BBM 320 ASSIGNMENT

Question 1.

Define and explain the meaning of audit program

MEANING

An audit programme is a detailed, written statement designed by the auditor indicating the work to be
performed by the audit assistants, specifying the time limit for completion of work, instructions and
guidance to the audit staff. In short, it is a tool for planning, directing and controlling the audit work.

DEFINITION

An audit programme Is a detailed plan of the auditing work to be performed. It specifies the procedures
to be followed in the conduct of audit more efficiently. The auditor outlines the whole procedure of
audit from beginning till the finalization of audit report. Audit programme is generally contained in the
audit notebook

Features of an Audit Programme

1. It is a set of procedures to be adopted to conduct the audit more efficiently.

2. It is a written scheme designed by the auditor.
3. It is a blue print of the audit work.
4. It facilitates delegation of work, based on the capabilities of audit staff.
5. It acts as evidence in future for the audit work being performed.
6. It specifies the work to be done by the audit staff, the manner and time limit for completion
of the work.

Objectives of Audit Programme

The following are the objectives of audit programme:

1. To provide clear instructions to the audit assistants specifying the nature of work to be
performed and fixing the time span for completion of each work.
2. To facilitate coordination among various parts of audit work.
3. To ensure uniformity in the performance of audit work and to avoid duplication and
repetition of work.
4. To attain a fair allocation of work among audit team.
5. To fix responsibility and accountability of each audit assistant.
6. To serve as a guide for planning the audit work in future.
 7. To serve as evidence in future showing the date of completion of audit work, methods or
procedures undertaken, persons involved in completion of audit work etc.

Contents of an Audit Programme

The following are the details of an audit programme:

1. Name of the client.

2. Nature of operations and business of client.
3. Review of system of internal check.
4. Date of commencement of audit work.
5. Duration of audit work.
6. Accounting system followed in client organization.
7. Review the report of the previous auditor.
8. Review the remarks, instructions or objections raised in the previous audit report.

9. Examine the various ledger accounts and subsidiary books.

9. Examine the statutory books and registers, profit and loss account, and balance sheet.

Question 2

Disadvantages of using audit programs and how they can be solved

Disadvantages of an Audit Programme

Audit programme has certain disadvantages and limitations, which should be taken care of.

1. Mechanical: When audit work is conducted mechanically every year based on the audit
programme, it causes monotony and boredom to the auditor and audit staffs.

2. No Quality in Work:

There is always a tendency to speed up the work so as to complete it within the required time schedule.
The audit staff will be more interested to complete the work in time rather than to maintain any
standard in the work.

3. Loss of Initiative: Audit staff cannot take their own decisions and they are compelled to comply
with the audit programme. Hence, an efficient audit clerk loses his initiative and interest as he
cannot make any suggestions.
4. Rigidity: A rigid and inflexible audit programme cannot be laid down for different types of
business because each business has got its own problems. During the course of audit, new areas
to be verified may come to the notice of the audit staff. Unless the audit programme is revised,
such areas may escape from auditing.

5. Shelter for Inefficient Staff: Inefficient audit staffs conceal their mistakes or weakness on the
basis of audit programme. Hence, it provides shelter for inefficient audit staff.

6. Unsuitable: Pre-determined audit programme is not suitable for small business organization.
Audit programme is not much useful in the case of a small audit where the books to be audited
are very few.

7. The audit staff tends to go ahead with the work as per the audit programme. Therefore, there is
no scope for adopting new techniques or additional procedures, which are necessary according
to the circumstances, which arise during the course of audit.

8. Even a detailed audit programme cannot consider each and every minute work involved during
the course of audit of a business. Similarly,the audit programme may not be completed because
certain items may be left from being checked

Precautionary Measures to Overcome the Limitations of Audit Programme

1. The audit programme should be altered as per the internal control system to be reviewed
from time to time and from firm to firm.

2. The auditor should also revise it when his client has adopted a new line of action.

3. The assistants should be consulted while preparing the audit programme.

4. A rigid and stereotyped programme should be avoided.

5. Audit assistants while they actually using the audit programme should really feel that they
have actually some discretion in practice.

Hence, to guard against the disadvantages, it is usually suggested that an audit programme
should be divided into two parts,

Work common to all types of audit, and

 Work relating to a particular audit.
This will, therefore, leave some scope for modification to be made in the audit programme
whenever necessary.

Question 3.

Draft an audit program for a fixed assets

Step 1: understand the client procedure of Fixed Assets acquisition and disposal.

