BMSCCM Principles & Practice of Auditing

UNIT 1 – INTRODUCTION TO AUDITING

DEFINITION OF AUDITING

Auditing is a systematic and independent examination of data, statements, records, operations and
performances of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and
recognizes the proposition before him for examination, collects evidence, evaluates the same and on
this basis, formulates his judgment which is communicated through his audit report.
- Institute of Charted Accountants of India
An audit is the independent examination of financial information of any entity whether profit-oriented
or not and irrespective of its size, or legal form when such an examination is conducted to express an
opinion.
- International Federation Accountants

FEATURES OF AUDITING

• Systematic process: auditing is a systematic and scientific process that follows a sequence of
activities which are logical, structured and organized.
• Purpose: the main purpose of auditing is to see whether the balance sheet shows true & fair view
of statement of affairs of the business and the profit and loss account shows the true operating
results during the year.
• Three-Party Relationship: the process of auditing involves three parties i.e. shareholders,
auditors and organization.
• Requisite qualification: the audit of companies can only be conducted by a qualifies Chartered
Accountant.
• Statutory requirement: Audit of accounts is a statutory requirement as per Companies Act 2013
• Evidence: the auditing process requires collecting the evidence i.e., financial and non-financial
data and examining thereof.
• Commencement: auditing starts where accountancy ends
• Level of knowledge: an auditor must have knowledge of accounting as well as audit techniques
and procedures
• Established criteria: the evidence for auditing purposes must be evaluated regarding the
established criteria which include International Accounting Standard, IFRS, Industry practices
etc.
• Opinion: the auditor has to express an opinion as to the reasonable assurance on the financial
statements of the business corporation.

OBJECTIVES OF AUDITING

1. Primary objective: the main objective of auditing is to very and establish a true and fair view
of financial statements. It is to be established that accounting statements satisfy a certain degree
of reliability. To judge the accuracy of books of account, the auditor must look into:
a) Access the system of internal control
b) Verify the accuracy of posting, balancing etc.
c) Confirm the validity of the transaction with supporting documents
d) Ascertain whether distinction has been made between capital and revenue items
BMSCCM Principles & Practice of Auditing

e) Confirm existence of assets and liabilities

f) Ascertain all statutory requirements of maintenance of books and records have been
complied with
g) Confirm existence of assets and liabilities
h) Ascertain all statutory requirements of maintenance of books and records have been
complied with

Examining the system of internal check

Checking arithmetical accuracy of books of accounts,

verifying posting, casting, balancing

Primary
Verifying the authenticity and validity of transactions

Checking the proper distinction between capital and

revenue nature of transactions

Objectives of
Auditing Confirming the existence and value of assets and liabilities

Detection & prevention of errors

Subsidiary
Detection & prevention of frauds

Under or over valuation of stock

2. Subsidiary objective:
a) Detection & prevention of fraud: errors are mistakes which are committed due to
carelessness or negligence or lack of knowledge. An error is usually taken to be innocent
and not deliberate. Errors such as errors of principle, errors of omission, errors of
commission and compensating errors.
b) Detection & prevention of frauds: frauds refer to intentional misrepresentation of financial
information by one or more persons among management, employees or third parties.
Frauds may involve misappropriation of cash or assets, manipulation or alteration of
records or documents, recording of transactions without substance, and misapplication of
accounting policies.
c) Under or over valuation of stock: the stock recorded in the books of accounts and stock in
actual should match. Over valuation or under valuation of stock is usually done by the top
level management.
BMSCCM Principles & Practice of Auditing

