What should be thought before Marketing Audit?

Marketing can be a difficult area of operations for an operational internal audit assignment. This is partly because it is difficult to establish the effectiveness of some activities, such as advertising and branding; and some marketing activities may marketing to build a corporate image

Marketing activities differ widely between different types of business. Some entities rely heavily on direct selling by sales representatives. Others rely more heavily on advertising. All entities should be trying to find out as much information as they can about what customers are buying, and what they would like to buy.

However, marketing is much more than just selling and advertising and obtaining market research information. It is useful to think of marketing activities in terms of the ‘four Ps’:

• Product. The product or service itself is an aspect of marketing. Does it meet the needs of customers as effectively as it could? Product design and product quality have an important influence on the buying decisions of customers for many items. The ‘product’ also includes related services such as after-sales service (repairs and maintenance).

• Place. The delivery of the product to customers is an element of marketing. How does the product get to the customer? Where does the customer have to go to buy it? For example, consumer items may be sold by shops, supermarkets and general stores, or by specialised retail outlets. Some items can be purchased on the internet.

• Price. The price of the product is a key element of marketing, because customers will often make their buying decisions on the basis of price. Discounts and special price offers, for example, are a common feature of marketing consumer products in retail stores.

• Promotion. These are the activities that are probably most associated with marketing, such as market research activities, advertising, sales promotion, and direct selling.

What is operational internal audit assignment?

Operational internal audit assignments involve the internal auditor being asked by management to focus at a particular aspect of the enterprise’s operations, such as marketing activities or the activities of human resources department.
 

Operational internal audit assignments are thus defined as audits of specific processes and operations performed by an organization. They are also known as management audits, or efficiency audits.

The purpose of an operational internal audit assignment is to assess management’s performance in the specific area of operations that is subject to the audit, and to ensure that company policy and control procedures are adhered to. The audit will identify areas for improvement in efficiency and performance, and
improvements in management.

The general approach to an operational internal audit assignment will be determined by the purpose of the audit. For each area of operations that is subject to an operational internal audit assignment, the internal auditor should assess:

• the adequacy of the policies, procedures and controls adopted, and

• the effectiveness of the policies, procedures and controls.

Comparison of external and internal audit

Internal and external auditors often carry out their work using similar procedures.

This is something to bear in mind when answering ‘practical’ questions on auditing in an examination.

However, there are a number of fundamental differences between the two audit roles. These are summarized in the following:

External Auditors Role and work: To express an opinion on the truth and fairness of the annual financial statements. The external auditor will therefore carry out whatever work he deems necessary to reach that opinion.
Internal Auditors Role and workTo examine systems and controls and assess risks in order to make recommendations to management for improvement. The internal auditor’s work programme will therefore to a large extent be dictated by management.

Qualification to act
External Auditors Set out by statute. This ensures that the external autitor is independent of the entity and suitably qualified.
Internal Auditors : No statutory requirements – management select a suitably competent person to act as internal auditor. It is therefore possible that the internal auditor may not be as competent as the external auditor, depending on management’s recruitment criteria.

External Auditors Appointed by The shareholders. This ensures independence.
Internal Auditors Appointed by Management. In order to give as much independence as possible the internal auditor should therefore report to the highest level of management.
External Auditors Duties set out by Statute.
Internal Duties set out by Management
External Auditors Report to The shareholders.
Internal Auditors Report to Management.

External auditor has no specific responsibility for fraud and error, other than to report whether or not the financial statements give a true and fair view; the external auditor will be concerned that there has been no material undetected fraud or error during the period.

What is Audit Risk?

Audit risk is the risk that an auditor may give an inappropriate opinion on financial information that is materially mis-stated. For example, an auditor may give an unqualified opinion on financial statements without knowing that they are materially mis-stated. Such risk may exist at overall level or while verifying various transactions and balance-sheet items.

According to SA 200A, on “Objective and scope of Financial Statements”, there is unavoidable risk that even some material misstatements may remain undiscovered due to the test nature and other inherent limitations of any system of internal control. SA-500 on “Audit Evidence” also makes it clear that an auditor’s judgement as to what is sufficient and appropriate audit evidence is affected by the degree of risk of mis-statement. Therefore, it becomes significant that an auditor is aware of risks which are inherent in any audit with reference to materiality of transactions involved and accordingly test and evaluate internal control systems so as to assess the extent of risk. In the following paragraphs, first of all various facts of audit risks are discussed followed by relationship between materiality and audit risk.

