- 1-Audit procedures in external audit for sales
- 2-Audit procedures for accounts receivables
- 3-Audit procedures for cash and bank
- 4-Audit procedures for property, plant, and equipment
- 5-Audit procedures for a bank loan
- 6-Audit procedures in external audit for related party transactions
- 7-Audit procedures for accounts payable
- 8-Audit procedures for inventory
- Conclusion for audit procedures in external audit
Audit procedures in external audit play important role. Without performing these procedures, an auditor may not verify audit assertions and issue audit report.
It’s advisable to plan audit procedures in line with audit assertions. For instance, for a sales audit, the auditor needs to verify assertions like completeness, accuracy, cut-off, classification, occurrence etc.
Similarly, for account balance, different audit assertions are applicable. These assertions include completeness, existence, valuation, rights and obligation.
It’s important to note that one audit procedure can address multiple assertions. However, all of the assertions must be verified by the auditor. This enables them to conclude the conduction of a reasonable audit.
Let’s discuss different audit procedures and how these help collect audit evidence.
1-Audit procedures in external audit for sales
Following audit procedures can be performed to obtain assurance on the sales.
- Obtain a list of revenue streams from management.
- Perform an analytical review by comparing numbers with the past trend, industry average, competitor, and expectations.
- If there is some difference between your understanding and actual sales, inquire management and document reasoning.
- From sales population, select representative sampling. The sample should be selected throughout the population; the selection should be in such a way that each transaction should have equal chances of selection.
- For the selected sample transactions – obtain sales order, sales invoice, goods dispatched notes, and payment receipt documentation.
- Cross-check dates on goods dispatched notes with the relevant invoices; this helps ensure the transaction is posted in the correct accounting period (cut-off assertion).
- Review invoices and ensure these were authorized, approved, and accurate in terms of calculation.
- Compare accounts receivables with the sales to ensure the account balance is appropriate.
- Compare sales volume with the marketing expense; it can be a good idea to close that increase/decrease of sales was in line with the marketing expenses. However, this analysis can support as additional evidence only.
The amount of sales recorded in the income statement is transaction-based class. Hence, it must satisfy all relevant assertions for the income statement.
2-Audit procedures for accounts receivables
Following audit procedures can be performed to obtain assurance on the accounts receivables.
- Obtain customer confirmation for the accounts receivables balance at year/period end.
- Reconcile balance in the confirmation with ledger balance of parties. In case of a difference, inquire management.
- Perform subsequent testing for the receipt of receivable balance – usually, audit fieldwork takes place after a few days of year-end. So, the audit client may have collected receivables between year/period end and the date of performing audit procedures. So, it can be reliable evidence to assess if cash has been collected against invoices in the accounts receivables.
- If no payment was collected, traditional audit procedures can be performed. These procedures include reviewing sales orders, sales invoices, goods dispatched notes etc.
- Analytical review can be performed by comparing sales with the accounts receivable balance. It helps understand the reasonableness of the figures. For instance, increase of account receivable is logical with increased of credit sales.
- Obtain accounts receivables ageing report. Analyze overdue balance and credibility of debtors. Inquire management about these balances and if there is a need to book provision or write off the balance.
- The credibility of the ageing report can be assessed by comparing data on the sales invoice with the days range in the summary report.
3-Audit procedures for cash and bank
Following audit procedures can be performed to ensure the cash and bank balance.
- Obtain a list of banks and cash ledgers from the audit client.
- Send bank confirmation to each of the banks in a list.
- Request bank to confirm balance and other details directly to an auditor without addressing audit client. (although, audit client needs to authorize the request for confirmation)
- For each bank, compare the balance in the bank statement with the ledger break-up. In case of a difference, obtain reconciling items. The reconciling items can be un-presented cheques, uncredited cheques, and finance charges.
- Ensure all bank reconciliations are accurate, authorized, and approved.
- Verify reconciling items with the subsequent clearance. For instance, if reconciling items were financial charges – then inquire if these charges can be seen in the bank statement? Similarly, subsequent clearance for un-credited and un-presented cheques can be verified with the bank statement of later periods.
- Sometimes, short term liquid investments are also included in the cash balance. In this case, the source documents can be verified.
- For cash in hand, plan cash count activity. A management representation letter can be obtained if the cash count was not conducted at year-end.
In line with auditing standard, audit firms do not sign audit reports until they have obtained bank confirmation. Further, cash and bank is one of the most important auditing areas. Key stakeholders like investors, banks, Governments are highly interested in this account balance. So, you need to exercise due care while auditing cash and bank balance.