BASIC PRINCIPLES OF AUDITING

1. Integrity, independence and objectivity: the auditor has to be honest & sincere towards the work.
Auditor cannot be favoring the business corporation and must remain objective through the entire
process without any prejudice.
2. Confidentiality: the auditor has to acquire & access significant financial information of the firm
and that should be kept confidential. It should not be shared to any outside party without the
permission of client.
3. Skill and competence: the auditor must be experienced and trained in auditing work. The auditor
also needs to be aware regularly of new developments in the field of accounting, auditing and
statutory rules and regulations as amended from time to time.
4. Work performed by others: the auditor remains accountable for expressing opinion on financial
information whether the work delegated to assistants are properly performed. Hence, the auditor
must carefully supervise and review such work and be reasonably sure of the accuracy of such
work.
5. Documentation: the auditor must prepare & preserve all the significant documents such as audit
plan and auditing file. All these documents can be used as evidence that audit was conducted as
per the basic principles.
6. Planning: an audit plan permits the auditor to plan out the activities and enables it to be efficient
and timely.
7. Audit evidence: the auditor must obtain enough appropriate evidence before conduction audit
work. The collecting of evidence is done by compliance and substantive procedure.
8. Accounting system and internal control: it is the responsibility of management to maintain an
adequate accounting system and incorporating internal control system as per the requirements of
business.
9. Audit conclusions and reporting: the auditor should form the opinion of financial statements on
the ground of his/her review and assessment of audit evidence and knowledge of business.

ADVANTAGES OF AUDITING

1. Advantages of auditing to Business

a) Exhibits a true and fair view: audited books of accounts help to reveal that the balance
sheet and P&L account of the business corporation presents a true and fair view of the state
of affairs of the company.
b) Detection and prevention of errors & frauds: when books of accounts are audited, errors
and frauds can be detected and required steps can be taken to prevent the errors and frauds.
c) Expert advice: auditors with professional expertise can offer expert advice to the business
concern on different aspects such as tax matters internal check, internal control &
submission of required reports to statutory authorities, preparation of project reports & so
on.
d) Check on employees: auditing keeps the accountants & staff vigilant while preparing books
e) Resolving disputes: audited books of accounts serve as a basis for settling trade disputes &
conflicts for higher wages or bonus.
f) Claims settlements: auditing can be useful for insurance companies to settle the claims to
the companies for the loss of damages of business property
BMSCCM Principles & Practice of Auditing

g) Helpful in getting loans: audited books of accounts will be an authenticated statement to

banks to lend loans
h) Helpful in decision making: decision-making process of an organisation will be easy if the
audited financial statements are there which provides true and fair statement.
i) Determination of future trends: the trend of financial activities can be determined by
comparing the audited accounts with past years.
j) Increased goodwill: audited books of accounts increase the confidence of the interested
parties and general public which in turn enhances the goodwill of a business.
k) Basis of taxation: taxation authorities depend upon audited statements in assessing the
income tax, GST & other tax liability of business.

2. Advantages of auditing to Owners:

a) Benefits to sole proprietors: audited books of accounts assure proprietors about the
accuracy of accounts maintained by their employees. It also helps in analysing the financial
performance of the business.
b) Benefits of partners: audited accounts will be useful in valuing goodwill and business on
admission and retirement of a partner.
c) Benefits to shareholders: shareholders can judge the performance of management from
audited accounts. They value their shares based on audited financial statements.
d) Benefits of trust, cooperative societies: audit of accounts of cooperative societies & trust
provide evidence that the interest of members is properly safeguarded.

3. Advantages of auditing to Outsiders

a) Banks & financial institutions: loans & advances are granted by banks & financial
institutions to business firms based on audited financial statements.
b) Creditors: creditors are the suppliers of goods to businesses can assess the financial health
& liquidity position of business concern based on audited books of accounts.
c) Insurance companies: insurance companies can depend on audited books of accounts for
settlement of insurance claims
d) Statutory authorities: statutory authorities like the Income Tax department, GST
department accept audited financial statements for determining the liability that arises due
to income and sales
e) Prospective investors: prospective investors of the company who want to invest money in
shares and debentures of a company also depend on audited accounts to make investment
decisions.