Low-risk areas are those which require the application of routine “nuts and bolts” audit procedures in the ordinary course of vouching, casting, checking, etc., at both compliance and substantive stages, usually occupying up to 80% of all audit effort. High-risk areas are those which should be the primary concern of partners and senior managers, and will include such matters as:

(a) Adequacy of provisions;

(b) Full disclosure of liabilities, including contingent liabilities;

(c) Interpretation of SAs and company legislation;

(d) Post–balance sheet review of subsequent events;

(e) Analytical reviews on draft financial statements;

(f) Implications of tax legislation;

(g) Detecting overstatement of assets, e.g. by capitalizing expenditure;

(h) Identifying high-value items and ‘error-prone’ conditions, and

(i) Drafting the audit report itself.

Advantages of Statistical Sampling in Auditing?

The advantages of statistical sampling may be summarized as follows -

1. The amount of testing (sample size) does not increase in proportion to the increase in the size of the area (universe) tested.

2. The sample selection is more objective and thereby more defensible.

3. The method provides a means of estimating the minimum sample size associated with a specified risk and precision.

4. It provides a means for deriving a “calculated risk” and corresponding precision (sampling error) i.e. the probable difference in result due to the use of a sample in lieu of examining all the records in the group (universe), using the same audit procedures.

5. It may provide a better description of a large mass of data than a complete examination of all the data, since non-sampling errors such as processing and clerical mistakes are not as large.

Under some audit circumstances, statistical sampling methods may not be appropriate. The auditor should not attempt to use statistical sampling when another approach is either necessary or will provide satisfactory information in less time or with less effort, for instance when exact accuracy is required or in case of legal requirements etc.

How to select the Audit sample?

Sample should be selected in such a manner that it is representative of the population from which the sample is being selected. It will necessitate that each item in the population has an equal chance of being included in the sample. Some of the important methods of selecting the sample are discussed below -

1. Random Sampling : Random selection ensures that all items in the population or within each stratum have a known chance of selection. It may involve use of random number tables. Random sampling includes two very popular methods which are discussed below:

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(i) Simple random sampling : Under this method each unit of the whole population e.g. purchase or sales invoice has an equal chance of being selected. The mechanics of selection of items may be by choosing numbers from table of random numbers by computers or picking up numbers randomly from a drum. It is considered that random number tables are simple and easy to use and also provide assurance that the bias does not affect the selection. This method is considered appropriate provided the population to be sampled consists of reasonably similar units and fall within a reasonable range. 

(ii) Stratified Sampling : This method involves dividing the whole population to be tested in a few separate groups called strata and taking a sample from each of them. Each stratum is treated as if it were a separate population and if proportionate of items are selected from each of these stratum. The number of groups into which the whole population has to be divided is determined on the basis of auditor judgment. For example in the above case, debtors balances may be divided into four groups as follows:-

(a) balances in excess of $1,00,000;

(b) balances in the range of $ 75,000 to $1,00,000;

(c) balances in the range of $ 25,000 to $75,000; and

(d) balances below $ 25,000.

From these above groups the auditor may pick up different percentage of items from each of the group. From the top group i.e. balances in excess of $ 1,00,000, the auditor may examine all the items; from the second group 25 per cent of the items; from the third group 10 per cent of the items; and from the lowest group 2 per cent of the items may be selected.The reasoning behind the stratified sampling is that for a highly diversified population, weights should be allocated to reflect these differences. This is achieved by selecting different proportions from each strata. It can be seen that the stratified sampling is simply an extension of simple random sampling.

