Advance Auditing & Assurance

Quick Revision Notes for CAP III

Chapter 7: Audit Procedures & Techniques- I

Coverage: Audit Procedures

NSA 520
NSA 500

CA Sunil Joshi

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 NSA 520
AUDIT PROCEDURES & TECHNIQUES

NSA 500
AUDIT EVIDENCE

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Meaning of Audit Procedures
• Audit procedures are the methods that auditors use
for obtaining audit evidence to form a basis for their
opinion on financial statements.
• Audit Procedures are performed in order to test the
Financial Statement assertions related to different
class of transactions and account balances.

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 Overall Audit Procedures

RAP
(Discussed in earlier Other than RAP
chapter)

Compliance Procedures Substantive Procedures

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Compliance Procedures
• Compliance Procedures are tests designed to obtain reasonable
assurance that those internal controls on which audit reliance is to
be placed are in effect.
• Test of controls consist of procedures directed toward the
evaluation of the effectiveness of the design and implementation
of internal controls.
• When test of control look at design issues, the auditor evaluates
whether the control has been properly designed to prevent or
detect material misstatement.

Assertions regarding compliance procedures:

1) Existence
2) Operating Effectiveness
3) Continuity

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Substantive Procedures
• Substantive procedures are the tests designed to obtain evidence
regarding the completeness, accuracy and validity of transactions.
• In substantive testing, auditors gather evidence to evaluate the
integrity of data, a transaction or other information. e.g., auditors
trace a transaction to the accounting records to verify that it was
properly recorded.

Types of Substantive Procedures

Test of Details
Analytical Procedures
- Vouching
(is discussed in following slides)
- Verification

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 Assertions in Substantive Procedures

Assertions about classes of Assertions about account

transactions and events, and related balances, and related
disclosures, for the period under audit disclosures, at the period end

- Occurrence - Existence
- Completeness - Rights and Obligations
- Accuracy - Completeness
- Cut off - Accuracy, Valuation and
Allocation
- Classification
- Classification
- Presentation
- Presentation

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 Analytical Procedures
• Analytical Procedures refer to the analysis of significant ratios and
trends to identify the fluctuation and variation in the financial
information. When performing analytical procedures, the auditors
examine variation in the both financial and nonfinancial data.
• Analytical Procedures are substantive tests of information made
by a study of comparisons and relationship among data.
• For e.g., Comparison of:
 Gross Profit Ratio with that of industry.
 Amount of Expenses on particular head of two different
periods.
 Balances of assets or liabilities, etc.

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Analytical procedures include the consideration of
comparisons of the entity’s financial information with,
for example:
• Comparable information for prior periods.
• Anticipated results of the entity, such as budgets or
forecasts, or expectations of the auditor, such as an
estimation of depreciation.
• Similar industry information, such as a comparison of
the entity’s ratio of sales to accounts receivable with
industry averages or with other entities of
comparable size in the same industry.

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 Analytical procedures also include consideration of
relationships, for example:
• Among elements of financial information that would be expected to
conform to a predictable pattern based on the entity’s experience,
such as gross margin percentages.
• Between financial information and relevant non-financial information,
such as payroll costs to number of employees.

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Types of Analytical Procedures
1) Ratio Analysis Various financial ratios of comparable periods are
computed for analysis. For e.g. GP ratio, NP ratio,
Asset turnover ratio etc.
2) Trend Analysis The account balances of two different periods are
compared for analysis of fluctuation. It can be done
either by diagnostic approach or by casual approach.

3) Reasonableness Auditors verify the reasonableness of the transaction

Testing through their own diligence and does not consider
the historical data for comparison.
4) Model Based Auditor compares the industry models / benchmarks
Procedures with the actual balances of the client in order to
identify deviations.
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NSA 520 ANALYTICAL PROCEDURES

 Definition of Analytical Procedures (para 4):

Evaluations of financial information through analysis of plausible
relationships among both financial and non-financial data.

Analytical procedures also encompass such investigation as is

necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from
expected values by a significant amount.

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Substantive Analytical Procedures (para 5)
When designing and performing substantive analytical procedures, either
alone or in combination with tests of details, as substantive procedures in
accordance with NSA 330 the auditor shall:
• Determine the suitability of particular analytical procedure by taking into
an account the nature of transaction, account balances and ROMM.
• Evaluate the reliability of data from which the auditor’s expectation of
recorded amounts or ratios is developed.
• Develop an expectation of recorded amounts or ratios and evaluate
whether the expectation is sufficiently precise to identify a material
misstatement.
• Determine the amount of any difference of recorded amounts from
expected values that is acceptable without further investigation.

