Question

Orange & Co is the motor insurance company established on 1^st January 2005. The company is well known and generating positive cash flows for the first 10 years. From the year 2015, the Orange & Co profit was on declining trend. To make different corrective actions, the CEO of a company decided to change the CPA firm. The company hired Purple & co as a new CPA firm. Now suppose you are working in Purple & Co, and your CEO assigned you to perform audit procedures for the client Orange & Co and obtain sufficient audit evidence.

Required:

1. What are the different types of audit procedures that you as an auditor is planning to perform/adopt during audit process?

b. Support each type of audit procedure with relevant example. (10 marks

Answer 1

Audit procedures may be as following:

• Making Inquiries: The auditors may gain knowledge by asking questions usually verbally and collect answers to take further actions. He may usually do so to understand the system works. Evidence gathered from inquiry may not be heavy for consideration. Hence the auditor has to go for any other better audit procedure. Example., understanding how goods flows in the business, auditor may inquire with storage and production dept. employees.
• External Confirmation: Auditor may accept the Balances and transactions by reverifying them with the external parties by asking them to confirm the transactions or balance or both. Example, confirmation is usually sent for accounts receivable and payable balances with huge amounts outstanding or heavy transactions or any other.
• Observation: The auditors physically keeps a watch over the system of the business enterprise to verify it it functions as intended in the document. He checks for movement of asset, flow of responsibilities, authorisations and time taken. Example, Inventory management may be observed closely to verify how well inventory is handled and how deviations area identified and treated.
• Inspection: Auditors can ask for records, documents and other files from the client or external parties to verify and vouch the genuineness, accuracy and completeness of transcations. He may physically inspect assets to ensure the presence and working is genuine and is as expected. Example, auditor can physically inspect new assets purchased and put to use to confirm them.
• Reperformance: Auditor can reperform some tasks in order to check if the internal controls are working efficiently and effectively. Example, using Computed Assisted Audit Techniques auditor can use dummy entries and verify the processing controls and match the output with the expected.
• Analytical procedures: Auditors may use mathematical, statistical or computerised analytical techniques to evaluate the accuracy of the transactions and compare the results with the expected. Example, in computing dividends auditor can use mathematical formulas various ways.