2. Interval sampling or systematic sampling : It involves selecting items using a constant interval between selections, the first interval having a random start. The interval might be based on a certain number of items (for example every 20th voucher) or a monetary totals (for example every $ 1,000 in the cumulative value of the population). When using systematic selection, the auditor should determine that the population is not structured in such a manner that the sampling interval corresponds with a particular pattern in the population. For example, if in a population of branch sales, a particular branch sales occur only as every 100th item and the sampling interval selected is 100. The result would be that either the auditor would have selected all or none of the sales of that particular branch. To minimize the effect of the possible known buyers through a pattern in the population, more than one starting point may be taken. The multiple random starting point is taken because it minimizes the risk of interval sampling pattern with that of the population being sampled.

(i) Block Sampling : This method involves the selection of a defined block of consecutive items. For example take the first 200 sales invoices from the sales day book in the month of September, alternatively take any our blocks of 50 sales invoices. Therefore, once the first item in the block is selected, the rest of the block follows an items to the completion. There is a close similarity between this method and judgmental sampling. Consequently it has similar characteristics, namely, simplicity and economy. On the other hand there is a risk of bias and of establishing a pattern of selection which may be noted by the auditees.

(ii) Cluster sampling : This method involves dividing the population into groups of items known as clusters. A number of clusters are randomly selected from all the clusters rather than individual items of the population. Cluster sampling can be used together with both unrestricted random and stratified sampling, for example 500 to 540, 2015 to 2055 etc. The first item i.e. 500, 2015 is randomly selected from random number tables. The items of selected cluster can either be checked completely or a randomly selected proportion of them can be examined. The cluster is less effective for a given sample size than unrestricted random and stratified samples as items are not individually selected. However, the time saved can be utilized to have a larger sample to make the sample results more reliable. As per SA 530, when determining the sample size, the auditor should consider sampling risk, the tolerable error, and the expected error. Sampling risk arises from the possibility that the auditor’s conclusion, based on a sample, may be different from the conclusion that would be reached if the entire population were subjected to the same audit procedure.

What are the methods of Statistical Sampling in Auditing?

As per SA 530, “Audit Sampling”, the auditor should select sample items in such a way that the sample can be expected to be representative of the population. This requires that all items in the population have an opportunity of being selected. There are two major methods in which the size of the sample and the selection of individual items of the sample are determined. These methods are : (1) judgmental

sampling; and (2) statistical sampling.

Whatever may be the method, judgmental or statistical sampling, the sample must be representative. This means that it must be closely similar to the whole population although not necessarily exactly the same. The sample must be large enough to provide statistically meaningful results.

Judgmental Sampling : Under this method, the sample size and its composition are determined on the basis of the personal experience and knowledge of the auditor. This method has been in common application for many years because of its simplicity in operation. Traditionally, the auditor on the basis of his personal experience, will determine the size of the sample and express it in terms that number of pages or personal accounts in the purchases or sales ledger to be checked. For example, March, June and September may be selected in year one and different months would be selected in the next year. An attempt would be made to avoid establishing a pattern of selection year after year to maintain an element of surprise as to what the auditor is going to check. It is a common practice to check large number of items towards the close of the year so that the adequacy of cut-off procedures can also be determined.

The judgmental sampling is criticized on the grounds that it is neither objective nor scientific. The expected degree of objective cannot be assured in judgmental sampling because the risk of personal bias in selection of sample items cannot be eliminated. The closeness of the qualities projected by the sample results with that of the whole population cannot be measured because the sample has not been selected in accordance with the mathematically based statistical techniques. However, it may be stated that the auditor with his experience and knowledge of the client’s business can evaluate accurately enough the sample findings to make audit decision and the mathematical proof of accuracy in some cases may be a luxury which the auditor cannot afford. In judgmental sampling the auditor’s opinion determines the sample size but it cannot be measured how far the sample size would fulfill the audit objective. In statistical sampling, the sample results are measurable as to the adequacy and reliability of the audit objectives.

Statistical Sampling : Statistical sampling is a method of audit testing which is more scientific than testing based entirely on the auditor’s own judgment because it involves use of mathematical laws of probability in determining the appropriate sample size in varying circumstances. Statistical sampling has reasonably wide application where a population to be tested consists of a large number of similar items and more in the case of transactions involving compliance testing, debtors’ confirmation, payroll checking, vouching of invoices and petty cash vouchers. Students may note that it is unnecessary for the auditor to gain in depth knowledge of statistics before making use of statistical sampling for audit testing since published statistical tables are available which indicate the sample size based on predetermined criteria.

