AUDITING: Auditors toolbox

Auditing technique

Auditing technique is defined as any technique used by auditors to determine deviations from actual accounting and controls established by a business or organization as well as uncovering problems in established processes and controls. Auditing techniques can be used to aid organizations by uncovering errors in business practices and providing a means of correction. Some businesses have used irregular accounting methods to hide certain monetary transactions and non-compliant behavior which has been uncovered by the use of varied auditing techniques. Other businesses have found new ways to save money and streamline business practices through various auditing techniques which have found waste in certain processes. 

Auditing techniques can be used to uncover these issues in order to ensure ethical business practices and to minimize waste or possible oversights within an organization. The applied techniques can determine if any income is hidden or improperly categorized or reported; transactions are being completed between the organization and regulated or prohibited persons, groups, or countries; uncovering of environmental waste discrepancies; finding of data inconsistencies; or any other business practice that can be considered as a process error, oversight, or violation of ethics, regulations, and laws.

In the past, the ISAs listed some techniques as being controls testing techniques, and others as substantive testing techniques.  This distinction is no longer made in the ISAs, but I think it could help you:

• • Controls testing techniques (listed in order from the weakest to the strongest technique):
    • Inquiry (about the design of a control, or compliance by staff).
    • Observation (of the control activity being performed).
    • Inspection (of documents, generally for a signature indicating that a control activity was performed).
    • Reperformance (of a control activity).
  • Substantive testing techniques:
    • Inquiry.
    • External confirmation (typically used for bank and receivables).
    • Reperformance.
    • Recalculation.
    • Inspection (of a document or a tangible asset).
    • Analytical procedures.
      • Analytical procedures can be used as a testing technique (see below for more on this), but it can also be used for other purposes.
  The testing techniques do not produce equally "strong" evidence. You must understand why this is the case.
   
  
  

  Stages of an audit

  The following are the stages of a typical audit:^[1]
  

  Phase I Plan and Design an Audit Approach

  • Accept Client and Perform Initial Planning.
  • Understand the Client’s Business and Industry.
    • What should auditors understand?^[9]
      • The relevant industry, regulatory, and other external factors including the applicable financial reporting framework
      • The nature of the entity
      • The entity's selection and application of accounting policies
      • The entity's objectives and strategies, and the related business risks that may result in material misstatement of the financial statements
      • The measurement and review of the entity's financial performance
      • Internal control relevant to the audit
  • Assess Client’s Business Risk
  • Set Materiality and Assess Accepted Audit Risk (AAR) and Inherent Risk (IR).
  • Understand Internal Control and Assess Control Risk (CR).
  • Develop Overall Audit Plan and Audit Program

  Phase II Perform Test of Controls and Substantive Test of Transactions

  • Test of Control: if the auditor plan to reduce the determined control risk, then the auditor should perform the test of control, to assess the operating effectiveness of internal controls (e.g. authorisation of transactions, account reconciliations, segregation of duties) including IT General Controls. If internal controls are assessed as effective, this will reduce (but not entirely eliminate) the amount of 'substantive' work the auditor needs to do (see below).
  • Substantive test of transactions: evaluate the client’s recording of transactions by verifying the monetary amounts of transactions, a process called substantive tests of transactions. For example, the auditor might use computer software to compare the unit selling price on duplicate sales invoices with an electronic file of approved prices as a test of the accuracy objective for sales transactions. Like the test of control in the preceding paragraph, this test satisfies the accuracy transaction-related audit objective for sales. For the sake of efficiency, auditors often perform tests of controls and substantive tests of transactions at the same time.
  • Assess Likelihood of Misstatement in Financial Statement.

  Notes:
  

  • At this stage, if the auditor accept the CR that has been set at the phase I and does not want to reduce the controls risk, then the auditor may not perform test of control. If so, then the auditor perform substantive test of transactions.
  • This test determines the amount of work to be performed i.e. substantive testing or test of details.^{[citation needed]}

  Phase III Perform Analytical Procedures and Tests of Details of Balances

  • where internal controls are strong, auditors typically rely more on Substantive Analytical Procedures (the comparison of sets of financial information, and financial with non-financial information, to see if the numbers 'make sense' and that unexpected movements can be explained)
  • where internal controls are weak, auditors typically rely more on Substantive Tests of Detail of Balance (selecting a sample of items from the major account balances, and finding hard evidence (e.g. invoices, bank statements) for those items)

  Notes:
  

  • Some audits involve a 'hard close' or 'fast close' whereby certain substantive procedures can be performed before year-end. For example, if the year-end is 31 December, the hard close may provide the auditors with figures as at 30 November. The auditors would audit income/expense movements between 1 January and 30 November, so that after year end, it is only necessary for them to audit the December income/expense movements and 31 December balance sheet. In some countries and accountancy firms these are known as 'rollforward' procedures.

  Phase IV Complete the Audit and Issue an Audit Report

  After the auditor has completed all procedures for each audit objective and for each financial statement account and related disclosures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This highly subjective process relies heavily on the auditor’s professional judgment. When the audit is completed, the CPA must issue an audit report to accompany the client’s published financial statements.