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AUDIT PROCEDURES

Audit procedures are the methods that auditors use for obtaining audit evidence to form a basis
for their opinion on financial statements. Likewise, audit procedures are performed in order to
test various audit assertions related to different class of transactions and account balances.
Eight types of audit procedures include:
 inquiry
 confirmation
 inspection of records or documents
 inspection of tangible assets
 observation
 recalculation
 re-performance
 analytical procedures

Inquiry
Inquiry is the process of asking the clients for an explanation of the process or transactions
related to financial statements. This type of audit procedure usually involves collecting verbal
evidence. Likewise, auditors use inquiry procedure for a wide range in the audit process. For
example, auditors may inquire clients to understand the business and control environment; or
they may inquire about transactions or balances of financial statement line items.

Evidence gathered by formal or informal inquiry generally cannot stand alone as convincing.
Hence, auditors usually perform other procedures together with the inquiry such as inspecting the
supporting documents to ensure that the explanation provided by clients can be relied upon.

Confirmation
Confirmation is similar to the inquiry as it is also the procedure of asking for the information.
However, confirmation is usually done by asking the third party, instead of the client, to confirm
transactions and balances. This type of audit procedures is usually done through formal written
letters. Auditors usually perform the confirmation procedure for testing account balances such as
accounts receivable, accounts payable, and bank balances, etc. For example, auditors usually
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perform confirmation on the client’s bank balances in order to obtain evidence about its
existence as well as rights and obligations assertion.

Inspection of records or documents

Inspection of records or documents is the process of gathering evidence by examining the
records or documents. This type of audit procedures may be done by vouching the transaction
records to the supporting documents or tracing the supporting documents to transaction records.
For example, auditor may use the inspection procedure to test the occurrence assertion of
expense transactions by vouching them to receiving reports, supplier’s invoice and purchase
orders.

Audit assertions such as occurrence, accuracy, and cut-off are usually tested by inspecting the
documents to support the accounting transactions in the company’s records (vouching). And
completeness assertion is usually tested by selecting documents and trace them back to the
company’s records (tracing).

Inspection of tangible assets

Inspection of tangible assets is the process of physical examination of the company’s tangible
assets such as property, plant and equipment. This type of audit procedures can provide the
evidence of tangible assets’ existence. For example, auditors may test the existence assertion of
fixed assets by performing physical inspection of assets that are recorded in the fixed assets
register. Also, it is useful to note that the inspection alone will not provide evidence about the
rights and obligations. For this audit assertion, auditors may need to inspect the legal documents
of the assets.

Observation
Observation is the process that the auditors perform by looking at the procedures being
performed by the client. This type of audit procedures provides evidence that the client’s
procedures actually take place at the time the auditors perform the observation.
Observation is different from physical examination of assets as the physical examination of
assets is actually the same as counting assets while observation focuses only on the client’s
activities.
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For example, the auditor may perform an observation procedure by witnessing the counting of
inventories by the client. This observation procedure is to test the existence of the client’s
inventories counting procedures, not the accuracy of the client’s inventory.

Recalculation
Recalculation is the process of re-computing the work that the client has already done to see if
there are different results between auditor’s work and the client’s work. This type of audit
procedures is usually used to test the valuation and allocation assertion of the financial
statements. For example, auditors may perform recalculation on the depreciation of fixed assets
to test their valuation assertion.
Re-performance
Re-performance is the process that auditors independently perform the control procedures that
were originally done as part of the internal control system by the client. This type of audit
procedures is used to test the client’s control procedures. For example, auditors may use a re-
performance audit procedure in the test of controls on the bank reconciliation procedure that the
client already has done.

Analytical procedures
Analytical procedures are the processes of evaluating financial information through analysis of
trend, ratio or relationship between data including both financial and non-financial data. Auditors
usually perform this type of audit procedures by building their expectations about typical
transactions or account balances and comparing them to the client’s record.
If auditors find that the client’s record is inconsistent with their expectations, they will
investigate further on the variance that exists. The investigation might involve performing more
substantive tests.

For example, auditor may perform the analytical procedure on interest expense account by
multiplying the average interest rate with the average outstanding balance of the borrowings.
Then, the auditor will use the result to compare with the amount recorded by the client. Any
significant difference will be investigated further.