Precautions should be taken with Test Checking Techniques

Generally, a large manufacturing concern is associated with a large volume of transactions. Also, the nature of the transactions is determined by the nature of the business. Depending upon the product lines, the sales mechanics may be different for different products - some may be to dealers and agents, some to wholesalers and some others even to retailers and consumers directly. Sales and purchase operations may stretch even to overseas markets. There may be various forms in which such a concern can raise bank finance, like letter of credit, packing credit, overdraft, bills discounted, etc. Basically, in a large manufacturing concern the problem is the problem of volume and variety.

In the circumstances when necessarily the test check technique has got to be adopted for audit work, it should be done by taking certain precautions so that a reliable idea about the truth and fairness of the accounts can be obtained by the auditor. The precautions that should be taken may be the following :

(i) The transactions of the concern should be classified under appropriate heads and may be stratified if wide variations are there between transactions of the same kind.

(ii) Systems and procedures for entering into and processing a transaction right from the beginning to the end should be studied in a sequential order. It involves questions of authorizations, documentation and recording and evidencing the same.

(iii) The whole of the system of internal control in the areas of accounts and finance should be studied and evaluated for its efficiency, soundness and capability for producing reliable accounting and financial data. This can be done by studying the controls and internal checks, evaluating their general soundness in the context of the business of the concern and testing their actual operation. If, and only if, the auditor is satisfied about soundness of the controls and their operation in actuality, can he decide to have test checks. For testing the operation of the control system, he should select a few transactions and check them in depth by the application of procedural tests.

(iv) A properly thought-out test check plan should be prepared and the objective of each check should be clearly understood by the auditing staff. For example, each voucher may be checked by the test check method for a number of objectives - one may be to ensure that the cash payments are properly authorised and acknowledged, others may be to see whether the amount actually payable has in fact been paid and whether the payment has been debited to the proper account. If there is a mix-up in the objectives or the objective is to test a number of variables in one test scheme, the result may not be helpful. Hence it requires a clear definition of the audit objective related to the particular test check plan.

(v) The transactions falling under each test-check plan should be selected in a manner so that bias cannot enter in the selection. For the purpose, selection should be made by reference to the random number tables.

(vi) Identification of the areas where test check may not be done. For example, if there are only 20 overseas sales in the year, it would be preferable to have them all thoroughly checked.

(vii) The number of transactions to be selected for each test-check plan should be predetermined. This can be done by deciding upon the degree of reliance that should be placed on the test-check result and the confidence that can be placed - the result to be obtained should be veering round the degree of reliance set up. Once the degree of reliance and the confidence level required in the audit for expression of the opinion have been decided, the number to be tested out of the given population can be easily known by reference to the statistical tables.

(viii) Errors that may be found may be material or immaterial in the context of the particular audit. Since errors of immaterial nature are not likely to distort the overall truth and fairness of the accounts, it is necessary to decide upon the criteria to judge what constitutes a material error. Further investigation of immaterial error may be avoided and only the material errors may be properly and thoroughly investigated.

Importance of audit working papers?

Importance of Working Papers:

(i) It provides guidance to the audit staff with regard to the manner of checking the schedules.

(ii) The auditor is able to fix responsibility on the staff member who signs each schedule checked by him.

(iii) It acts as an evidence in the court of law when a charge of negligence is brought against the auditor.

(iv) It acts as the process of planning for the auditor so that he can estimate the time that may be required for checking the schedules.

The auditor should adopt reasonable procedures for custody and confidentiality of his working papers and should retain them for a period of time sufficient to meet the needs of his practice and satisfy any pertinent legal or professional requirements of record retention.

Auditors’ Rights Where Clients And Other Auditors Seek Access To Their Audit Working Papers

1. Auditing and Assurance Standard SA 200, "Basic Principles Governing an Audit", states in para 6: "The auditor should respect the confidentiality of information acquired in the course of his work and should not disclose any such information to a third party without specific authority or unless there is a legal or professional duty to disclose". Auditing and Assurance Standard SA 230, states: "Working papers are the property of the auditor. The auditor may, at his discretion, make portions of or extracts from his working papers available to his client. SA 230 further requires, inter alia, that the "auditor should adopt reasonable procedures for custody and confidentiality of his working papers."

