Auditing Techniques

The audit is the examination of the financial statements of any business, any government organization or department, or any individual. The audit does not depend on size. Each size of entity can be audited. Audit just checks whether the accounts are properly maintained according to the law.

Audit Techniques:

The process of auditing includes these several steps.

Vouching
Confirmation
Reconciliation
Testing
Physical Examination
Analysis
Scanning
Inquiry
Verification of posting
Flow chart
Observations

1. Vouching:

In this step auditor checks accounting transactions along with documentary evidence.
Through vouching, the auditor checks the authenticity of records. Invoices, receipts debits, and credit notes are checked in this step.

2. Confirmation:

In this step, the correctness of the transactions is checked. To confirm any receipt or invoice, the auditor obtains data from the invoice/receipt issuance office. This is don’t to confirm whether the numbers appearing here matches those of debtors.

3. Reconciliation:

This technique helps in finding out the differences in balances. The auditor uses this step to match the balances of both accounts.

4. Testing:

Auditors cannot check everything. Therefore, he selects some accounts/files or things on which he has a doubt, and then examines that account and applies all sorts of auditing techniques to figure out any mismanagement. This selection of a few components from the whole file is known as testing.

5. Physical Examination:

In this step, the auditor checks things physically, whether the assets/inventory mentioned in documents is physically present or not.

6. Analysis:

The auditor in this step separates important things to further study their relationship.

7. Scanning:

Auditors through scanning find out which accounts need more attention. Such accounts are separated from the rest in which the auditor has any doubt.

8. Inquiry:

When there is some sort of doubt and mismanagement, the auditor orders an inquiry. Inquiry helps in finding more detail about the suspected accounts.

9. Verification of Posting:

The auditor verifies the posting of original entries from books to the ledger and confirms the balance.

10. Observation:

After the above, all steps, the auditor through observation finds out all the odds and the mismanagements that happened within an organization.

Importance of Pre-audit producers

Pre-Audit:

Before the official audit by the Government of Pakistan, some companies also do their pre-audit. Companies do their pre-audit to ensure that there is no mismanagement within the organization. All the accounts are dully examined in pre-audit to find out any mismanagement and to recover that before the official audit. This is done to ensure that all the information listed in the accounts is correct and contains no mismanagement.
Companies can do a pre-audit by their own employees or they also can hire a private firm for conducting their pre-audit in order to determine the accuracy of the financial statements.

Importance of Pre-Audit:

Pre-audit is much important for an organization. When company foes pre-audit before the official audit, they are able to find out all errors in the financial statement and accounts. After finding these errors the companies fix all those errors before these errors are caught by an official audit. When all the accounts are fixed and transparent, the official audit does not find any error and hence the company does not lose its image.

The pre-audit helps in finding out errors and helps in removing the errors before the final official audit
Pre-audit saves the time of the company as well as of the auditor when the accounts are transparent.
Pre-audit is important; it helps to streamline financial information and documents.

Salient Features Required for An Auditor

Professional Competence:

He must be well versed in the fundamental principles and theory of all branches of accounting, General Accounting, cost, management accounting, etc. He should possess a sound knowledge of the techniques of audit and be conversant with the decided legal cases in the field of theory and practice of auditing. This tool of knowledge must be constantly replenished and kept up to date. He must possess a sound working knowledge of taxation laws. Income Tax sales tax, etc. of his country. He should be quite familiar with the company and mercantile laws; he should have thought of training in business organization management and finance. He should have an understanding of the general principles of Economics and Business statistics, and integrity.

Integrity:

The word integrity implies complete honesty, together with strength of mind. Integrity and keeping its flag flying up should be kept by an auditor as a guiding inflexible rule. He must be tactful and honest, the concept of "To be honest", has been explained by Lord justice in London, and "general bank 1895 case.
“An auditor must be honest, that is he must not clarify what he does not believe to be true and he must take reasonable care and skill before he believes what he certifies is true.
He must possess qualities of withstanding and resisting the influence direct or indirect exerted by others in the course of the discharge of his duty. He should not disclose the secret of his clients he should never compromise his principles, without being rigid in his attitude.

General skills:

He should be able to grasp quickly the technical details of the nature of his client's business. He must have the tact of putting intelligent questions to extract full information. He must be prepared to hear arguments and decide on logical grounds. He should have the ability to write his reports in a concise clear and correct manner. He will often be in need of patience, both with people, and what his professional problems.
ISA 3 has emphasized integrity and objectivity independence confidentiality skills and competence.

Integrity objectivity, independence:

The auditor should be straightforward, honest, and sincere in his approach to his professional work. He must be fair and must not allow prejudice or override his objectivity. He should maintain an impartial attitude in both be and appear to be freed of any interest, which might be regarded whatever its actual effect as being incompatible with integrity and objectivity.

Confidentiality:

The auditor must keep the information confidential. He /she should not disclose anyone’s data/information to any other body. During course work, the auditor comes through different organizational information, he should keep the secrecy of the data.

Skills and competence:

The auditor must have the capability to perform the audit. He/she must have the required experience and competence.
The auditor requires specialized skills and competence which are acquired through a combination of general education technical knowledge obtained through study and formal courses concluded by a qualifying examination and practical experience under proper supervision. In addition, the auditor requires a continuing awareness of developments including relevant international and national pronouncements on accounting and auditing matters and relevant regulations and statutory requirements.

Audit Engagement Letter

An audit Engagement letter is a kind of agreement that is signed by the client and the auditor. The auditor performs an audit of the client for which the client pays for that. For
the engagement letter, both the parties the client and the auditor discuss the services needed by the client. The amount of money, time duration of the audit, and other important things related to the agreement are discussed. All this information is written in a letter prepared by the auditor and sent to the client. If the client agrees, both of them sign the agreement, and the contract is formed. This process is known as an audit engagement letter.

Importance of Audit Engagement Letter:

An audit engagement letter creates a good communication channel between both parties.
There is no expectations gap between the auditor and the client
This clarifies the duties of both persons.
This also decides the amount of money and time duration of the audit
It does not create any kind of misunderstanding between the parties.

There is no doubt that an audit engagement letter is an important tool that helps the auditor as well as the client in making a written contract. This decides all the important elements of the contract and the terms and conditions of the contract. The absence of this letter would create a misunderstanding between the client and the auditor.

Powers of Auditor

The auditor is given the power to inspect any office of the accounts, under the control of the Federation or of a Province or a district, including treasuries, and such offices responsible for the keeping of initial or subsidiary accounts
the auditor has the power to access any accounts, books, papers, and other documents which deal with, or form, the basis of or otherwise relevant to the transactions to which his duties in respect of audit extend, shall be sent to such place as he may direct for his inspection.
Another power given is the right to visit branches. The results of branch operations have to be displayed in the financial statements. Hence may have to visit the respective branches to understand their functioning status.