4-Audit procedures for property, plant, and equipment
Following procedures can be performed to audit the property, plant, and equipment.
- Obtain PPE schedule from an audit client.
- Reconcile closing balance in the PPE schedule with the general ledger.
- Analyze the movement of the balance from opening to closing of the account balance.
- Trace opening balance with the last year’s audited accounts.
- Recalculate depreciation expense. Compare your ‘’calculated expense’’ with the expense calculated by the audit client. If there is a difference, inquire management about it.
- Obtain a list of additions in the PPE. Further, sampling techniques can be applied to the selection of PPE purchased.
- Review PPE purchased documents – these documents include purchase order, goods receipt note, and payment supports. Likewise, physical verification can be a good option to verify this account balance.
- Obtain a list of items disposed-off during the year.
- Re-perform calculation for loss/profit on the disposal.
- Ensure correct profit/loss on disposal is recorded in the financial statements.
- Review supports for the cash receipt by selling PPE.
5-Audit procedures for a bank loan
Following audit procedures can be performed to obtain assurance on the bank loan.
- Obtain a schedule for the loan movement.
- Reconcile the closing balance of the schedule with the balance in the trial balance.
- Recalculate totals in the schedule to verify accuracy.
- Obtain a list of loans raised during the period under consideration.
- Obtain and review bank agreements for raising the loan.
- Review if audit client is complying with the covenant. (if any in the loan agreement)
- Vouch receipt/payment for the loan movement.
- Review balance in the bank confirmation with the trial. This helps ensure completeness and the existence of account balance.
6-Audit procedures in external audit for related party transactions
Following audit procedures can be performed to obtain assurance on related party transactions.
- Obtain a list of related parties from the audit client.
- Review accounting records to identify transactions from related parties.
- Review holding and other details to decide appropriate accounting treatment. For instance, it may be classified as a normal investment, joint venture, associate, or subsidiary.
- Review if sufficient and appropriate information is presented in the financial statement regarding disclosure.
- Review if there is a clause that transactions with the related parties are executed on commercial terms. If there is such disclosure, an auditor needs to verify transactions are executed at a commercial rate. It’s also called testing arm’s length transaction.
7-Audit procedures for accounts payable
Following audit procedures can be performed to obtain assurance on accounts payable.
- Obtain schedule for the movement of accounts payable balance.
- Trace movement for the account balance.
- Cross verify purchases with the increase of accounts payable balance. For instance, if there is an increase in purchases, accounts payable is expected to increase.
- Obtain supplier confirmation for the account balances. Reconcile balance in the confirmation with the supplier ledgers.
- Perform subsequent payment tests for the accounts payable balance. Usually, audit fieldwork takes place after some time of year-end. The audit client may have made payment for the outstanding invoices during this period. So, it’s advisable to review payment support, such as cash payment receipt or bank transfer, etc.
- Purchase orders, purchase invoices, goods receipt notes can be reviewed to ensure the existence and completion of an account balance.
8-Audit procedures for inventory
Following audit procedures can be performed to obtain assurance on the inventory.
- Obtain break up for the inventory. It may be in raw material, finished goods, and work in process.
- Conduct inventory count at the year-end. Compare count inventory with the ledger listing. In case there is some difference, it needs to be inquired from management. This procedure helps in verification for the existence of inventory.
- On a sample basis, perform NRV testing.
- NRV testing ensures that inventory is recorded lower of cost and net realizable value. Cost is the amount incurred in making the product. On the other hand, NRV is the amount that can be realized by selling the inventory. Accounting standards (IFRS and GAAP) require that inventory be recorded at the lower cost and NRV-Net realizable Value.
- Review inventory report to ensure NRV testing is performed for the old and obsolete items. It helps in assuring that the accounting record does not contain overstatements for the assets/inventory.
- Review last three purchases of period to ensure these are recorded appropriately. It helps ensure cut-off assertion.
- Review accounting treatment for the scrap inventory.
It’s important to note that NRV testing can be performed for finished goods as we have a selling price. On the other hand, valuation for material can be done via purchase invoices.
Similarly, the cost card can be reviewed to assess accuracy for the costing for work in process.
Conclusion for audit procedures in external audit
External auditors perform audit procedures to obtain sufficient and appropriate audit evidence. The auditors need to verify management claims regarding accuracy, completeness and other aspects of the financial statement.
So, auditors design and perform audit procedures to verify assertions and obtain audit evidence.