LIMITATIONS OF AUDITING

1. Complexity to Business and system: auditors may not be able to perform the correct risk
assessment due to the complexity of the business and system
2. Management intention and override control: in case the management overrides the control,
auditor may not be able to detect the fraud risks or errors. Internal control is reliable only if
people working in the firm follow & have the right to execute their roles.
3. Scope: the scope of audit covers only the financial statements over the period that they are
auditing.
BMSCCM Principles & Practice of Auditing

4. Conflict of interest: independence & conflict of interest of audit team members can increase
the risks of poor audit quality and audit reports.
5. Time constraint: the quality of audit works and reports can be affected by the time constraints.
It happens when auditors have many clients on hand at the same time.
6. Cost factor: a very through and detailed audit would be a costly affair. It is not cost effective.
Auditor has to limit the scope of audit and use techniques like sampling and test checking.
7. Gives opinion: an auditor gives only the opinion regarding true and fair view of the books of
accounts & financial position of business after the completion of audit.
8. Not prevention: the work of audit begins after the completion of transactions recorded in the
books of accounts.
9. Lack of proper care and skill: sometimes auditor does not apply proper care and skill in
verifying the books of accounts.

DIFFERENCE BETWEEN ACCOUNTANCY AND AUDITING

Basis Accountancy Auditing

Definition Accounting is keeping records of Audit is a critical examination of
financial transactions and preparing financial statements to give an opinion
financial statements of their fairness
Nature The nature of accounting is constructive. Auditing is analytical in nature. It deals
It deals with the compilation of checking and verification of financial
accounting information for preparing statements
profit and loss accounts and balance sheet
Timing The timing of accounting is continuous Auditing has a periodic process. It is
with daily recording of financial carried out after the preparation of final
transactions accounts
Beginning Accounting starts where book-keeping Auditing starts where accounting ends
ends
Scope The scope of accounting is restricted to The scope of auditing is determined by
preparation of financial the agreement between auditor and its
client
Coverage Accounting covers all transactions, Auditing covers the final financial
records and statements having financial statements and records
implications
Focus The main focus of accounting is to record The main focus of auditing is to verify
and present all financial transactions & the correctness of financial statements
statements
Objective The prime objective of accounting is to The prime objective of auditing is to add
determine the financial position, credibility to the financial statements
profitability & performance
Performed Accounting is performed by the Auditing is performed by the auditors
by accountants
Legal status Accounting is governed by accounting Auditing is governed by standards on
standards auditing
Basis of Accountant is paid monthly salary Auditor gets a fixed amount as per
remuneration agreement with his client
Appointment Accountant is employee of the business Auditor is an independent outsider
concern appointed on contractual basis for a year
BMSCCM Principles & Practice of Auditing

Qualification No formal qualification has been An auditor must be a qualified chartered

recommended Accountant
Duration The accounting work is performed The audit may be conducted at the end
throughout the year of the year or throughout the year

TYPES OF AUDIT
Types of Audit

On the basis of conduct On the basis of objective On the basis of On the basis of
of Audit of audit independence organisational structure

Continuous audit Cash audit External audit Statutory audit

Interim audit Cost audit Internal audit Voluntary audit

Balance sheet Management Government

audit audit audit

Final audit Special audit

Operational audit

Performance audit

I. On the basis of conduct of audit

A. Continuous audit: the continuous audit is conducted throughout the year either at regular or
irregular short internals of time. The financial statements and books of accounts are verified
by the auditor or staff at regular intervals like weakly, fortnightly or monthly.
“A continuous audit involves a detailed examination of all the transactions by the auditor
attending at regular intervals say weekly, fortnightly or monthly, during the whole period of
trading” – T R Batliboi
Advantages of continuous audit
i) Complete checking of all the records
ii) Proper planning
iii) Preparation of Interim accounts
iv) Early detection of frauds & errors
v) Up-to-date accounts
vi) Valuable suggestions

B. Interim audit: it is a type of audit, which is done between the two annual audits. Interim audit
is suitable to those business corporation, which want to declare interim dividend. Interim
audit refers to the examination of books of accounts with the objective of checking the
recording to transaction correctly and working of company in the manner legally acceptable
before the conduct of any statutory audit.
BMSCCM Principles & Practice of Auditing

Advantages
i) Timely completion of final audit
ii) Moral check on fraud
iii) Easy settlement of insurance claim

C. Balance sheet audit: balance sheet audit concerns to the verification of different items of
balance sheet such as assets, liabilities, reserves and surplus, provisions, profit and loss
account. Audit work begins from the balance sheet, working back to the books of original
entry and documentary evidence.

