Audit Procedures

Audit procedures are the acts performed or the methods and techniques used by the auditor to
gather and evaluate audit evidence.

They may be applied to the underlying accounting data or to the process of obtaining and
evaluating corroborating information.

In designing audit procedures, it is common to spell them out insufficiently specific terms to
permit their use as instructions during the audit.

For example, the following. is an audit procedure for the verification of cash disbursements:

Obtain the cash disbursements journal and compare the payor name, amount and date on the
canceled check with the cash disbursements journal.

Classification of Audit Procedures

Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is
obtained by performing the following:

1. Risk assessment procedures

2. Further audit procedures, which comprise-

i. Tests of controls, when required or when the auditor has chosen to do so, and

ii. Substantive procedures, which include tests of details and substantive analytical
procedures.

A. Risk Assessment Procedures

The auditor shall perform risk assessment procedures to provide a basis for the identification and
assessment of risks of material misstatement at the financial statement and assertion levels.

Risk assessment procedures by themselves, however, do not provide sufficient appropriate audit
evidence on which to base the audit opinion.

The risk assessment procedures shall include the following;

 1. Inquiries of Management
Inquiries of management and of others within the entity who in the auditor’s judgment may have
information that is likely to assist in identifying risks of material misstatement due to fraud or
error.

Much of the information obtained by the auditor’s inquiries is obtained from management and
those responsible for financial reporting.

However, the auditor may also obtain information, or a different perspective in identifying

risks of material misstatement, through inquiries of others within the entity and other employees
with different levels of authority.

2. Analytical Procedures
The analytical procedures performed as risk assessment procedures may identify aspects of the
entity of which the auditor was unaware and may assist in assessing the risk of material
misstatement to provide a basis for designing and implementing responses to the assessed risks.

Analytical procedures performed as risk assessment procedures may include both financial and
non-financial information, for example, the relationship between sales and square footage of
selling space or volume of goods sold.

3. Observation and Inspection

The observation and inspection procedures may support inquiries of management and others, and
may also provide information about the entity and its environment.

Examples of such audit procedures include observation or inspection of the following;

i. the entity’s operations,

ii. documents (such as business plans and strategies), records, and internal control manuals,

iii. reports prepared by management (such as quarterly management reports and interim
financial statements) and those charged with governance (such as minutes of the board of
directors’ meetings),

iv. the entity’s premises and plant facilities.

B.Further Audit Procedures

In addition to the risk assessment procedure, there are some other audit procedures, which are
known as further audit procedures.
They are described below;

1. Tests of Controls
Tests of controls are audit procedures performed to test the operating effectiveness of controls in
preventing or detecting material misstatements at the relevant assertion level.

An auditor might use inspection of documents, observation of specific controls, reperformance of

the control, or other audit procedures to gather evidence about controls.

The objective of the tests of controls in an audit of internal control over financial reporting is
to obtain evidence about the effectiveness of controls to support the auditor’s opinion on the
company’s internal control over financial reporting.

The auditor’s opinion relates to the effectiveness of the company’s internal control over financial
reporting as of a point in time and taken as a whole.

2. Substantive Procedure
Substantive procedures are audit procedures performed to test material misstatements (monetary
errors) in an account balance, transaction class, or disclosure component of financial
statements.

A substantive procedure is a process, step, or test that creates conclusive evidence regarding the
completeness, existence, disclosure, rights, or valuation (the five audit assertions) of assets
and/or accounts on the financial statements.

To qualify as a substantive procedure, enough documentation must be collected so that another

competent auditor could conduct the same procedure on the same documents and make the same
conclusion.

There are some categories of substantive procedures;

i. substantive analytical procedures,

ii. Tests of details of classes of transactions,

iii. Tests of details of account balances,

iv. Tests of details of disclosures, etc.

These are explained below;

1. Substantive Analytical Procedures

“Analytical procedures” means evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data.

Analytical procedures also encompass the investigation of identified fluctuations and

relationships that are inconsistent with other relevant information or deviate significantly from
predicted amounts.

2. Tests of Details of Classes of Transactions

Tests of details of classes of transactions involve examining the evidential support for the
individual debits and credits to an account and are usually done through vouching and tracing.

3. Tests of Details Account Balances

Tests of details of account balances involve examining support of the closing balances directly
as, for example confirming an ending account receivable balance directly with the customer.

4. Test of Details of Disclosures

Test of details of disclosures involve examining whether;

i. all disclosures that should have included in the financial statements following the
applicable financial reporting framework have been included,

ii. all the disclosures are clearly expressed, and

iii. all the disclosures are made fairly and at appropriate amounts.