Audit procedures - F8

There are so many things that the auditors do in every audit engagement. Firstly, there are two broad types of audit procedures:
1. Test of controls - this aims to check that an audit client's internal control systems are operating effectively.
2. Substantive procedures - this aims to ensure that there are no material errors at the assertion level in the client's financial statements. They include tests of details of transactions, balances, disclosures and substantive analytical procedures. Audit assertions include accuracy, completeness, classification, allocation, cut-off, occurrence, valuation, existence, and rights and obligations (can be remembered by ACCA COVER, although you can ignore allocation in exam as it is actually under 'valuation').

In general the audit procedures can be remembered as AEIOU + CR:

Analytical procedure (A)
This is the analysis of significant ratios and trends and the resulting investigation of fluctuations and relationships that are inconsistent. Essentially, auditor will compare something with something and any significant differences should be discussed with management. Ratio analysis is one technique of analytical procedure. Analytical procedure can be used as substantive procedure (known as substantive analytical procedure) to test for completeness of the records.

Inquiry (E, since it is similar to enquiry)
This means seeking information from knowledgeable persons (eg. management), both financial or non-financial, either within or outside the entity. This is normally used when other audit procedures are not enough to obtain the sufficient appropriate audit evidence, for example inquiring entity's legal council may be necessary for legal issues.

Inspection (I)
This involves examination of records or documents in whatever form (eg. manual or computerised, external or internal). Inspection is normally done to ensure that company's internal controls are running effectively (test of controls) but sometime auditor may need to inspect company's correspondence with outsider as part of substantive procedure.

Observation (O)
In this case, auditor is looking at the processes or procedures being carried out by others. Therefore, this is mainly used in test of controls as auditor needs to ensure that the workers are doing things correctly (eg. inventory count).

Recalculation (U, since 'u' is pronouned in the middle)
This means checking the mathematical accuracy of documents or records. Sometime, auditors need to cast or recalculate total of something (eg. payroll records) to ensure that the amounts are accurate or valued correctly.

Confirmation (C)
This is the process of obtaining a representation of an existing condition from a third party (eg. a receivables letter). External confirmation could be required when sufficient appropriate audit evidence cannot be obtained internally, and this can include confirmation with receivables (also known as circularisation of receivables), bank confirmation, payables confirmation etc. Confirmation can also be internal, for example confirmation with entity's legal council.

Reperformance (R)
This is the auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control system. For example, auditor may reperform bank reconciliation to ensure that company's bank reconciliation statement is done correctly.

In addition to the above, there are two common substantive procedures done by auditors:
1. Tracing/agree to/reprocessing - this begins from outside the accounting records (documents) and check back to accounting records. This can test the completeness of the records.
2. Vouching/agree back - this begins with the accounting records and check back to supporting documents. This can test the accuracy/valuation of the records.