D. Final audit: in final audit, the auditor takes up audit work of checking the books of accounts
at the end of the accounting period which financial statements have been prepared.

II. On the basis of objective of audit

A. Cash audit: the cash transactions like cash receipts and payments are audited by the auditor
in detail in cash audit

B. Cost audit: cost audit deals with the detailed checking and verification of the correctness of
the techniques and systems of costing. It is the verification of the correctness of cost accounts
and adherence to the cost accounting plans. Cost audit helps to verify the accuracy of costing
data.

C. Management audit: management audit is an investigation of a business from the highest level
downward in order to ascertain whether sound management prevails thoughtout, thus
facilitating the most effective relationship with outside world and most efficient organization
and smooth running of internal organizations.

D. Special audit: the central government is empowered to appoint a special auditor to audit the
working of firm and its states of affairs if the activities of the company are not being managed
in accordance with the sound business principles

E. Operational audit: operational audit involves intelligent study of different operation of the
various functional area of a business and observing the weakness, lapses, in efficiencies in
operation and suggesting ways to strengthen the system.

F. Performance audit: it is the procedure to examine the profits and losses of different economic
activities performed by a company, analysing the relationship between production and sales
and finding the new avenues for maximizing the profits.

III. On the basis of degree of independence

A. External audit: external audit is also known as independent audit. It refers to the audit which
is conducted by external auditors. This type of audit is most commonly intended to result in
a certification of the financial statements of a business unit
BMSCCM Principles & Practice of Auditing

B. Internal audit: internal audit refers to the audit of books of accounts by the staff of the
company. The staff may or many to have the professional qualification to audit the books of
accounts. An internal audit offers risk management and evaluates the effectiveness of the
internal control, corporate governance and accounting processes of the company.

IV. On the basis of organisational structure

A. Statutory audit: statutory audit is an audit of books of accounts of a business corporation by

qualified auditors which is compulsory requirement under law. Statutory audit is mandated
by a law or a statue to ensure the accounts presented to the regulatory body and public are
true and fair.

B. Voluntary audit: where the audit is not compulsory under any law or statue, but is undertaken
by the owner voluntarily to get the benefits of audit, such audit is called as voluntary audit.

C. Government audit: government audit is the means through which public management is
verified and controlled. The audit of government offices and departments is covered under
the government audit. A separate department is maintained by government of India known
as account and audit department which is headed by Controller and auditor general of India.

PREPARATION BEFORE COMMENCEMENT OF NEW AUDIT

1. Obtaining the letter of appointment

2. Knowing the nature and scope of his duties
3. Knowledge of the system of accounting employed
4. Obtaining of the list of principal officers of the client’s organization
5. Knowledge of internal control in force in the client’s business
6. Obtaining of the list of books
7. Study of the previous year’s financial statements
8. Study of the important documents
9. Giving instructions to the client
10. Ascertain the nature of business
11. Knowledge of the organization structure

WORKING PAPERS

Audit working papers are a set of documents which record all audit evidence obtained during financial
statements auditing, internal management auditing, information systems auditing and investigations.
These papers are used to support the audit work done in order to provide assurance that the audit was
performed in accordance with the relevant auditing standards.