2. A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he discloses information acquired in the course of his professional engagement to any person other than his client, without the consent of his client or otherwise than as required by any law for the time being in force."

3. Requests are sometime received by the members of the Institute, who have/had been performing the duties as the auditors of an enterprise, to provide access to their audit working papers. The requests may be made by the clients or other auditors of the enterprise or its related enterprise such as a parent enterprise.

4. An auditor is not required to provide the client or the other auditors of the same enterprise or its related enterprise such as a parent or a subsidiary, access to his audit working papers. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors. In the case of a company, the statutory auditor has to consider the report of the branch auditor and has a right to seek clarifications and/or to visit the branch if he deems it necessary to do so for the performance of the duties as auditor. An auditor can rely on the work of another auditor, without having any right of access to the audit working papers of the other auditor. For this purpose, the term ’auditor’ includes 'internal auditor'.

5. The client does not have a right to access the working papers of the auditor. However, the auditor may, at his discretion, in cases considered appropriate by him, make portions of or extracts from his working papers available to the clients.

Precautions taken to avoid disadvantages of a continuous audit?

The disadvantages of a continuous audit can be avoided if the following precautions are taken:

• During the course of each visit, work should be completed upto a definite stage so as to avoid loose ends.
• At the end of each visit, important balances should be noted down and the same should be compared at the time of the next visit.
• The visits should be at irregular intervals of time so that the client’s staff may not in advance know the exact date when the audit would be resumed and thus may be able to prepare themselves in advance for the same.
• The nominal accounts should be checked only at the time of final closing.
• The client’s staff should be instructed not to alter or correct audited figures. The auditor should also device a special form of ticks for being placed against figures which have been altered and neither its purpose nor significance should be disclosed to the client’s staff.

Thus, it is clear from the above that final or completed audit approach is advisable in case size of the entity is very small. On the other hand, continuous audit may be followed only in case size of the entity is very large and system of internal control is weak since the great disadvantage of continuous audit is that the cost would be very high and continuous presence of audit staff may impair auditor’s independence. The interim audit conducted on quarterly or half-yearly basis is the most practicable solution.

What are current and Permanent Audit files?

In the case of recurring audits, some working paper files may be classified as permanent audit files which are updated currently with information of continuing importance to succeeding audit, as distinct from current audit files which contain information relating primarily to the audit of a single period.

A permanent audit file normally includes :

• Information concerning the legal and organizational structure of the entity. In the case of a company, this includes the Memorandum and Articles of Association. In the case of a statutory corporation, this includes the Act and Regulations under which the corporation functions.
• Extracts or copies of important legal documents, agreements and minutes relevant to the audit.
• A record of the study and the evaluation of the internal controls related to the accounting system. This might be in the form of narrative descriptions,questionnaires or flow charts, or some combination thereof.
• Copies of audited financial statements for previous years.
• Analysis of significant ratios and trends.
• Copies of management letters issued by the auditor, if any. Record of communication with the retiring auditor, if any, before acceptance of the appointment as auditor.
• Notes regarding significant accounting policies.
• Significant audit observations of earlier years.

The current file normally includes :

1. Correspondence relating to acceptance of annual reappointment.
2. Extracts of important matters in the minutes of Board Meetings and General Meetings as relevant to audit.
3. Evidence of the planning process of the audit and audit programme.
4. Analysis of transactions and balances.
5. A record of the nature, timing and extent of auditing procedures performed, and the results of such procedures.
6. Evidence that the work performed by assistants was supervised and reviewed.
7. Copies of communication with other auditors, experts and other third parties.
8. Letters of representation or confirmation received from the client.
9. Conclusions reached by the auditor concerning significant aspects of the audit, including the manner in which exceptions and unusual matters, if any, disclosed by the auditor’s procedures were resolved or treated.
10. Copies of the financial information being reported on and the related audit reports.

What is an Audit Notebook?

