Question

15. Suggest steps for audit finalization
16. Explain use of audit technique
17. Estimate average sample size

Answer 1

Answer-:

15.) An audit is a formal check of financial accounts of an individual, business or organization. An internal audit is conducted by members of the same organization or business, and an external audit may be conducted by a regulatory agency or governmental agency. There are six specific steps in the audit process that should be followed to ensure a successful audit.

a.) Requesting Financial Documents
After notifying the organization of the upcoming audit, the auditor typically requests documents listed on an audit preliminary checklist. These documents may include a copy of the previous audit report, original bank statements, receipts and ledgers. In addition, the auditor may request organizational charts, along with copies of board and committee minutes and copies of bylaws and standing rules.

b.)Preparing an Audit Plan
The auditor looks over the information contained in the documents and plans out how the audit will be conducted. A risk workshop may be conducted to identify possible problems. An audit plan is then drafted.

c.)Scheduling an Open Meeting
Senior management and key administrative staff are then invited to an open meeting during which the scope of the audit is presented by the auditor. A time frame for the audit is determined, and any timing issues such as scheduled vacations are discussed and handled. Department heads may be asked to inform staff of possible interviews with the auditor.

d.)Conducting Onsite Fieldwork
The auditor takes information gathered from the open meeting and uses it to finalize the audit plan. Fieldwork is then conducted by speaking to staff members and reviewing procedures and processes. The auditor tests for compliance with policies and procedures. Internal controls are evaluated to make sure they're adequate. The auditor may discuss problems as they arise to give the organization an opportunity to respond.

e.)Drafting a Report
The auditor prepares a report detailing the findings of the audit. Included in the report are mathematical errors, posting problems, payments authorized but not paid and other discrepancies; other audit concerns are also listed. The auditor then writes up a commentary describing the findings of the audit and recommended solutions to any problems.

f.) Setting Up a Closing Meeting
The auditor solicits a response from management that indicates whether it agrees or disagrees with problems in the report, a description of management's action plan to address the problem and a projected completion date. At the closing meeting, all parties involved discuss the report and management responses. If there are any remaining issues, they're resolved at this point.

16.)

Evidences are very important for an Auditor to form an opinion regarding financial statements. If Auditor fails to collect proper evidence, it will reduce the reliability of audit report. The method of collecting evidence is called audit technique. Following are a few important audit techniques −

Vouching
When the Auditor verifies accounting transactions with documentary evidence, it is called vouching. Through vouching, the Auditor verifies authority and authenticity of records.

Confirmation
Confirmation is a technique used by an Auditor to validate the correctness of the transactions; for example, an Auditor obtains written statement directly from debtors to confirm the debtors balance as appeared in the books of client.

Reconciliation
Reconciliation is a technique used by an Auditor to know the reason of differences in balances. For example, to know the difference in the bank book of the client and the bank balance as appeared in the bank statement or pass book, the Auditor prepares the reconciliation statement. The same method may be used for debtors, creditors, etc.

Testing
Testing is a technique of selecting representative transactions out of whole accounting data to draw a conclusion about all items.

Physical Examination
Physical examination requires verification and confirmation of the physical existence of tangible assets as appears in the Balance Sheet like cash in hand, land and building, plant and machinery, etc.

Analysis
Analysis is technique used by an Auditor to segregate important facts and to further study their relationship.

Scanning
By scanning of books of accounts, an experienced Auditor can identify those entries which would require his attention. It is also called scrutiny of accounts.

Inquiry
This method is used to collect in-depth information about any transaction.

Verification of Posting
To verify posting from books of original entry to ledger account and confirm the balance, an Auditor is required to verify the postings; for example, to verify a sale book, an Auditor may verify postings from the sale register to the sale ledger. He may further calculate balances of the sale register and the sale book.

Flow Chart
The Flow Chart technique is used by an Auditor to determine the stages of transaction and the generation of documents at all levels of transactions.

Observations
Through observation, an Auditor get an idea about reliability of the process and the procedure of an organization.

17.) You can use several methods to determine the size of an audit sample. You can set the audit sample size based on tolerable and expected error or the previous year’s policy. You can use tables and software to set the sample size, or you can adjust the size based on your analysis.

Using tolerable and expected error

Tolerable error refers to the maximum number of client errors in a sample size that you’re prepared to accept and still conclude that you’ve achieved the audit objectives. Expected error is the amount of error in your sample size that you plan for and expect. The following sections explain what tools you can use and adjustments you can make to reach an unqualified report.

Following last year’s audit

Audit firms use the same types of criteria to set an audit’s confidence level (firm policy, population size, results of analytical review, and other known facts about the client and its business environment) as they do to set tolerable and expected error figures.

If the audit client is new, your firm’s policy will dictate the tolerable and expected error figures.

If you’re working with a repeat client, last year’s tolerable and expected error figures will be your baseline. However, you may determine that those figures should be changed. Keep reading, if so.

Using tables or software to set sample size

You can use many different methods to calculate sample size. They are based on statistics and probability so you can measure results. The method you use will be a function of your firm’s policy.

Adjusting sample size based on your analysis

During the audit, you may notice significant discrepancies between the company you’re auditing and other companies in the same industry. If so, you may need to adjust the sample size to get a clear picture. For example, say you’re working with a repeat client. Your analytical procedures show that your client’s inventory turnover rate has sharply declined in the last year, while companies in the same industry have shown only a slight decline. Inventory turnover is represented by a ratio: the cost of goods sold divided by the inventory value. An unusual decline in this ratio can indicate that inventory is overstated, which would artificially increase net income.

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