Audit working papers are the written private materials, which an auditor prepares for each audit. They
describe the accounting information which he receives from his client, the methods of examination
used, his conclusions and the financial statements.
- W Johnson
BMSCCM Principles & Practice of Auditing

Purpose of working paper

• They show the extent to which accounting principles and auditing standards have been
adhered to
• They provide essential support for the auditor’s opinion including evidence that the
examination was conducted in accordance with generally accepted auditing standard
• They also reveal how the work was performed by the audit staff and thus helps he auditor in
forming an opinion about their efficiency
• They assist the auditor in justifying his position against criticism and can be used as evidence
if a legal action is brought against the auditor alleging negligence in the performance of his
duties.
• They help the auditor in finalizing his audit report without much delay.
• They enable the auditor to know the weakness of the internal check system in operation, and
the inefficiency of the accounting system, if any. He may advice his client the ways and means
to improve this inefficiency.
• These working papers serve as guide to the auditor for audits of the same client in the
succeeding years

AUDIT NOTE BOOK

An audit notebook is a book, register, or diary maintained by the audit staff during the audit for
recording his observations during the audit, the points to be discussed with the senior audit clerk or
auditor, the points that require further clarifications, explanations and investigation and also the
inquiries made and the replies received to it.

Objectives of Audit note book

1. To know about the nature of business,
2. Detection and prevention of fraud and errors effectively.
3. To make the future audit work easier.
4. To know the facts where clarification and explanation are essential.
5. To check the list of debtors and creditors.
6. To present as proof by the auditor to clearance over the cases.

Advantages of Audit Note Book

1. It helps the auditor to have a record of important points that arise during the audit.
2. It is helpful in the preparation of audit report
3. It helps assess the efficiency, ability, and sincerity of the audit staff.
4. It can serve as evidence in a court of law if a suit is filed against the auditor for negligence of
duty.

Disadvantages of Audit Note Book

1. If it is not prepared carefully and properly, it can be used in a court of law as evidence of
negligence by the auditor.
2. It promotes a fault-finding attitude in the minds of the audit staff.
3. It may create misunderstandings between the staff of the client and the audit staff.
BMSCCM Principles & Practice of Auditing

Contents of Audit Note Book

1. A list of books of accounts maintained.
2. The nature, duties, and responsibilities of principal officers
3. Particulars of missing receipts and vouchers
4. Mistakes and errors detected
5. The points calling for clarifications and explanations
6. The points deserving the attention of the auditor
7. Various totals and balances
8. Extracts from the minutes and contracts
9. The points to be part of the auditor’s report
10. Date of commencement and completion of the audit

AUDIT PROGRAM

An audit program is the auditor’s plan of action, specifying the work to be done, the procedures to be
followed for doing the work, the persons responsible for the completion of the work and the duration
of time within which the work has to be completed.

Advantages
1. Audit work can be started immediately in a systematic manner once an audit program is made
ready
2. It ensures that each part of audit work is completed, and nothing is omitted.
3. It provides guidelines to the audit staff for the performance of the audit work allotted to them
and guides them for succeeding years.
4. It facilitates the proper distribution of work among the audit staff.
5. It facilitates the conduct of audit work by several audit assistants simultaneously.
6. It fixes up responsibilities among the audit staff for any omission or commission.
7. It helps the auditor to watch the progress made by the audit staff in the audit work.
8. It helps the auditor to exercise effective control over his audit staff.
9. It helps to complete the audit work within the scheduled time and increase the efficiency of the
audit staff.
10. It helps the auditor in assessing the cost of an audit

Disadvantages
1. The work of audit staff becomes stereotyped and mechanical.
2. Initiative and interest of the efficient audit staff will be discouraged, as they have to act as per
the audit program simply.
3. As the time limit for the completion of the audit work is fixed, the work may be hurried
4. The audit program may be followed from year to year without any alteration which leads to
inefficiency of the audit work.
5. A rigid audit program is useless
BMSCCM Principles & Practice of Auditing

AUDIT PLANNING

An audit plan is the specific guidelines to be followed when conducting an audit. It helps the auditor
obtain sufficient appropriate evidence for the circumstances, helps keep audit costs at a reasonable
level, and helps avoid misunderstandings with the client.