An audit note book is usually a bound book in which a large variety of matters observed during the course of audit are recorded. It is thus a part of the permanent record of the auditor available for reference later on, if required. The audit note book also provides a valuable help to the auditor in picking up the links of work when the concerned assistant is away or the work is stopped temporarily because in it are recorded along with observations, the various queries, explanations obtained and evidence seen, while queries remaining undisclosed of would be noted for follow up. It is more satisfactory in some ways, however, to use loose sheets for entering queries and notes which, subsequently, on being punched, may be filed in a special query file maintained for each client or along with the clients’ accounts and papers, separately for each year. 

Significant matters observed during the course of audit, a record of which should be kept in the Audit Note Book :

(a) Audit queries not cleared immediately e.g. missing receipts, vouchers, etc.

(b) The mistakes or irregularities observed during the course of audit e.g. cases of failure to comply with the requirements of the Companies Act, 1956 or the provisions contained in the Memorandum or Articles; a change in the basis of valuation of finished stock and work-in-progress or in the computation of depreciation; failure to provide adequate depreciation, etc.

(c) Unsatisfactory book-keeping arrangements, costing method, internal or financial administration or organization.

(d) Important information about the company which is not apparent from the accounts.

(e) Special points requiring consideration at the time of verification of final accounts.

(f) Important matters for future reference.

The making of intelligent inquiries on the accounts under audit is an important part of the work of an auditor. However, to guard against the client’s staff being required to provide explanation and information which are unnecessary or which could be ascertained otherwise junior members of the audit staff should be allowed to raise audit queries only after obtaining the prior approval of the senior in-charge. Nonetheless, the enthusiasm of an intelligent and energetic junior should not go unrewarded and, as such, the queries he wishes to raise and which are not pertinent or important should be discussed and explained to him.

The audit notes constitute important evidence of matters considered by the auditor during the course of the audit, some of which may not find a place in his report submitted to the shareholders or directors, for the reason that on the basis of an explanation given to him by the management, he, on being satisfied, decided to drop them. As such, audit notes can be an important defense for the auditor in the event of an action for negligence in the discharge of his duties being subsequently brought against him.

In the past, these have been used for successfully defending a legal action brought against an auditor alleging negligence in performance of his duties. For instance in the case of City Equitable Fire Insurance Company Limited the auditor was greatly assisted in his defense by the well maintained record of work that had been carried out by him in regard to the audit. The necessity of maintaining a systematic record of audit queries also was greatly emphasized by Lord Justice Williams while delivering the judgment in the case of London and General Bank.

Audit notes can also serve as a guide in framing audit programme in the future as they indicate the weaknesses in the system of the client which specially need to be watched.

Also, it is desirable that the audit notes, whether they are kept in a book or in loose sheets, should bear a reference to the particular item of work in the audit programme, and as far as practicable, all notes relating to the particular work in the programme should bekept together in the systematic order.

What should be the Contents of Working Paper?

Working papers should record the audit plan, nature, timing and extent of auditing procedures performed, and the conclusions drawn from the evidence obtained. The form and content of working papers are affected by matters such as :

• Nature of the engagement.
• Form of the auditor’s report.
• Nature and complexity of the client’s business.
• Nature and condition of the client’s records and degree of reliance on internal controls.
• Need in particular circumstances for direction, supervision and review of work performed by assistants.

Working papers should be designed and properly organized to meet the circumstances of each audit and the auditor’s needs in respect thereof. The standardization of working papers (for example, checklists, specimen letters, standard organization of working papers) improves the efficiency with which they are prepared and reviewed. It also facilitates the delegation of work while providing a means to control its quality. Working papers should be sufficiently complete and detailed for an auditor to obtain an overall understanding of the audit. The extent of the documentation is a matter of professional judgment since it is neither necessary nor practical that every observation, consideration or conclusion is documented by the auditor in his working papers. 

All significant matters which require the exercise of judgment, together with the auditor’s conclusion thereon, should be included in the working papers. To improve audit efficiency, the auditor normally obtains and utilizes schedules, analyses and other working papers prepared by the client. In such circumstances, the auditor should satisfy himself that these working papers have been properly prepared. Examples of such working papers are detailed analysis of important revenue accounts, receivables etc.

In the case of recurring audits, some working paper files may be classified as permanent audit files which are updated currently with information of continuing importance to succeeding audit, as distinct from current audit files which contain information relating primarily to the audit of a single period.

