CHAPTER 13 AUDIT PRINCIPLES & AUDIT TECHNIQUES

AUDIT PRINCIPLES – 9 AUDIT PRINCIPLES ARE ( DISCO PAIR)

DOCUMENTATION

Auditor will prepare and preserve working papers

audit procedures applied and audit evidences collected
 INTEGRITY, OBJECTIVITY AND INDEPENDENCE
An auditor must maintain his integrity by being honest,
sincere and straight forward.
He should maintain highest standards of independence
and objectivity of forming an impartial opinion
 SKILL AND COMPETENCE
Auditor shall conduct the audit with due skill and care
CONFIDENTIALITY
Of auditor cannot be leaked at any cost
USING WORK OF OTHERS
Auditor may hire experts for complicated works
 PLANNING
Auditor should conduct the audit after making an audit plan
Audit evidence
Sufficient appropriate audit evidences must be collected
Internal control and Accounting system
will be checked by auditor.
Reporting and Audit conclusion
Auditor will give his opinion in a written audit report
 AUDIT TECHNIQUES
1) INSPECTION :- Auditor will inspect books of A/Cs, statutory
books, vouchers, deeds, documents etc to get documentary
evidences-
a) Documents originate at third party’s place & lying with them.
MOST RELIABLE
b) Documents originate at third party’s place & lying with auditor-
MOST RELIABLE.
 AUDIT TECHNIQUES
C) Documents originate at auditee’s place & lying with 3RD
Party – RELIABLE

D) Documents originate at auditee’s place & lying with

Auditee – RELIABLE ONLY IF INTERNAL CONTROLS
ARE SATISFACTORY.
 AUDIT TECHNIQUES
2) Observation - Auditor will observe internal control,
policies and procedures of auditee to collect visual audit
evidences.
3) Inquiry and Confirmation - Auditor seeks information
which is called inquiry and then cross checks that
information with others audit evidences which is called
confirmation
 AUDIT TECHNIQUES
4) Computation - is done by the auditor to check
arithmetical accuracy of books of auditee

5) Analytical Procedures - i.e analysis of key ratios and

trends, comparison with industry standards and
compliances
 AUDIT PLAN
Refers to the processes and activities that will be carried
out during the course of audit
 THE PROCESS OF AUDIT PLAN INCLUDES FOLLOWING
ELEMENTS:-
1) Purpose and objective of audit
2) Legal framework under which audit will be conducted
3) Significant areas of audit
4) Check points
5) Allocation of work to auditing staff
 THE PROCESS OF AUDIT PLAN INCLUDES FOLLOWING
ELEMENTS:-
6) Time schedule of completion of auditing tasks
7) Preparation of timeline regarding –
• Submission Of Draft Report-
• Final Discussion With Auditee
• Submission Of Final Report
THE PROCESS OF AUDIT PLAN INCLUDES FOLLOWING
ELEMENTS:-

8) Form and content of audit report

9) Identification of RMM
10) Checking of internal control
 ESSENTIALS OF AUDIT PLAN:-

1) Audit plan should be such which enables audit to be

carried out effectively, efficiently and economic
manner
2) Audit plan should be documented
3) Should be reviewed by an experienced auditor.
 ESSENTIALS OF AUDIT PLAN:-

4) Should contain nature, timing and extent

of audit procedures
5) Should contain the materiality levels
6) Should be flexible
7) Should be known to auditing staff
 RISK ASSESSMENT

Audit Risk Is A Risk That Auditor May Issue Clear Report But There
May Be Same Undetected Material Mis-statements.
3 ELEMENTS/TYPES/COMPONENTS OF AUDIT RISK
INHERENTRISK(IR)

Means Susceptibility Of Class Of Transactions To A Mis-statement

That Can Be Material Either Individually Or In Combination With
Other Mis-statements Assuming That There Did Not Exist related
Internal Controls
3 ELEMENTS/TYPES/COMPONENTS OF AUDIT RISK
CONTROL RISK
(CR)

Means IC That Existed Might Have Failed To Prevent, Detect,

Correct Mis-statement That Can Be Material Either Individually
Or In Engagement With Other Mis-statements
3 ELEMENTS/TYPES/COMPONENTS OF AUDIT RISK
DETECTION RISK
(DR)

