Audit procedures are fundamental to carrying out an effective and thorough audit. They serve as the tools that auditors employ to obtain sufficient evidence about the financial statements of an entity. T
Auditors employ various types of audit procedures and testing methods during an audit to obtain sufficient appropriate evidence. The nature and extent of audit procedures depend on the auditor’s risk assessment, materiality considerations, audit assertions being tested, and other engagement circumstances. This blog discusses the different types of audit procedures auditors commonly use.
Risk Assessment Procedures
Before diving deep into specific procedures, auditors initiate risk assessment procedures. This involves understanding the company’s operations, its environment, and the risk factors that might lead to a misstatement in the financial statements.
Classification of Audit Procedures
The type of audit procedure to apply mainly depends on the audit objectives and the quality of audit evidence required. The methods used can be broadly categorized into controls and substantive procedures.
Test of Control
A test of control assesses the operating effectiveness of controls in preventing or detecting misstatements. This type of testing ensures that a control is operating effectively.
Substantive Audit Procedures
Substantive procedures are methods used to obtain evidence on the completeness and accuracy of data. There are two main types: analytical audit procedures and detailed tests of balances. While analytical audit procedures involve evaluating financial information through plausible relationships, detailed tests dive deeper, encompassing counting procedures or examining specific transactions.
Audit Method & Testing Methods Used During Audit
Auditors apply various testing methods used during audit procedures. The methods that auditors use can range from manual reviews of documents to advanced computer-assisted audit techniques.
5 Types of Audit Tests
Audit testing methods can be classified into five main types:
The inspection involves examining documents like invoices, contracts, minutes, bank statements, etc. Both internal documents and external documents from third parties may be inspected.
Auditors may observe processes or procedures being performed by the client’s personnel. Observation provides evidence about how controls are implemented.
Inquiries involve seeking information from knowledgeable persons, either verbally or through questionnaires. Inquiries provide important details that may not be documented.
Confirmation means obtaining a representation from a third party about certain details like account balances, terms of transactions, etc.
Checking the accuracy of documents and accounts by recalculating balances, performing reconciliations, etc. is important evidence.
8 Types of Substantive Audit Procedures
Some key substantive audit procedures include:
- Analytical procedures – Comparing balances, ratios, and trends to expectations
- Detail tests – Verifying the accuracy of documentation and accounts
- Walkthroughs – Tracing transactions from initiation to reporting
- Reperformance – Completely repeating controls and checks
- Confirmations – Obtaining independent confirmation of balances
- Document inspection – Examining supporting documents
- Scanning – Reviewing ledgers and journals for large or unusual items
- Audit sampling – Selecting and testing a sample from the population
SOC 2 Audits & Audit Sampling
SOC 2 audits focus on controls related to security, availability, processing integrity, confidentiality, and privacy. To validate these controls, auditors use audit sampling as a technique, selecting a subset to represent the whole population.
Computer-Assisted Audit Techniques
Advanced techniques like data analytics, continuous auditing, and audit software are used to analyze large populations and entire datasets. This provides greater accuracy and depth of testing.
Conclusive vs Persuasive Evidence
Evidence can be conclusive or persuasive in nature. Conclusive evidence provides definitive proof, while persuasive evidence allows auditors to form reasonable conclusions.
Physical examination and confirmation from third parties provide conclusive evidence. Inquiries, observations, and analytical procedures provide persuasive evidence.
Auditors need to gather a combination of both types of evidence to form the audit opinion. Relying only on one type of evidence is insufficient.
Best Evidence that Auditors Seek
While auditors use various procedures, the strongest evidence typically comes from:
- External confirmations of balances and terms with third parties
- Examination of original documents like invoices, contracts, bank statements etc.
- Inspecting and observing assets like inventory, property, equipment
- Legal agreements and titles to assets
- Minutes of Board and shareholder meetings
Designing Audit Procedures
While planning an audit, auditors consider various factors to design appropriate procedures including:
- Audit risk assessment for the area being tested
- Identified controls relevant to the audit area
- Importance of the accounts and risks involved
- Evidence needed to validate management’s assertions
- Results of prior year audits and known issues
- Time and resources available for evidence-gathering
The planned mix of tests of controls and substantive procedures should enable the auditor to form reasonable conclusions on which to base the audit opinion.
Documentation of Procedures
Auditors are required to document the audit plan outlining risk assessments and planned procedures. During fieldwork, they record the procedures performed, evidence obtained, conclusions reached and deviations observed.
Proper documentation demonstrates the audit was conducted as per standards and supports the audit findings.
Audit procedures are integral to ensuring that a company’s or organization’s financial statements are transparent, accurate, and in line with applicable standards. As the field evolves, the methods or techniques used by auditors adapt, offering more depth, clarity, and assurance in the audit engagement process.