This is first and very important aspect. In this step, we ask client for Policy regarding Fixed Assets. Form
this we obtain the general understanding of Client Working Pattern on Fixed Assets to know who is
responsible for what. On the basis of same we can plan our audit program on Fixed Assets.

Step 2: Obtain Fixed Assets Register as maintained by the Client

Comment on whether the proper records of Fixed Assets is maintained by the client. To ensure this we
have to obtain Fixed Assets Register maintained by the Client. Further we have to ensure that the Fixed
Assets Register contained following things:-

a.Year of acquisition;

b. Sufficient description of the assets to make identification possible;

c. Classification, that is, the head under which it is shown in accounts e.g., Land, Building, Plant &
Machinery etc;

d. Location;

e. Quantity, i.e. no. of units;

f. Original Cost;

g. Adjustment for revaluation or for increase or decrease in cost consequent on revolution of Foreign
Currency Liabilities if any;

h. Depreciation Written off to date;

j. Rate of depreciation and particulars regarding amortization and impairment;

k. Particulars regarding sale, discarding, demolition, destruction etc;

l. Particulars of Fixed Assets that have been retired from active use and held for disposal;

m. Whether Fixed Assets Register as per Register/Records agree with General Ledger balance. If not,
note the disagreement in respect of each class of assets e.g.Land freehold, Land leasehold,Building,Land,
Plant and Machinery,Vehicles,Furniture and Fixtures, Office Equipments etc.
Step 3: Vouching of Additions to Fixed Assets

a. Decision on Sample

On the basis of Total Addition, Period and Assessment of Risk decide the % of Addition to be check from
total addition made during the period under review.

b. Checking of Bills

Ensure that all fixed assets additions are route through proper channel as mention in policies

Ensure that Cost which form part of installation or commission of fixed assets along with any charges
incurred to bring the fixed assets to their present location and condition are capitalized.

If company takes credit on duty paid on fixed assets, ensure that such duty should not be forming part of
cost.

Ensure expenditure prior to date of ready to use had been capitalized and expenditure incurred
thereafter is booked as revenue expenditure.

c. Assets on Lease

Obtain list of fixed assets taken/given on lease during the year.

Ensure compliance with respect to assets given/taken on Lease.

Ensure that proper classification of Assets taken/given on lease

d. Imported Assets

Ensure that all duties on which credit not available should be form part of cost.

Freight and insurance expenses should be capitalized.

e. Other aspects for checking

Securitize all fixed assets/ repair & maintenance accounts to ensure that no items of revenue have been
capitalized and visa versa.

Ensure that eligible borrowing cost upto of assets becomes ready to use has been capitalized.

Ensure that in case of composite acquisition of assets- the price should be bifurcated into assets
supported by proper documents.

In case of Self capitalization case ensure that overheads are allocated on reasonable basis.

Ensure that replacement of assets is to be capitalized only when erstwhile assets is removed.

Step 4: Vouching of Deletion from Fixed Assets

Whether Disposal affect the Going Concern

Determine that substantial part of fixed asset is not disposed off. If substantial part is disposed off,
determine that such disposal does not affect the Going Concern Status of the company. If its affect the
Going Concern Status of Company then ensure that same should be reported in Audit Report.

a. Decision on Sample

On the basis of Total deletion, Period and Assessment of Risk decide the % of deletion to be check from
total deletion form fixed assets during the period under review.

b. Checking of Sales bills of Disposal

Ensure that all fixed assets deletions are route through proper channel

Ensure that profit/loss on disposal is correctly calculated and disclosed.

Ensure that cost, deprecation are eliminated from fixed assets for items which were scrapped and have
no residual value.

Step 5: Depreciation and Amortization

Obtained total number of shift worked during the period under review from plant head.

Ensure that depreciation/Amortization is calculated as per Accounting Policy

Depreciation on assets purchased during the year should be charge on pro-rata basis.

Lease premium should be amortized over the lease term.

Step 6: Revaluation

Identify the basis of revaluation.

Fact of revaluation should be disclosed for subsequent five years.

Quantum of Revaluation should be disclosed.

Depreciation on revalued amount should be transfer to Revaluation Reserve.

If the revalued assets sold, the remaining balance of Revaluation Reserve should be transfer to Revenue
Account.

Step 7: Other

Ensure that immovable properties held as investments and as stock in trade have been shown
accordingly in the accounts.
Ensure that Inter-unit Sales/Purchases are eliminated from Fixed Assets Register and Summary of Inter-
unit Sales/Purchase should be available separately.

Obtained Physical verification Report and ensure that it should be carried out at regular intervals.

Ensure that all fixed assets are properly insured.