MODULE – 2
AUDIT ENGAGEMENT
Audit Engagement
It is a written letter by which the auditor formally notifies his willingness to
engage the audit to the client. It is the initial stage of an audit. Steps included in
Audit Engagement are:
1. Sending Letter to the client alerting Audit
2. Meeting client to inform how, when and why the audit will happen.
3. Conducting primary surveys to understand the company
4. Testing control system and collect information
5. Preparing Draft of Formal Audit Report
6. Scheduling Exit Meeting
7. Client responds to the findings and recommendations of auditor
8. Issuing final report by the auditor and ask the client to conduct a survey
about audit performance.
Audit Planning
Audit planning refers to the planning by the auditor to enable him to conduct
an effective audit in an efficient and timely manner.
Audit planning Process/ Preparation for auditing / steps in audit planning
1. Letter of appointment – After audit engagement an auditor must receive a
letter of appointment from the client. If client is a company the letter must
made in accordance with The Companies Act, 1956
2. Ethical clearance- After receiving letter of appointment, in accordance with
ICAI, an auditor must communicate with the previous auditor of the firm.
3. Ascertain Scope of Audit- Depending on the conditions of Letter of
Appointment, auditor should clearly ascertain the scope of his work.
4. Acquire knowledge about the business- After deciding scope of work,
auditor should try to acquire full knowledge of business such as;
Knowledge about rules and regulations of the business by
studying MoA, AoA etc…
Knowledge about technical details of business
Knowledge about organization structure of business
Knowledge about accounting system of business
Knowledge about accounts of business
Knowledge about responsible officials who control the business
Knowledge about internal check in operation of business
Knowledge about duties of cashier of business
5. Study previous year’s financial statements- Auditor should go through the
audited financial statements of the previous year.
6. Instruct client- After acquiring the above knowledge, auditor should give
instruction to the client that to close all books of accounts, arrange all
vouchers serially and to prepare the following lists:
List of all relevant contract and title deeds
List of the details of capital expenditure and differed revenue
expenditure
List of sales and purchase returns
List of names and addresses of MD, Managers etc..
List of all debtors, creditors, bad and doubtful debts
List of all investments in cost price and also in market price
List of outstanding expenses, prepaid expenses, accrued
income and unearned income
Details of stock sheets and their method of valuation
7. Preperation of Audit Programme- Finally auditor prepares a detailed plan of
action before beginnings audit called audit programme and distribute it among his
staff.
Audit Programme
It is a written plan containing exact details with regard to the conduct of a
particular audit. It is a Plan of Action gives details of how much work is to be
done, to whom a particular work is to be allotted and the duration of time by which
the work is to be finished. Generally it is prepared by senior clerk.
Objectives of Audit Programme
1. To fix the responsibility of every clerk
2. To eliminate duplication of work
3. To provide guidance and instructions on work to be done
4. To review progress of audit
5. To control the audit work
Advantages of audit programme
1. Helps in fixing the responsibility of every clerk
2. Helps to eliminate duplication of work
3. Helps to provide guidance and instructions on work to be done
4. Helps to review progress of audit
5. Helps to control the audit work
Disadvantages of Audit programme
1. Staff may be mechanical in their work
2. Staff do not get sufficient opportunity to express their intelligence
and initiative
3. To small business units it would not be necessary to prepare an
audit programme
Types of Audit programme
1. Fixed or pre-determined Audited Programme- It is a “tailor
made” programme including a set of standardized instructions and
procedures to be followed during audit.
2. Flexible or progressive Audit programme- It is a “skeleton” form
of audit programme and it allows developing and modification of
the programme during the course of auditing in accordance with
situation.
Preparation before Auditing/How Proceed to an Audit
The considerations or preparations or proceedings before commencing the
new audit work are;
1. Letter of appointment - The auditor should obtain a proper letter of
appointment from the client and ensure that his appointment is in
accordance with the provisions of the Companies Act, 1956.
2. Ethical clearance from previous auditor - Before accepting an appointment
to act as auditor, a chartered accountant is required by the Institute of
Chartered Accountants of India (ICAI) to communicate with the previous
auditor
3. Scope of work - The auditor should clearly ascertain the scope of his work
and he can ascertain it from the provisions of the Companies Act.
4. Knowledge about business - The auditor should try to acquire full
knowledge of business and its affairs.
5. Knowledge about the rules and regulations - He should have a thorough
knowledge about the rules and regulations of the business, Memorandum
of Association, Articles of Association etc. if it is a company and the
partnership deed in the case of a partnership firm and the Trust Deed in the
case of a trust.
6. Knowledge about technical details - To make his work meaningful and
effective, the auditor should fully acquaint himself with the technical
details about the business.
7. Knowledge about the organization structure - The auditor should be aware
of the organization structure, authority responsibility relationship etc...
Present in the client's organization.
8. Knowledge about accounting system - The auditor should make himself
familiar with the different accounting systems to carry out his work
efficiently for different businesses like banks, insurance companies,
cinema houses etc..
