Audit Procedures Definition, Types, and Examples

If you have questions related to audit procedures for accounts receivable, accounts payable, cash receipts, then you have arrived at the right place. Here we will discuss everything about the audit process.

So, let’s get started…

What are Audit Procedures?

An audit is a procedure in which a group of independent auditors evaluates a corporation’s or company’s financial accounts.

The objective of an audit is for auditors to express views, typically in the shape of an audit report, on whether the financial reports present a truthful and fair picture.

Audits are generally statutory and mandated by law.

Other parties, such as investors, financial institutions, creditors, and others, may need an audit of its balance sheet before dealing with it.

To gather adequate, relevant audit evidence, auditors must execute many sorts of audit processes.

In this scenario, the methods that auditors use are usually determined by the risks that they confront.

Auditors will have to apply their professional judgment to create appropriate audit methods to respond appropriately to the identified risks.

Moreover, different audit methods are typically based on the various forms of audit evidence that auditors seek.

Types of Audit Process

There are different types of audit procedures.

Auditors can switch between these processes to find the most appropriate attribute and statement being examined. They can utilize one of eight types along with audit procedures examples.

Analytical Procedures

This is basically audit procedures for financial statements and one of the most basic but powerful tools used by auditors.

Analytical procedures are a collection of techniques that auditors use to examine a company’s financial statements.

Evaluation of trends, ratios, and linkages between the data in the financial statements are common examples of these procedures.

It can also entail figuring out how financial and non-financial variables are related.

Typically, auditors must use their judgment to assess if differences discovered through analytical processes are worth further investigation.

Auditors can detect anomalies in financial data given in a company’s financial statements using analytical processes.

Auditors can examine these anomalies further once they’ve been identified, which usually involves talking to management and people in charge of control.

Example

Analytical techniques include auditors evaluating an organization’s strategic ratios against historical data to spot any irregularities. Likewise, it might be a horizontal and vertical comparison of each financial statement’s line items.

Confirmations

Auditor confirmations are documents issued to third parties by auditors to verify their accounts with the customer.

To verify, the auditor contacts the partners with whom the company still has outstanding amounts.

Customers, bankers, and suppliers are examples of these. Confirmations are letters that do not seek the client’s participation. As a result, they constitute an essential audit method.

Confirmations are proof that there are balances in place.

They may also give valuation proof; however, it may not be correct.

Likewise, even though the customer is not personally participating in the confirmation process, auditors require the authority to communicate these confirmations to third parties.

Only a few precise balances can be verified by auditors using this type.

Example

Auditors may send bank confirmations to all of the client’s accounts to confirm their bank balance.

Inquiry

Inquiry is the procedure of requesting customers for an explanation of the financial statement process or activities.

Typically, this kind of audit technique includes gathering verbal evidence. Similarly, auditors employ the inquiry approach for a variety of purposes during the audit process.

Example

Auditors may question customers about transactions or balances of financial statement line items to understand the business and control environment better.

Inspection of Records or Documents

The practice of acquiring evidence through reviewing records or documents is known as record or document inspection.

You can also consider it as an audit procedure to detect fraud.

This type of audit can be performed by verifying transaction records against relevant documents or tracing supporting data back to transaction records.

Auditors can confirm numerous assertions by checking source papers required for every transaction in a financial system.

These statements could include ones about occurrence, correctness, completeness, or cut-off.

Auditors may inspect non-financial documentation to verify other parts of the financial accounts.

Example

Auditors may examine the relevant documents of a given transaction in a firm’s sales system to see if the specifics match the accounting systems.

Inspecting Assets

Assets are an important aspect of practically every company’s financial statements.

As a result, auditors must conduct audit procedures on those assets to assure their continued existence.

Although there are many different sorts of assets, only tangible assets may be inspected.

An asset inspection usually entails looking at a company’s fixed assets, also known as property, plant, and machinery. It may also entail inspecting the company’s inventory.

Example

Auditors can compile a list of all a corporation’s fixed assets and physically inspect them to ensure their presence. Larger businesses may need to start by selecting a sample of assets.

Observation

The auditors’ observation approach includes examining the procedures that the client is performing.

This kind of audit technique gives proof that the customer’s procedures are carried out when the auditors see them.

Physical inspection of assets differs from observation in that physical examination of assets is the same as counting assets, whereas observation concentrates solely on the client’s activities.

Example

By watching the client’s inventory count, the auditor can execute an observation method.

This observation technique aims to see if the client’s inventory counting procedures exist, not to see if the client’s inventory counting procedures are accurate.

Recalculation

The recalculation procedure is quite simple. The balances or transactions that the customer has already completed are recalculated or recomputed by the auditors.

Typically, they recalculate numbers to confirm that the quantities in the financial statements are consistent with the auditors’ predictions.

Auditors can also spot discrepancies between the predicted and actual amounts and look into them further.

They can employ recalculation to check the valuation and allocation, as well as the accuracy claims.

Example

Auditors can recalculate a company’s interest expense by multiplying a loan’s closing balance by the interest rate acquired from the contract.

Reperformance

The process of reperformance is identical to that of recalculation.

On the other hand, auditors independently undertake the control processes that the customer has already completed as part of its online control system during reperformance.

Reperformance is an important aspect of the audit process’s control testing.

Certain recalculations that are part of a customer’s internal controls may be required during reperformance.

Examples

Bank reconciliation is a type of internal control that auditors can use to confirm that the client’s internal controls work correctly.

How to Design the Audit Procedure?

Audit processes are typically designed by auditors based on the risks involved with target transactions or events and how the auditor reacts to those dangers.

Risk assessment aids auditors in developing the most appropriate audit processes.

Audit procedures that are followed correctly help auditors execute their jobs more efficiently and reduce audit risks (detection risk).

When creating an audit procedure, the auditor must make certain that it includes and addresses three key elements.

• The claim that the auditor wishes to verify
• Test procedure for that claim
• Purpose to perform the procedure

The auditor will analyse the issues they believe may occur to financial reports after a risk assessment.

The auditor, for example, may believe that the inventory shown in the financial report does not exist. Existence is the assertion that the auditor wants to test in this circumstance.

As a result, inventory observation is a practice that should be included in the audit procedure for inventories.

To ensure that the auditor in command of this cycle understands how to execute, the number of inventories to be monitored must be mentioned clearly.

Final Words

These are elements of the auditing process and are dependent on the customer’s nature.

You can use audit procedures for cash receipts, detect fraud, financial statements, and much more.

There are eight different kinds of audit evidence. To collect sufficient relevant audit evidence, auditors must employ a mix of these audit processes.