Pre-Audit Essentials: Audit Programme, Audit Notebook, and Working Papers You Need

 Auditing

Auditing means inspection of the books of account and financial statements of an organization.

Techniques of Audit

In the realm of auditing, employing a diverse array of techniques is essential for ensuring accuracy and integrity in financial reporting. Key methods such as vouching, confirming, reconciling, analyzing, physical examination, scanning, and verification of posting each play a crucial role in the audit process.

1. Vouching – It involves tracing transactions back to their source documents, ensuring authenticity.
2. Confirming – It involves validating information through direct communication with third parties, ensuring the accuracy of financial statements and enhancing the reliability of the audit process.
3. Reconciling – It helps identify discrepancies between records, while analyzing financial data reveals trends and anomalies.
4. Analysing - It entails a thorough examination of financial data and trends.
5. Physical examination – It allows auditors to verify the existence of assets
6. Scanning – It aids in identifying areas that require further scrutiny
7. Verification of posting - It ensures that all transactions are accurately recorded in the financial statements

Preparation before Audit

Depends upon the scope of work assign to auditor and method in which he will proceed.

1. Determine the scope of work – It depends upon terms of agreement entered into between auditor and his client.
2. Get information about business – 
• Go through the rule and regulation MOA and AOA
• Understand the method of maintaining account
• Ask for a list of books maintained
• Examine the system of internal check in operation
• Profit & loss and Balance sheet of previous year.
3. Instruction to the client
• Book of account should be kept ready
• All voucher should be serially arranged and filled
• Scheduled of debtors and creditors should be prepared
• List of bad and doubtful debts, outstanding, prepaid expenses should be prepared
4. Preparation by the auditor
• Distribution of work among his subordinate according to their qualification experience and training.
• Design audit program

Audit Programme

Audit program is the auditor’s plan of action. Audit programme is a detailed plan of the audit work to be performed specifying the procedure to be followed in verification of each item in the financial statement and giving the estimated time required.

Expert giving definition about audit programme

1. According to Stettler - An audit programme is an outline of all procedures to be followed in order to arrive at an opinion concerning client’s financial statements.
2. According to Jack c. Robertson - An audit programme is a listing of evidence gathering procedures considered necessary to satisfy specific practical audit objectives. 

Audit program includes 3 important points

1. Scope of work – How much work is to be done?
2. Work Distribution – Who is going to do a particular portion of work?
3. Work Duration – What is the duration of time by which work is to be finished?

Types of Audit Programme

1. Fixed Audit Programme
2. Flexible Audit Programme
3. Audit Programme for independent Audit
4. Audit Programme for internal Audit

Benefits of Audit programme

1. It provides a sort of guidance to ensure that the whole work of audit has been properly distributed and nothing is left.
2. To locate exactly the responsibility of every clerk in the auditor’s staff
3. The auditor can measure the progress of the work done 

limitations of Audit programme

The requirement of every company differs and therefore different audit programme is needed for different company, similar audit program may not be suitable for all the companies.

• The task becomes mechanical
• The task may be finished hurriedly
• Not good for small organisation
• Lack of uniformity of audit programme
• It brings rigidity
• Inefficient audit assistants may shelter behind the programme.

Examples of Audit Programme

Audit programme for cash

1. Account for numeric sequence of cash receipts and payments.
2. Check posting of cash book.
3. Check rough book and petty cash book
4. Examine and review system for cash receivables
5. Check the banking of cheque's received.
6. Check the vouchers for cash transactions
7. Check bank reconciliation statements
8. Check direct receipts into the bank and payments out of the bank account.
9. Check posting into personal accounts
10. Check arithmetic accuracy

Audit programme for purchases

1. Examine and review system for purchases
2. Check authority and authorization for ordering goods.
3. Check invoices checked by invoice clerk and compare with order book and goods inward book.
4. Check the approval of the goods by the department ordering it.
5. Check the entries in stock register.
6. In case of forward transactions check the provision for losses.
7. Check the advice note of the concerned department for purchase return and compare with invoice. 
8. Check the consignment outwards journal for goods sent on consignment

Audit Programme for sales return

1. Review and check the system from the stage of customer’s order to the ultimate receipt of cash.
2. Check number of entries in sales book
3. Check the entries for sales tax
4. Check a representative number of sales invoices with goods outward record.
5. Check the goods sold but still in possession are not taken in stock
6. Check the valuation of goods
7. Check the goods sold on hire purchase
8. Check the provision for bad and doubtful debts
9. Check the system of accounting for goods sold on sale or return basis.