Means auditors substantive procedures might not be

sufficient to detect a mis-statement that could be material
individually or in combination with other mis-statement.
Audit risk can be reduced to an acceptable low level
but cannot be made O due to inherent limitations of
audit.
COLLECTION OF INFORMATION ABOUT AUDITEE
1) Knowledge About Auditee’s Organization
2) Knowledge About Auditee’s Operations.
3) Familiarize With Auditee’s Financial Statement
4) Familiarize With Auditee’s Regular And Legal
Framework
5) Familiarize With Auditee’s Internal Control
6) Familiarize With Auditee’s Accounting System
7) Perform Preliminary Analytical Procedures
 AUDIT CHECK LIST

Is A List Of Things To Be Checked With 3 Columns

• Yes
• No
• Not Applicable
 AUDIT CHECK LIST

Following are benefits of checklist:-

1) It promotes audit planning
2) Helps in consistent audit
3) Serves as memory aid
4) Audit can be completed timely
 AUDIT CHECK LIST
Following are benefits of checklist:-
5) Audit can be completed timely
6)Helps in future references
7) Improves quality of audit
8) Serves as a record
9) Can be handed over to client before
10) Easy for auditing staff
 HOW TO COLLECT AUDIT EVIDENCES

Exactly Same 5 Points Of Audit Techniques

 AUDIT SAMPLING

It Means Application Of Audit Procedures To

Less Than 100% Items Of Population
 FACTORS TO BE CONSIDERED WHILE SELECTING SAMPLING
a) Apply random sampling (select sample without any
bias)
b) Sample size should be such that sampling risk is minimum
c) Select sample keeping in mind objective of audit
d) Apply stratification i.e, divide the population into both
material & non-material items & then selecting sample
from both material & non-material items.
AUDITPROCEDURE
1) COMPLIANCE

CHECKING WHETHER
PROPER IC EXIST & IF
EFFECTIVE & EFFICIENT
OR NOT
 2) SUBSTANTIVE
VOUCHING, VERIFICATION, ANALYTICAL PREOCEDURESAPPLIED TO
CHECK FOLLOWING:-
•Existence
•Occurrence
•Rights & obligations
•Accuracy
•Completeness
•Presentation & disclosure
 USING THE WORK OF EXPERT
Before Relying On Experts Work Auditor Should Check His:-
• Professional Qualification
• Skill And Competence
• Licence For Membership Number
• Experts Objectivity
•Experts Finding A Relevant And Reasonable Or Not Assumptions Made
By Expert
• Arithmetical Accuracy Of Expert
MENTIONING EXPERT’S NAME & HIS WORK IN AUDIT REPORT

CLEAR REPORT MODIFIED REPORT

CAN MENTION WITH

CAN’ T MENTION. EXPERT’SAPPROVAL.
 STEPS INVOLVES IN EXTERNALCONFIRMATION
1. Select The Information On Which External Confirmation Required.
2. Select The External Party From Whom Its Required
3. Design The Type Of Confirmation Request

POSITIVE NEGATIVE
Reply required from external party in Reply required only if does not
both cases i.e, when information tallies tally.
or even if does not tally.
 EVALUATION OF REPLY FROM EXTERNAL PARTY.

CONSISTENT WITH LICENSOR OR

OTHER AUDIT LICENCEE OF
EVIDENCES INCONSISTENT EXISTING CLIENT

RELIANCE WILL BE SHOULD

MORE AUDITOR ALTERNATIVE PERFORM
PROCEDURES MORE AUDIT AUDIT TO
WHICH IF NOT AVILABLE THEN GATHER
ISSUE MODIFIED REPORT EVIDENCES
 AUDIT TRAIL
Auditor Can Prove That He Had Planned And
Formed The Audit Procedures By Sharing Is
Working Papers Example Documentation
(Write Advantages Of Documentation
Learnt Earlier)
 MATERIALITY
1) Information on basis of which uses take the economic
decisions is regarded as material.
2)Auditor should contain materiality:-
• During Planning
• While Evaluating Audit Evidence
• While Forming An Opinion
 MATERIALITY

3)Materiality can be quantitative or qualitative

4)Materiality can be judged by
• Nature
• Value
• Disclosure
RECORD KEEPING - Means Documentation. (Read From
Documentation Chapter)