Advantages
1. Obtain evidence: Audit planning assists the auditor in getting sufficient appropriate proof for
the circumstances.
2. Economical: Audit planning helps to keep the audit costs at a reasonable level.
3. Avoidance of misunderstandings: Audit planning plays a very significant role in avoiding
misunderstandings with the client.
4. Identification of problems: Audit planning helps promptly identify potential problems.
5. Scope: An auditor can easily decide the scope of audit work well in advance.
6. Smooth work: Audit planning helps to perform the audit work smoothly and in a well-defined
manner.
7. Timely completion of work: Audit planning ensures that work is completed properly within the
particular time and no significant area is left out.
8. Coordination: Audit planning facilitates coordination of the audit work done by auditors and
other experts.

Steps Involved in Audit Planning

1. Planning activities: The auditor needs to decide the overall audit strategy that describes the
scope, and timing, and the audit guides the development of the audit plan.
2. Defined report requirement: The audit report is very significant and the auditor should identify
the objective of using audit reports and the time needed.
3. Assess conflict of interest: The auditor should consider the factors that could influence the audit
team member’s professional judgment and subsequently the quality of the audit report.
4. Assess resource requirement: The success of audit engagement and the good quality of audit
reports depend importantly on the audit resources.

AUDIT STRATEGY

Audit strategy outlines how an audit must be conducted and sets the timing and scope of audits. It
helps develop an audit plan comprising detailed responses to an auditor’s risk evaluation. Audit
strategy refers to the combination of the audit approach taken by an auditor, resource allocation and
management, the way of managing the audit engagement, and the audit timing.

Contents
1. Significant risks: Describe the significant risks and mentions how the auditors will address
them.
2. Materiality: includes performance materiality and overall materiality
3. Deliverable and timetable: auditors describe the audit’s timetable with the deliverable
documents
4. Independence: describes how the auditors ensure they are independent in the audit engagement
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5. Audit approach and scope: details of the approach and standards auditors use and also mention
whose works the auditors consider reliable.
6. Audit engagement team: describes the senior members of the audit team, including the team
manager and leader
7. Overview: summarizes the auditors’ responsibilities and engagement.

AUDIT ENGAGEMENT

An audit engagement refers to the formal arrangement between an auditor and a client to conduct an
independent examination and evaluation of the client’s financial information and operational
processes.
The objective of an audit engagement is to provide an opinion on the fairness and accuracy of the
client’s financial statements and to enhance the credibility and reliability of financial reporting.

Types of Audit Engagement

1. Financial statement audit: focuses on the company’s financial statements. The auditor will
examine the accuracy and completeness of the financial statements and ensure that they are
prepared in compliance with applicable accounting standards and regulations.
2. Compliance audit: verifies whether the company follows specific laws, regulations, or
contractual obligations. It ensures that the company complies with legal and regulatory
requirements and can include areas such as tax compliance, environmental compliance, or data
privacy compliance.
3. Operational audit: an operational audit is focuses on reviewing the efficiency and effectiveness
of the company’s operations, processes and procedures. It may include inventory management,
procurement processes, and employee productivity.
4. Information systems audit: it examines the company’s information systems to ensure they are
secure, reliable and compliant with relevant regulations. The auditor will assess the integrity
of the company’s data.
5. Internal audit: an internal audit is conducted by a company’s internal audit department or by an
external auditor on behalf of the company. An internal audit aims to assess the effectiveness
of the company’s internal controls and risk management processes and provide
recommendations for improvement.

AUDIT DOCUMENTATION

Audit documentation refers to the written records and materials that auditors create and maintain
during the course of an audit. It serves as a comprehensive record of the planning, execution and
results of the audit, providing evidence of the auditor’s procedures, findings, and conclusions.