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 Uses / Stages of Analytical Procedures

Stage I: Planning
Stage II:
For understanding Substantive Stage III:
the entity. Procedures Conclusion and
The assessment of Substantive tests are Reporting
Risk of Material performed to identify
Misstatement at the material misstatements
FS & assertion level at the assertion level. Opinion….
provides the basis Tests of control (TOCs)
for determining the are performed to assess
NTE of audit the operating
procedures effectiveness of controls
at the financial
statement and assertion
level

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Investigating Results of Analytical Procedures
(para 7)

Other information obtained Results of Analytical

by Auditor Procedures

Fluctuation is found

Inquire with management and Perform other audit procedures

obtain appropriate audit evidence

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Reliability of Data
• The reliability of data is influenced by its source and nature and
is dependent on the circumstances under which it is obtained.

Matters relevant while determining reliability of data are:

• Source of the information available.
• Comparability of the information available.
• Nature and relevance of the information available
• Controls over the preparation of the information that are
designed to ensure its completeness, accuracy and validity.

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Audit Techniques
 Methods and means available for collection and accumulation of audit
evidence are known as audit techniques.
 Some of the techniques commonly adopted by the auditors are the
following:
• Posting checking (Ledger)
• Casting checking
• Physical examination and count
• Confirmation
• Inquiry
• Year-end scrutiny
• Re-computation
• Tracing in subsequent period
• Bank Reconciliation
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Questions For Discussion
 Explain the analytical procedures that an auditor can adopt to verify
inventories. (July 2015)
 Answer: The auditor can adopt the following analytical procedures to verify
inventories.
 Quantitative reconciliation of opening stock, purchases, production, sales and
closing stock
 Comparison of closing stock quantities and values with those of previous year.
 Comparison the inventory turnover ratio with that of the previous year and
industry average, if available.
 Comparison of the current year gross profit ratio with that of previous year.
 Comparison of actual stock, purchase and sales figures with the budgeted one.
 Comparison of raw material yield/wastage with previous year.

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Questions For Discussion
 List out the analytical procedures that you would adopt in audit of Revenue of an
entity.
Answer : The analytical procedures that will be adopted in obtaining audit evidence
regarding the various assertions relating to revenue are as follows:
 Comparison of Gross-profit ratio to sales for the current year with the corresponding
figure of the previous years.
 Comparison of ratio of sales returns to sales for the current year with the corresponding
figures for previous years.
 Comparison of trade discount to sales for the current year with previous year.
 Review of Reconciliation of Excise/VAT booked during the year with Excise/VAT returns
submitted with the total sales booked.
 Comparison of dividend/interest/royalty for the current year with the corresponding
figures for previous years.
 Comparison of ratio of income on investments to average investment for the current
year with corresponding figures for the previous year.

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NSA 500: AUDIT EVIDENCE
 Auditor Should Obtain Sufficient Appropriate Audit Evidence to
express opinion on the Financial Statements.

Sufficiency = Quantity
Appropriateness = Quality (Relevance & Reliability)

Audit evidence – It is Information used by the auditor in arriving

at the conclusions on which the auditor’s opinion is based. Audit
evidence includes both information contained in the accounting
records underlying the financial statements and information
obtained from other sources.

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Auditors Duties (Para 6,7)
 The auditor shall design and perform audit procedures that are
appropriate in the circumstances for the purpose of obtaining
sufficient appropriate audit evidence.

 When designing and performing audit procedures, the auditor shall

consider the relevance and reliability of the information to be used
as audit evidence.

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Use of Management’s Expert (Para 8)
 If information to be used as audit evidence has been prepared
using the work of a management’s expert, the auditor shall, to the
extent necessary, having regard to the significance of that
expert’s work for the auditor’s purposes :
 Evaluate the competence, capabilities and objectivity of that
expert;
 Obtain an understanding of the work of that expert and
 Evaluate the appropriateness of that expert’s work as audit
evidence for the relevant assertion.

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Inconsistency in, or Doubts over Reliability of,
Audit Evidence (Para 11)

IF ..Audit evidence The auditor has

obtained from one doubts over the
source is OR reliability of
inconsistent with information to be
that obtained from used as audit
another evidence

Effect in Opinion–
Modification?

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--------END OF CHAPTER--------

Pc: Askideas

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