Chapter 5 : Chapter 5 : Audit Techniques and Audit Techniques and Internal AuditInternal Audit

T.Y.B com (Honours)

Academic Year : 2009-10

Trimester : VIII

Meaning of Test CheckingMeaning of Test Checking

AAS 5 issued by The Institute of Chartered Accountant of India states that in forming an opinion an auditor may obtain audit evidence on a selective basis. The selection may be based on the auditor’s personal judgement or statistical sampling technique. …

When is test checking not When is test checking not suitable?suitable?1) Opening and closing Entries

2) Bank Reconciliation Statements

3) Items requiring calculations (eg. Dep, royalty)

4) Very Important transactions/balances

5) Transactions on which the auditor has to give specific reporting

6) Exceptional/ non recurring transactions

How to select a SampleHow to select a Sample

1) 100% Coverage in 3-5 Years2) Surprise3) Factors to decide the Extent of checking :

- possibility of errors, frauds, misstatements- nature of materiality of item- nature of business and size of company- System of accounting- internal controls- internal audit working- past experience- results of checking done till date- type of information available- past trends and ratio analysis

Drawbacks of SamplingDrawbacks of Sampling1) Arbitrary Selection 2) Ignores Statistical Techniques3) Ignores quality4) Sampling risks

Precautions to be taken prior Precautions to be taken prior to test checkingto test checking

1) Classify Transactions2) Systems and Procedures3) Internal Controls4) Test Check Plan5) No Bias in Selection6) Avoid Unsuitable Areas7) Decide No. of Transactions8) Decide Significance of Errors

Methods of selecting Sample Methods of selecting Sample and their evaluationand their evaluation

There are mainly 3 methods of sampling :i. Random Selectionii. Systematic Selectioniii.Haphazard Selection

There are mainly 3 methods of evaluation of samples :

i. Analysis of errors in the sampleii. Projection of Errorsiii.Reassessing Sampling risk

Auditors duties on internal Auditors duties on internal controlcontrol1) Responsibility of Management2) Auditor’s Duty3) Need for Evaluation

-to establish reliability of internal control-Decide the areas of checking

4) Steps in Evaluation-Understand the system- Test applications-Evaluate the System

5) Communicate Weakness to Management

6) Reporting of internal control under CARO

Inherent Limitations of Inherent Limitations of Internal ControlInternal Control

The objectives of internal control may not be achieved due to the following limitations :

1) Costs more than benefits2) Human Error3) Collusion of duties of employees4) Misuse of authority by employee5) Manipulation by Management

Internal Control for SalesInternal Control for Sales1) Division of work2) Procedure of transaction3) Cross-check within depts4) Change in Duties5) Annual Leave6) Limited Access to books7) Proper Recording8) Prompt Recording9) Accounting Policies10) Safeguarding stock in hand11) Errors and Frauds12) Reconciliation and Confirmations

Internal Control for Internal Control for DebtorsDebtors

1) Credit Limits2) Prompt recording3) Prompt Adjustment4) Age wise schedule5) Statement of Accounts6) Discounts and write offs7) Reconcile control accounts

Internal control for Internal control for PurchasesPurchases1) Division of Work2) Procedures3) Cross checking4) Change in duties5) Annual Leave6) Access to books7) Proper recording8) Prompt recording9) Accounting policies 10) Safeguarding11) Errors and Frauds12) Reconciliation and confirmation

Internal control for CreditorsInternal control for Creditors

1) Prompt Recording2) Prompt adjustment3) Age wise schedule4) Statements of accounts5) Discount and write backs6) Reconcile Control accounts

Internal control for salaries Internal control for salaries and wagesand wages

1) Division of Work2) Procedure for Payment3) Cross check4) Change in duties5) Annual leave6) Access to books7) Proper Recording8) Prompt Recording9) Accounting Policies10) Safeguarding11) Errors and Frauds