Key Elements of Audit Documentation

1. Purpose and importance: audit documentation provides a record of the audit work performed,
supporting the audit opinion, facilitating review and supervision, aiding in the continuity of the
audit, and demonstrating compliance with auditing standards and regulations.
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2. Types of documentation: documents such as audit programs, audit tests and procedures,
supporting evidence, analyses and summaries, correspondence, memoranda, conclusions, and
recommendations.
3. Requirements and standards: audit documentation is required by auditing standards to support
the audit report and demonstrate that the audit was conducted in accordance with professional
guidelines.
4. Organizational structure: working papers are typically organized in a structured manner, with
clear headings, references to audit objectives, cross-references to supporting documents and
proper dates.
5. Ownership and access: audit documentation is the property of the audit firm. It is important to
ensure that access is controlled and that only authorized individuals can view or make changes
to the documentation.
6. Review and supervision: senior auditors and reviewers use documentation to understand the
procedures performed, evaluate the quality of work, and provide guidance or feedback.
7. Future reference and continuity: documentation is required for future reference, when
reviewing previous audits or conducting follow-up engagements. It also ensures continuity
when different auditors work on the same engagement in subsequent periods.
8. Legal and regulatory considerations: comprehensive documentation can provide a defence in
case of legal disputes. It helps to demonstrate the auditor’s due diligence and professional
judgment.

AUDIT EVIDENCE

Audit evidence is the information, documentation and data that auditors gather and evaluate during an
audit engagement to support their conclusions and opinions on an organization’s financial statements
and operational processes. It is the foundation upon which auditors form their judgments and make
decisions about the accuracy and reliability of the audit work.

Key concepts of audit evidence

1. Nature of audit evidence: audit evidence can be in various forms including financial statements,
contracts, invoices, bank statements, emails, physical assets, etc. It may be obtained from
internal or external sources.
2. Sufficiency and appropriateness: audit evidence must be adequate, relevant, and reliable to
provide a reasonable basis for forming an opinion.
3. Audit procedures: auditors use a variety of procedures to gather evidence, including inspection,
observation, inquiry, confirmation, recalculation, reperformance, and analytical procedures.
4. Risk assessment: the nature and extent of audit procedures depend on the assessed risks of
material misstatement. High-risk areas receive more extensive testing.
5. Independence and objectivity: auditors must remain independent and objective to ensure their
conclusions are unbiased and reliable.
6. Documenting evidence: audit evidence is documented in working papers to provide a clear
record of the procedures performed, results obtained, and conclusions reached.
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Types of audit evidence

1. Physical evidence: Tangible items such as inventory, property, or assets are physically
inspected or counted to verify their existence and condition.
2. Documentary evidence: Written or electronic records, such as contracts, invoices, bank
statements, and emails, provide documentary support for transactions and balances.
3. Oral evidence: Information obtained through discussions with employees, management or
other parties can provide insights into operations, processes, and controls.
4. Analytical procedures: Comparing financial information with expectations or industry
benchmarks helps to identify unusual or unexpected fluctuations that may require further
investigation.
5. Confirmation: external parties, such as banks or customers, may be asked to confirm balances
or transactions directly with the auditor to verify the accuracy of information.
6. Reperformance and reconciliation: auditors may independently perform calculations or
reconcile accounts to verify accuracy.
7. Observation: Auditors may observe physical processes, control activities, or operations to
assess their effectiveness.

AUDIT WRITTEN REPRESENTATION

Written representations in auditing refer to formal written statements provided by management to

confirm certain matters related to the financial statements, internal controls, and other information
being audited. These representations serve to enhance the reliability of audit evidence and support the
auditor’s conclusions and opinions.

Importance of written representation

1. Purpose: The purpose of written representations is to obtain acknowledgment and confirmation

from management regarding various matters relevant to the audit.
2. Auditor’s request: auditors prepare a written representation letter and present it to management
for their review and signature. The letter includes a list of specific assertions and matters
management asks to confirm.
3. Scope of representations: Written representations cover a wide range of areas, including
financial statements, completeness of information, accuracy of disclosures, significant
estimates, contingent liabilities, related party transactions, compliance with laws and
regulations, and the availability of records and documentation.
4. management’s responsibility: management is responsible for providing accurate and complete
information in the written representations. This reinforces the principle of management’s
accountability for the financial statements and related disclosures.
5. Importance of documentation: The auditor documents the process of requesting, obtaining, and
evaluating written representations in the audit working papers.