Audit programme for salary Expense of key officers

1. Check organisation chart and make a list of officers.
2. Check salary authorization from minutes of board of directors.
3. Observe individuals and their office locations.
4. Add up authorized salaries and compare it to the expense account balance
5. Retrace the payroll journal entries to posting in the expense account
6. Inquire about the existence of any stock options or bonus plans
7. Scan stock issue records for issue of shares to officers
8. Check bonus plan
9. Check legal cut off for salaries.

Audit Notebook

A diary or register maintained by the audit staff to note difficulties, queries, errors or other important points with their clarifications is known to be audit note book.

Following are the main contents of an audit notebook

1. Quarries calling for clarification and explanation and important points on which attention of auditor require
2. Date of commencement and completion of audit
3. List of books of accounts as maintained by the company
4. Organization chart with responsibilities of principal officers.
5. Any other point auditor staff feels important for discussion with management or auditor.

Advantages of Audit note book

1. Helps in knowing the amount of work done
2. Important matters relating to the audit work may be easily recalled
3. Facilitates the preparation of audit report
4. No difficulty in case assistant in-charge is changed
5. It shows the extent of pains and interest taken by audit staff
6. It ensures the audit programme has been sincerely followed.
7. It is reliable evidence in the court of law

Auditing Working papers 

Working papers are supporting documents prepared by auditors in course of their audit. Working papers may be in form of data on papers, electronic media, film or other media and designate the files of summaries, comments, correspondence and analysis. 

Other working papers are Trail Balance, Accounts Analysis, Schedule of fixed assets, Depreciation Chart, Schedule for debtor and creditor, schedule for liabilities, advances, bank reconciliation, stock valuation, previous audit reports, audit program, audit evidence and important quarries with their explanation etc.

Working papers can also be used by auditor in his defense if require in any court case of negligent audit.

Audit working papers

1. Permanent file Papers
2. Audit Administrative Papers
3. Audit Evidence Papers

Permanent File Papers

1. Copy of M.O.A , A.O.A and partnership deed
2. Copy of minutes of the meetings
3. Short description of the type of business and place of business
4. List of responsible officers
5. Policy regarding valuation of inventories, charge of depreciation etc.
6. Copies of continuing contracts
7. History of company and its products
8. Copies of balance sheet of earlier years  

Current file Papers

1. Appointment letter
2. Memoranda of meetings with the management
3. Memoranda of meetings with audit committee
4. Audit time budget
5. Internal control questionnaire
6. Management control questionnaire
7. Internal control system with flow chart
8. Audit programme

Audit Evidence Papers

Evidence paper enables the auditor to judge the truthfulness of prepositions brought before him and for scrutiny and analysis. It is through evidence that the auditor can form an opinion about the financial affairs. It is the audit evidence working papers contain the record of the procedures followed, the test performed, the evidence obtained and the decisions made in the course of Audit.

Audit evidence papers must be well indexed, clear, complete and informative as these papers highlights the quality of audit. Audit evidence obtained during audit and the decisions made on it form the main content of audit evidence papers.

Purpose of audit working papers

1. Shows volume of work done by auditor and its staff
2. Shows extent of adherence to accounting Principles and standards
3. Useful evidence against the charge of negligence
4. These papers contain basic material from which audit report is prepared.
5. Evidence papers assist in planning and performance of the audit work.
6. Working papers contain backup material in support of audit observations
7. With the help of working papers, the auditor gets to know the weaknesses of the accounting operations and internal control of an organization.

Forms and contents of working papers

It should record the audit plan, the nature, timing and extent of audit procedures performed and conclusion drawn. It should be complete and detailed.

FAQ's

What is a Pre-Audit?

Pre-audit refers to the preparation phase of an audit, where the auditor gathers background information, plans the audit approach, and organizes tools and documentation to ensure the audit runs efficiently and thoroughly.

Can an Audit Programme be modified during the audit?

Yes. It should be flexible. Auditors may revise it based on findings, new risks, or changes in the organization’s operations.

Who owns the Audit Working Papers?

They are the property of the auditor or audit firm, not the client. However, confidentiality must be maintained unless legally required to disclose.

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