A permanent audit file normally includes :

• Information concerning the legal and organizational structure of the entity. In the case of a company, this includes the Memorandum and Articles of Association. In the case of a statutory corporation, this includes the Act and Regulations under which the corporation functions.
• Extracts or copies of important legal documents, agreements and minutes relevant to the audit.
• A record of the study and the evaluation of the internal controls related to the accounting system. This might be in the form of narrative descriptions,questionnaires or flow charts, or some combination thereof.
• Copies of audited financial statements for previous years.
• Analysis of significant ratios and trends.
• Copies of management letters issued by the auditor, if any. Record of communication with the retiring auditor, if any, before acceptance of the appointment as auditor.
• Notes regarding significant accounting policies.
• Significant audit observations of earlier years.

The current file normally includes :

1. Correspondence relating to acceptance of annual reappointment.
2. Extracts of important matters in the minutes of Board Meetings and General Meetings as relevant to audit.
3. Evidence of the planning process of the audit and audit programme.
4. Analysis of transactions and balances.
5. A record of the nature, timing and extent of auditing procedures performed, and the results of such procedures.
6. Evidence that the work performed by assistants was supervised and reviewed.
7. Copies of communication with other auditors, experts and other third parties.
8. Letters of representation or confirmation received from the client.
9. Conclusions reached by the auditor concerning significant aspects of the audit, including the manner in which exceptions and unusual matters, if any, disclosed by the auditor’s procedures were resolved or treated.
10. Copies of the financial information being reported on and the related audit reports.

What needs before Expression of opinion by an Auditor?

The auditor must gather sufficient competent evidential matter as a basis for forming his opinion on :

(a) the truth and fairness of the accounts and also their compliance with the provisions of the related laws, rules and regulations;

(b) the proper keeping of the accounting records, and other records and related registers of the client.

These broad objectives may be amplified as follows :

To determine whether :

(1) all assets and liabilities are properly stated and classified on a basis consistent with that of the previous year;

(2) proper disclosure is made of securities for liabilities and of assets charged or secured;

(3) the client has complied with the provisions of the applicable laws and documents created under them, loan agreements and other documents to which he is a party;

(4) income and expenses are properly classified and disclosed and are properly matched. They relate to the period in which they are reported and have been determined on a basis consistent with that of the previous year;

(5) all contingencies and commitments are properly disclosed;

(6) no material omissions have been made in the financial statements;

(7) no material error or inaccuracy in reporting or disclosing income, expenses, assets and liabilities has been created in the financial statements;

(8) the books and records have been properly kept in accordance with the requirements of the client.

The expression of opinion on the overall balance sheet and profit and loss account involves initially forming an opinion on each of the balance sheet or profit and loss items; it is necessary first to decide what are the essential conditions or prerequisites for each balance sheet or profit and loss account item in order to give a true and fair view of the particular assets or liabilities or item of income or expense being represented. These conditions are well established and may be illustrated by reference to the areas of sundry debtors and sales revenues.

Advantages and disadvantages Final Audit?

Final or Completed or Periodical Audit :

A final or completed audit is commonly understood to be an audit which does not begin until the books have closed at the end of the accounting period and thereafter is carried on continuously until completed. Whether an audit ought to be conducted continuously after the close of the financial year should be decided on a consideration of the size of the business and the extent of detailed checking required.

Advantages of such an audit are :

(i) Work can be carried on till the audit is over, thus, avoiding the necessity of having to return on separate occasions to complete the work.

(ii) The possibility of figures being altered after work has been done is also avoided.

(iii) Allocation of work for staff also becomes easier.

Disadvantages of final or completed audit include may be mainly on account of delay  which may occur after the end of the financial period particularly if size of the business is large; accounting periods of several clients may end on the same date, and thus difficulties may be experienced in allocating audit staff.

