Audit (Paper 12B) Key points to remember 2.
Key points to remember
Chapter 2 - Audit engagement, audit programme, audit working papers,
audit notebook, audit evidence and audit report
What should be Objective & scope of engagement
contained in Management responsibility
Auditor’s Existence of inherent limitations
engagement Need for use of Internal Auditor
letter ? Management confirmation letter
Restrictions & limitations of Auditor liabilities
Basis of computation of Audit fees
Billing arrangement
Form of report & Other communications of engagement
Validity of report
Limits on submission of report to other authorities
Audit Detailed plan of auditing work containing:
Programme
Procedures to followed in verification
estimated time required for verification
description of the work to be done during an audit.
Assigning the responsibility to each audit assistant
arranging and distributing the audit work as well as checking
against the possibility of the omissions.
Advantages
Proper / systematic allocation of work to the audit assistants
Existence of checklist ensures that none of the audit
procedure is omitted
Individual responsibility for work may be assigned
Serves as a guide for planning the audit of the subsequent
years
Disadvantages
Same audit programme cannot be used for all the entities
Unnecessary for smaller concerns
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Audit (Paper 12B) Key points to remember 2.2
If any procedure is missed from the programme, it will not be
done
Auditors task becomes mechanical
Audit Working The record of planning and execution of audit engagement
papers Evidences the audit work performed
Types of audit working papers:
Permanent Audit File Current Audit File
Contains working papers which Contains working papers which
are useful for more than one are useful for only one
accounting period accounting period, ie the
current year
It contains documents related to It contains documents related to
the organizational structure, the current year like:
like:
- Engagement letter
- Memorandum of - Board meeting minutes
Association and - AGM minutes
- Article of Association in - Evidences for the
case of a company financial statements of
- Long-term Lease the current period, like
agreements invoices, bills etc.
Evaluation of internal controls, Evaluation of assumptions in
includes report on deficiencies Management letter
in internal controls, if any
Analysis of significant ratios Analysis of transactions and
and trends over a period of time balances of the current year
Notes regarding significant Notes on Audit programme
accounting policies
Contains significant audit Contains conclusions on
observations of prior years significant aspects of audit of
the current year
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Audit (Paper 12B) Key points to remember 2.3
Audit Notebook A bound book containing matters observed during the course
of audit
Separate notebook for each audit year
Forms part of the audit working papers and records
Serves as an evidence of work done
Should be maintained clearly, completely and systematically
Contains information like – Name of organization;
organization structure; important clauses of MoA and AoA;
errors and frauds detected; work completed and pending etc.
Audit Risk Risk that the auditor gives an inappropriate audit opinion
It is a factor of – Inherent risk, control risk and detection risk
Inherent risk is the risk of a misstatement, owing to the
inherent nature of the account balance. Eg complex
calculations / estimates involves judgement and hence are
likely to be misstated
Control risks is the risk of a misstatement not being detected
owing to weak internal controls
Detection risk is the risk of a misstatement owing to worn
audit procedures being employed by the auditor
Audit evidence Audit evidence are the set of facts and reasons which are
accumulated during the audit process
They forms the basis of audit conclusions
Audit evidence should be reasonable and sufficient
It should provide reasonable assurance on the assertions of
the management
Audit evidence may be internal or external
External evidences are more reliable than internal
Test of controls Test of effectiveness of internal controls
Gathers evidence on the operational effectiveness of internal
(Compliance
control procedures
procedures)
If the controls are strong, auditor can place reliance on them
and can reduce efforts on substantive procedures
Test of details This involves a complete checking of the validity and
completeness of the accuracy of the financial accounts
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Audit (Paper 12B) Key points to remember 2.4
(Substantive Substantive procedures are of two types – analytical
procedures) procedures and test of details
Audit Report Ultimate and final output of the audit procedure
Reflects auditor’s opinion and the work done by auditor
Audit report should be clear and concise
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