit, the usual modes are to:
1. Examine the Directors’ and Shareholders’ Minute books for important resolutions that have a bearing to the items in the balance sheet.
2. Ascertain that the information in the balance sheet has been collated as per the generally accepted accounting principles.
3. See that the prior year information is also given in the balance sheet.
4. Compare the current year balance of all items in the balance sheet and profit and loss account with those of the prior year actuals and budgetary provisions, where applicable, in order to consider the significant variations and unusual fluctuations.
5. Prepare and/or examine the statement of Sources and Application of Funds with a view to understanding the changes in working capital and the increases/decreases of various elements of expenses which vitally affect the workings of the company.
The balance sheet audit offers the following advantages:
1. Detailed auditing procedures, such as vouching, casting, etc. are not necessary.
2. Accounting ratios as audit techniques can be usefully employed for critical studies.
3. Cause-wise changes in assets and liabilities, gross and net profits can be studied.
4. Senior level auditors are afforded opportunities to budget their time for audit.
The constraint in the balance sheet audit is that it presupposes the existence of an efficient and effective system of internal check and internal accounting controls throughout the organisation.
8. Essay on Auditing Techniques: (Around 150 Words)
Q. What is occasional audit? State its advantages.
Ans. An audit conducted once a while as and when thought necessary. Thus, this audit depends on the necessity felt by the client.
The proprietary concerns, such as sole traders, partnership firms resort to this audit in the following circumstances, namely
(i) Submission of tax returns.
(ii) Valuation of goodwill and assets owing to admission, retirement or death of partner.
(iii) Change of book-keeping method from single entry to double entry, etc.
The advantages associated with this audit are:
(i) Traders and partners come to know of the actual state of affairs of their businesses;
(ii) Partners become satisfied with the impartial views expressed by the auditor and
(iii) The audit is less expensive.
9. Essay on Auditing Techniques: (Around 200 Words)
Q. What do you mean by partial audit? Also state its advantages.
Ans. It is not a full-scale audit. The work of an auditor is restricted to particular areas, such as cash, inventory, etc. depending on the requirements of the client. It is, thus, an audit for some special purposes determined by the proprietor. It is not applicable to the private and public-limited companies and co-operative societies. The scope and extent of audit being limited by the client, the auditor must clearly state in his report that he has undertaken partial audit as per the terms of reference determined by the client.
This audit has certain advantages:
(i) It acts as a moral check;
(ii) It suits the client’s specific objective;
(iii) It helps locate errors and fraud and
(iv) It makes possible critical analysis of the books relating to a particular assignment.
The main disadvantage of this audit is that the complete picture of the business is not reflected.
10. Essay on Auditing Techniques: (Around 150 Words)
Q. What is procedural audit?
Ans. It is an audit which examines and appraises procedures, laid down by the management, in maintaining the books of account of an organisation. It is, thus, an audit of procedures and not any particular type of audit.
Its scope and extent are broadly limited to:
1. Review of internal accounting control systems and procedures from the perspectives of objectivity, disclosure, adequacy and reliability.
2. Assessment of internal check systems as a measure of effectiveness in the maintenance and compilation of final accounts and balance sheet.
3. Recommendation of changes and improvements necessary in the procedures owing to the growing complexities of business in the light of business, economic and social laws.
This audit, in view of the Companies (Auditor’s Report) Order, 2003 and various Cost Accounting Records Rules, has assumed its importance to the statutory Financial Auditors and Cost Auditors.
11. Essay on Auditing Techniques: (Around 150 Words)
Q. What do you mean by vouch and post audit?
Ans. It is an expression having the same meaning attached to the term ‘statutory audit’. Every statutory audit is a ‘vouch and post’ audit. This audit extends to the application of auditing techniques and procedures right from the verification and checking of all financial transactions (e.g., vouchers) to the examination of: records maintained, accounting rigidity, truthfulness of transactions and the presentation of financial statements, such as the profit and loss account and the balance sheet.
It is important to note that this audit leads to propriety audit and compliance audit. This audit achieves manifold objectives, such as prevention and/or detection of errors and fraud, protection against manipulation of accounts, precision in the presentation of final accounts as true and fair, etc.
12. Essay on Auditing Techniques: (Around 250 Words)
Q. What do you mean by standard audit?
Ans. It is neither a kind of audit nor a technique of auditing. It refers to the auditing standards to be followed by an auditor in the conduct of his audit. The ‘Generally Accepted Auditing Standards’ enunciated by the American Institute of Certified Public Accountants are a good guide to the practice of standard audit.
The five concepts of auditing, viz. evidence, due audit care, fair presentation, independence, and ethical conduct (outlined by Mautz) contain and state about the standards to be developed for an independent audit function. Thus, standard audit refers to an acceptable level of quality in certain basic areas which must be maintained by an independent auditor.
The standard audit is fundamentally based on the premises that an auditor should:
(i) Maintain an independence in mental attitude;
(ii) Have technical competence in adequate measure;
(iii) Exercise due professional care;
(iv) Adequately plan and supervise the work;
(v) Evaluate properly the internal control as a basis for determining the extent of the tests to be made;
(vi) Obtain sufficient competent evidential matter;
(vii) Ensure consistency in information disclosures in accordance with Generally Accepted Accounting Principles and within the framework of legal requirements and general custom and
(viii) Give definite expression of opinion or ‘no’ opinion on the financial statements with a clear statement of responsibilities taken.
13. Essay on Auditing Techniques: (Around 300 Words)
Q. What do you understand by compliance audit? State its objectives and important components.
Ans. The traditional government audit is usually referred to as compliance audit. Compliance audit seeks to establish stewardship accountability of public servants in various govt. departments.
It is concerned with the examination of financial records and internal control to determine:
(1) Whether there has been proper recording of receipts;
(2) Whether the resources have been legally and honestly spent;
(3) Whether the financial statements are complete and reliable in all respects; and
(4) Whether the public servants have faithfully adhered to the constitution, statutes and administrative policies and budgetary provisions.
The objectives of compliance audit are:
(1) Reviewing financial operations and compliance with applicable laws and regulations;
(2) Reviewing economy and efficiency of management practices; and
(3) Reviewing the effectiveness of programmes in achieving a desired level of results.
Thus, three important components of compliance audit emerge, viz.
(i) Traditional financial audit,
(ii) Management practices audit and
(iii) Programme audit. It can, therefore, be stated that this audit makes an examination to ascertain whether all reasonable steps have taken:
(a) To safeguard the collection and custody of public moneys or other moneys;
(b) To ensure that issues and payments of moneys were made in accordance with proper authority and payments were properly chargeable and are supported by sufficient vouchers or proof of payment; and
(c) To ensure that the provisions of the constitution and of other laws relating to moneys or stores have been complied with in all respects.