9. Information about books of accounts, operation of internal check system
and officials – An auditor should ask from his client for a list of books of
accounts maintained and the names of officials who are assigned the role
of keeping them.
10. Information about the duties of cashier - He should understand the duties
of client's cashier and the method of keeping and controlling petty cash.
11. Study of the previous year's financial statements - The auditor should go
through the profit and loss account and the balance sheet of the previous
year and auditor's report.
12.Instructions to the client - After acquiring an up-to-date knowledge of the
affairs of a concern, the auditor should give clear instructions to his client
with regard to the following ;
The books of accounts should be closed before audit
All the vouchers should be serially arranged and filed
The following lists and schedules should be prepared for
reference
A list of all relevant title deeds and contract
deeds
A list of the details of capital expenditure during
the period
A list of deferred revenue expenditure
A list of sales returns and purchases returns
A list of documents to which the auditor will
have access
A list of names and addresses of managers, and
Managing Director
A schedule of debtors and creditors
A schedule of bad and doubtful debts
A schedule of investments exhibiting their cost
price and market price.
A schedule of outstanding expenses, prepaid
expenses, accrued incomes and unearned
incomes
Detailed stock sheets with their method of
valuation
13.. Preparation of Audit Programme - Finally, the auditor prepares a detailed
plan of action before he actually begins the audit of the business of his
client. This is done by preparing an audit programme. The auditor can
distribute the work and assign duties among his staff with its help
AUDIT FILE
The documents such as audit notes, audit programme, audit working papers
etc… prepared by an auditor for the efficient conduct of auditing is properly filed
in a folder is known as audit files. This serves as a guide in auditing and also as a
proof in court of law. Audit files may be of two types:
1. Permanent file – The file includes information regarding financial
history, Organizational structure, MoA, AoA, internal control system,
previous year audited financial statements etc…
2. Current File - The file contains information regarding current audit such
as financial statement draft, schedules supporting the financial
statements, audit programme, internal control questionnaire,
conformations from bank, debtors, etc…
AUDIT WORKING PAPER
Audit working papers are the documents and papers consist of details about
accounts which are under audit. They are the written private papers and
materials prepared by an auditor for each audit. It includes:
1. Draft copy of Trial Balance
2. Schedules of debtors, creditors, depreciation, inventories etc..
3. Reconciliation statements
4. Previous audit reports
5. Audit programme
Purpose/importance / Essentials of Audit working paper
1. They are properly organized, arranged, filed and numbered documents
represent the volume of work done by the auditor.
2. They helps in preparing audit report
3. They assist in planning, performing, co-coordinating and organizing the
work of audit team.
4. They help the auditor in locating the weaknesses of internal check system
and efficiency of accounting system.
5. It should contain essential data in an understandable manner.
The ownership and Custody of Audit working papers
are always vested with the auditor. In cases Sockockinisky vs. Bright
Graham& co. and Chandery Mrtin & Co. vs. Martin, court made
judgment that audit working papers belonged to the auditor and not to the
client as auditor is an independent professional.
AUDIT EVIDENCE
Audit evidence refers to the information obtained by the auditor in arriving
at his conclusion regarding financial statements. Different factors affecting audit
evidence are;
- Experience of auditor and materiality of item
- Audit procedure
- Types of information
- Degree of risk misstatements
- Trend of accounting ratios
Types of audit evidences
1. Oral audit evidence- If information is collected through discussion with
management, it is called oral audit evidence.
2. Visual audit evidence- If information is collected by observing, it is called
visual audit evidence.
3. Written audit evidence- If information is collected from written documents,
it is called written audit evidence.
4. Internal audit evidence- The information collected from the sources
generated within the entity, is called internal audit evidence.
5. External audit evidence- The information collected from the sources
generated outside the entity, is called external audit evidence
6. Persuasive audit evidence- Interim audit evidence is called persuasive audit
evidence
7. Conclusive audit evidence- Final audit evidence is called conclusive audit
evidence.
Methods obtaining audit evidences
1. Physical verification- Auditor in order to satisfy himself about the
existence of an asset or document, he is used with physical verification.
Physical verification is the examination of internal or external records or
documents, which are in paper form or in electronic form.
2. Documentation- Documentation or vouching means the examination of
original documents in order to verify its validity. Supporting documents
also examined for the purpose of;
- confirming authenticity of the documents
- examining relevancy of supporting documents
- examining approval and arithmetical accuracy of transactions
- examining the classification of transactions is proper
3. Direct confirmation-Enquiry or seeking information from
knowledgeable persons inside or outside the entity, formal or informal,
written or oral known as direct confirmation.
4. Re-Computation- The process of computation by the auditor with the
objective of checking arithmetical accuracy of accounting data of the entity
is called re computation.
5. Analytical review – Analytical techniques like Comparative analysis
(comparing information with industry information) and Relational analysis
(analyzing inter relation and intra relation of financial and non financial
information) are the techniques that an auditor may apply at any stage of
audit.
6. Representation - Obtaining evidence from management, minutes of
meeting of BoD, financial statements etc …
