What are the 5 types of audit tests?
Audit procedures are the processes, techniques, and methods that auditors perform to obtain audit evidence, enabling them to conclude the set audit objective and express their
opinion. Sometimes we call audit procedures audit programs. These two terms are referring to the same thing. Auditors normally prepare audit procedures at the planning stages once they identified
audit objectives, audit scope, audit approach, and audit risks. Auditors design audit procedures to detect all kinds of risks identified and ensure that the required audit evidence is obtained sufficiently
and appropriately. Normally, audit partners need to approve audit plans and audit procedures before the audit team performs their testing. This is to make sure that all concerns or risks are addressed in the procedures. Audit procedures might be different from client to client and period to period. This is because internal control over financial reporting is different from one client to another, and the control might change from time to time. The auditor might need to update
audit procedures from time to time even though its firm or team had audited current financial statements. Typically, five types of audit procedures are normally used by auditors to obtain audit evidence. Those five audit procedures include Analytical review, inquiry, observation, inspection, and recalculation. Analytical review is not the procedure that uses to obtain audit evidence. Still, the procedure is used to assess the unusual transactions or events as the principle or basic to perform other procedures. For example, when the auditor found there is unusual transactions or event as a result of using
analytical review, the auditor will use other applicable procedures to obtain evidence. The analytical procedure could be used for the types of transactions or events that occur regularly or connect with others’ transactions or events. For example, we can use the analytical procedure to assess the reasonableness of depreciation that records in the financial statements. The main
reason is that depreciation expenses are calculated systematically and occur regularly. Auditors inquire about an accountant and related management to gather information and explain the matter found by auditors. Sometimes auditors inquire about the business process and how financial transactions are recorded and the major control of business transactions. The inquiry is also one of the most important audit procedures and it could be used in
different stages. For example, the auditor might inquire about management at the planning stage. The auditor could also inquire management to confirm the consignment liabilities at the end of the audit work. Audit inquiry is sometimes used by the auditor to obtain the audit evidence and sometimes is used to understand some nature of business or accounting transactions to gain enough knowledge to design and perform testing. However, information from the inquiry is sometimes hard to be used as audit evidence. The audit evidence found as the result of your testing after an inquiry is strong to be used as audit evidence rather than information from the inquiry itself. 3) Observation:Observation is one of the audit procedures that auditors use to understand and gather audit evidence mainly to the real process or how clients have done some specific business process. This kind of audit procedure mainly confirms the process that the client told, physical confirmation, or some time used to obtain audit evidence to make their own projection, which will be used for comparison with the client figure. For example, an auditor joins client stock take at the year-end and observes whether the way that they count are in the correct procedures or not. In this procedure, the audit is not confirmed whether the client counts their inventories correctly or not, but it confirms whether the client counting procedure is correct or not is one thing. Another thing is the auditor tries to confirm whether the counting really existed. However, in practice, sometimes the auditor not only observes how the client counts but also jointly performs counting inventories. Sometimes auditors using observation are not only for observing and counting fixed assets or inventories but also for testing the reasonableness of revenue. Here is how, For example, the auditor performs the reasonableness testing of revenue recording in the restaurant and based on the accounting record fact check with their understanding. The revenue seems not completely recorded. In this case, the auditor might perform one week or two weeks observe in the restaurant and then make their own estimate of whether or not the revenue is reasonable. 4) Inspection:Inspection refers to the verification or vouching of documents. This is one of the most important, and 60% of audit work involves the inspection of documents. For example, the auditor examines the sales invoices that record in financial reports. The auditor might examine whether the invoice issued by the client is really based on the goods received. And the goods that are received are actually the ones the company makes an order. The auditor might also examine the payment voucher against the authority that approves the payment vouchers. The auditor might also inspect the supporting documents recording the inventory’s movement during the year. This is including the documents related to purchasing raw materials. 5) Recalculation:Recalculation is the type of audit procedure normally done by re-performing the works performed by the client to assess if there is any difference between the audit’s work and the client’s work. For example, the auditor might re-perform depreciation calculation and assess if there is any difference between the auditor’s calculation and its client’s calculation. The auditor might also perform the recalculation on monthly salary expenses prepared by the payroll and finance department to ensure that the net salaries paid to the employee are correct. Recalculation is the procedure that use to confirm the accuracy of a transaction that involves calculation. Financial Assertion and Audit Procedures:Audit procedures above are normally designed to confirm the financial assertion of transactions or events in the financial statements. For example, the auditor may test the occurrence of sales revenues that record in the period’s income statement. This test is to confirm whether those transactions have really occurred or not. The auditor might also test whether the sales revenues that recording is completely recorded or not by testing the completeness. Understanding financial statement assertion could help the auditor tailor actionable and effective audit procedures and help perform their testing more efficiently. This will also help them to redesign audit procedures when the existing procedures are not practical. The following is the list of the financial assertions that auditors normally test: Transactions and events: ( in P&L)
Account balances (BS items)
Presentation and disclosure
How to design the audit procedure?Risk assessment contributes significantly to auditors designing the right audit procedures. Audit procedures are normally designed by auditors based on the characteristic of target transactions or event risks associated with and the approach that the auditor responds to those risks. Right audit procedures help the auditor perform their work more effectively and contribute to the auditor minimizing audit risks (detection risk). When designing the audit procedure, the auditor must ensure that all of that procedures contain and address three important things.
After performing a risk assessment, the auditor will be identified the risks that they think might happen to financial statements. For example, the auditor might things the inventories that are reported in the financial statement might not exist. In this case, existence is the assertion that the auditor wants to test. Therefore, inventories observation is the procedure that should be included in the inventories’ audit procedure. How perform, the number of inventories to be observed needs to be stated clearly to make sure that the auditor in charge of this cycle could understand. Can audit procedures be revised during the substantive testing?Audit procedures are initially prepared at the planning stage based on the risks assessed according to the internal controls environment and internal control over financial reporting. The auditor’s understanding of the client’s internal control over financial reporting or the information they obtained at the time of planning might not be corrected and insufficient. Therefore, if during the substantive testing, the auditor notes that the audit procedures are not addressing the possible risks and the procedures are not sufficient to address the risks, then auditor procedures could be revised. The revision might need to get approval from the audit partner. Auditors can also assess if the procedures that were performed in the substantive testing are correct or sufficient or not while they are in the conclusion stage. If the procedures are not sufficient or incorrect, then the procedures are needed to be revised, and then additional work is needed to be done. Before the execution of audit procedures, auditors need to get those procedures approved by audit partners first. The revision of audit procedures in all stages: planning, substantive, and conclusion also need to be approved by audit partners. What are the 5 types of analytical procedures?7 examples of analytical procedure methods. Efficiency ratio analysis. ... . Industry comparison ratio analysis. ... . Other ratio analysis methods. ... . Revenue and cost trend analysis. ... . Investment trend analysis. ... . Reasonableness test. ... . Regression analysis.. What are the 7 audit procedures?Audit evidence is collected through audit procedures.. Inspection. ... . Observation. ... . External confirmation. ... . Recalculation. ... . Reperformance. ... . Analytical procedures.. What are the 7 types of audit evidence?Audit procedures, tests, and techniques are often said to be forms or types of audit evidence. One widely used audit text lists physical examination, confirmation, documentation, analytical procedures, inquiries, recalculation, re-performance, and observation as types of audit evidence.
What are the 8 audit procedures?Audit Procedure Methods. Substantive audit procedures. ... . Analytical audit procedures. ... . Inquiry. ... . Confirmation. ... . Observation. ... . Inspection of documents. ... . Inspection of physical or tangible assets. ... . Recalculation.. |