Auditors perform audit procedures to obtain sufficient and appropriate audit evidence on the identified risks.
Generally, auditors understand business, assess the risk of material misstatement, plan audit procedures, obtain audit evidence, and form their opinion.
So, the extent and nature of audit procedures are dependent on the risk of material misstatement. If the risk of material misstatement is higher, auditors need to plan extensive audit procedures and vice versa.
Likewise, auditors need to perform different audit procedures for account balances, financial information, and operational information. Similarly, these procedures differ from client to client and period to period. It’s because different clients have different control environments resulting in a different risk of material misstatement.
Overall, it’s important to keep in mind that the extent and design of audit procedures depends on the risk of material misstatement carried by audit engagement.
Generally, there are five kinds of audit procedures that include the following.
- Analytical review
Observation is when auditors observe the real business process with professional behavior and keeping risks in mind. This observation can directly serve as audit evidence. For instance, an auditor can notice if the client complies with policies like material in/out movement halted during inventory count.
So, observation helps auditors to assess if the client is committed to the internal controls. Further, auditors can develop point estimates based on observation and compare them with the reported figures. This helps understanding if reported figures are reasonable and in line with their observation.
For instance, you are auditing a retail shop and observing few customers daily. On the contrary, the accounting record shows millions of sales. So, your observation is not in line with the reported financial information. Hence, this point estimate cannot be used as audit evidence. Instead, you need to extend audit procedures on revenue to get sufficient and appropriate audit evidence.
2-Inquiry as audit procedures
Inquiry is performed by the auditor when they notice some unusual balance or information in the accounting record. It’s a procedure that seeks explanation/information from the management. For instance, during an audit, you notice marketing expense has increased in comparison to last year. However, revenue remains static. So, you decide to approach management and seek their explanation.
Although, it may not be logical to rely on explanation and use it as audit evidence. But, it’s a way to proceed and discover evidence by a discussion with the audit client.
Analytical review is when auditors compare account balance, information, trend, market information to get reasonable assurance on the set of financial statement.
These procedures are performed at different levels including planning, execution, and opinion formation. At the planning stage, these procedures help assess the risk of material misstatement.
Analytical reviews help obtain sufficient and appropriate audit evidence at the execution level. By comparing different account balances, the auditor concludes on the reasonableness of account balances. This acts as evidence. Although, it’s counted as limited evidence and not sufficient to base your opinion.
At the time of finalization, an auditor again compares different balances. It’s because balances usually change because of adjustment during fieldwork.
Example of analytical review
- Comparing marketing expense with the revenue.
- Comparing financial charges with the loan,
- Comparing sales with the last year.
- Comparing sales growth with the industry average.
- Analyzing expenses.
There can be different analytical procedures depending on the industry, account balance, market, regulations, and other factors.
Inspection is one of the most important audit procedures. Usually, it’s performed at the time of audit execution. It involves a review of different internal and external documents to get assurance on the account balance or transaction.
In fact, a major portion of audit evidence is based on document inspections. The auditor needs to file and preserve documents in the audit file.
Generally, documents are inspected to assess whether the transaction was authorized, approved, and posted in the correct accounting period.
Example of inspection as an audit procedure
- Auditors inspect sales invoices, goods dispatched notes, and payment receipts to ensure recorded revenue does not contain material misstatement.
- Inspect the purchase invoice, goods receipt notes, and payment to ensure recorded purchase/expenses do not contain material misstatement.
- Review PPE purchasing documents like internal requisition, quotation approved, capital budget, purchase order, goods receipt note, and payment to ensure the recorded purchase is free from material misstatement.
5-Recalculation as audit procedures
Recalculation is when auditors re-perform certain calculations to check accuracy. It’s done by comparing the final figure calculated by the auditor with the figure recorded in the general ledger. It helps the auditor ensure the correct amount is incorporated in the financial statement.
Example of recalculation as an audit procedure
- Auditors recalculate deferred tax to ensure the accuracy of deferred tax asset/liability and provision.
- Depreciation recalculation to ensure accuracy of depreciation expense, accumulated depreciation, and closing net book value.
- Recalculation for amortization to ensure the correct amount is recorded in the financial statement.
Conclusion on audit procedures
Auditors perform audit procedures to collect sufficient and appropriate audit evidence. The extent and scope of procedures vary from client to client and period to period.
The performance of audit procedures is one of the most important audit activities that consume time and energy. It involves collecting understanding, documents, explanations, and documentation, facts and figures.
Generally, five different audit procedures include observation, inquiry, analytical review, inspection, and recalculation.