What are the advantages and disadvantages of Continuous Audit

Continuous audit : A continuous audit is one in which the auditor’s staff is engaged continuously in checking the accounts of the client the whole year round or when for this purpose the staff attends at intervals, fixed or otherwise, during the currency of the financial period. Strictly speaking, when auditor’s staff attends the audit work at fixed intervals it may be strictly called interim audit. This is when an audit is conducted up to a particular date within the accounting period. The auditor may attend to audit the figures for a month or for a quarter, as the work may require. It would differ distinctly from the final audit in the extent of the work carried out; verification of assets, for example would be left until the final audit. In case of continuous audit, the work is conducted throughout the course of the financial year but is not taken to a specific accounting period, as is an interim audit. It might be that during the course of the continuous work interim figures are being audited, but the significant factor here is that the auditor will be engaged continuously on the audit throughout the financial period. Staff may be in residence throughout the period or may come and go at irregular intervals, but most of the time, the audit staff is present at the location. Thus, in case of continuous audit, the audit staff is resent as the client’s premises almost during the entire accounting period.

Advantages :

(1) Errors are discovered earlier with the result that there is adequate time for making the necessary rectification.

(2) Because of the frequent attendance of the auditor, the opportunities of committing frauds are reduced.

(3) Fraud, if perpetrated, is detected sooner with the result that size of the fraud is limited and also the chances of recovering the amount lost are improved. 

(4) The attendance of the audit staff acts a moral check on the client’s staff.

(5) The client’s accounts are always kept up-to-date.

(6) Since audit can be carried on throughout the year, there is more time for detailed checking of the accounts when the audit is taken up at the close of the year.

(7) If the audit of routine transactions is completed before the close of the year, the final accounts can be prepared and reported upon much earlier.

(8) If the auditor carries on a continuous audit, he remains constantly in touch with the client’s affairs thereby able to carry out his duties efficiently.

(9) In the case of continuous audit, the work of the auditor is greatly facilitated since he is in a better position to plan out his engagements and take up the job at his convenience, avoiding the pressure at the close of the financial year when most of the business firms usually close their accounts.

Disadvantages :

(1) There is a danger that the records of transactions after they have been audited may be altered either innocently or fraudulently.

(2) The examination of an item left incomplete on a visit for being undertaking on the next visit may be overlooked.

(3) A continuous audit may involve good deal of waste of time and effort if the size of the concern is small.

What are the advantages and disadvantages of the use of an Audit Programme?

The advantages of the use of an Audit Programme are:

(a) It provides the assistant carrying out the audit with total and clear set of instructions of the work generally to be done.

(b) It is essential, particularly for major audits, to provide a total perspective of the work to be performed.

(c) Selection of assistants for the jobs on the basis of capability becomes easier when the work is rationally planned, defined and segregated.

(d) Without a written and predetermined programme, work is necessarily to be carried out on the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or overlooking certain books and records. Under a properly framed programme, the danger is significantly less and the audit can proceed systematically.

(e) The assistants, by putting their signature on programme, accept the responsibility for the work carried out by them individually and, if necessary, the work done may be traced back to the assistant.

(f) The principal can control the progress of the various audits in hand by examination of audit programmes initiated by the assistants deputed to the jobs for completed work.

(g) It serves as a guide for audits to be carried out in the succeeding year.

(h) A properly drawn up audit programme serves as evidence in the event of any charge of negligence being brought against the auditor. It may be of considerable value in establishing that he exercised reasonable skill and care that was expected of professional auditor.

Disadvantages:

Some disadvantages are also there in the use of audit programmes but most of these can be removed by taking some steps which otherwise also contribute to the making of a good audit. The disadvantages are :

(a) The work may become mechanical and particular parts of the programme may be carried out without any understanding of the object of such parts in the whole audit scheme.

(b) The programme often tends to become rigid and inflexible following set grooves; the business may change in its operation of conduct, but the old programme may still be carried on. Changes in staff or internal control may render precaution necessary at points different from those originally decided upon.

(c) Inefficient assistants may take shelter behind the programme i.e. defend deficiencies in their work on the ground that no instruction in the matter is contained therein.

(d) A hard and fast audit programme may kill the initiative of efficient and enterprising assistants.

All these disadvantages may be eliminated by imaginative supervision of the work carried on by the assistants; the auditor must have a receptive attitude as regards the assistants; the assistants should be encouraged to observe matters objectively and bring significant matters to the notice of supervisor/principal.