Chapter No.

5
AUDIT TECHNIQUES
  Audit Techniques
 Audit techniques are tools, methods or processes by means of which an auditor collects
the necessary evidence to support his opinion in respect of the propositions or assertions
submitted by the client to him for his examination. The techniques of auditing are
concerned with the collection of adequate, valid and relevant evidence.
 Kinds of Audit Techniques
 Audit techniques to be applied in collecting the required evidence by the auditor to
support his opinion will differ from situation to situation.
 The auditor must from time to time review, amend and modify his audit techniques in
the light of each audit objective, nature and circumstances because no audit technique is
final and suitable for all situations. The audit techniques may possible be classified into
the following categories:-

 Posting Verification: Tracing selected items recorded in one source to another source to
establish the propriety and consistency of the recording process.
 Extension Verification: Multiplying two or more amounts to prove the accuracy of the
total.
 Vouching: A careful examination of all original evidence such as invoices, statements,
receipts, correspondence, minutes, contracts, etc., with a view to proving the accuracy of
the entries in the books of account and to ascertaining so far as possible that no
transactions have been omitted from the books.
 Confirmation: An independent confirmation by the auditor with a third party to
ascertain the correctness of the figures and validity of the clients’ records. The auditor
obtains written statements and certificates from debtors and lenders, etc. The auditor
adopts direct mail method.
 Physical Observation: This is carried out in respect of tangible assets as shown by the
books of accounts of the client. Physical examination includes inspection, counting,
identification, measurement and escalation of quality. The auditor may observe the
process of stocktaking done by the staff of the client. Assets which are not easily
identifiable may create some problem in the way of physical examination.
 Reconciliation: This is another audit technique manually used by an auditor during the
course of an audit. Where two or more related items do not agree it becomes essential to
adopt the reconciliation techniques. For example: rent account may be reconciled by
multiplying monthly rent by twelve, interest may be reconciled by multiplying the
amount of loan with the percentage of interest and so on.
 Testing: This technique involves the selection of representative items form the records
and examining them for reaching a conclusion about the trend of the whole activity. The
items selected must be sufficiently representative of the whole data.
 Analysis of Financial Statements: An audit technique, which involves the working of
various financial ratios between different audit periods ended. Sometimes such ratios are
calculated between those of the enterprise and other similar organizations. The
objectives ensure whether they have a logical relationship. Such ratios may be
profitability ratio, solvency ratio, activity ratio etc.
 Scanning: This technique can be employed only by an experience auditor. Such auditor
may make a wide sweeping search or look through hastily to find out which of the entries
are regular consistent and logical and which are not so. The irregular and inconsistent
entries can then be examined in depth with the evidence.

 Flow Charting: This technique is used in auditing to describe graphically the issue of
transactions through different stages from start to the end.
 Electronic Data Processing: This technique simplifies the conduct of audit because
generally the number of errors are excluded to the minimum as the human element is
eliminated. However, if the computer is not properly controlled, the errors may multiply
many times and the results may be unreliable.
 Inspection: The Auditor before beginning his examination and review of the financial
statements, should arrange an inspection of the client’s office, plant, branches, sales,
offices etc., to obtain understanding the plant layout, manufacturing processes, principal
product, control and safeguard of inventories, the books and records maintained about
the location of various accounting records, the extent of responsibilities of each
executive. They should also make a detailed inspection of electronic data processing
department.
 Inspection consists of examining records, documents or tangible assets. Inspection of
records and documents provides audit evidence of varying degrees of reliability
depending on their nature and source and the effectiveness of internal control over their
processing.
 Observation: The auditor before beginning the verification of specific transactions and
observation consists of looking at a process being performed by others, for instance, the
observation by the auditor of the counting of inventories by the entity’s personnel or the
performance of control procedures that have no audit trial. Observation provided audit
evidence as to the manner of performing a procedure only at the time of observation.
 Enquiry: Enquiry consists of seeking information of knowledgeable persons inside or
outside the entity. Enquiries may range from formal written inquiries addressed to third
parties to informal oral inquiries addressed to persons inside the entity. Enquiries may
range from formal Responses to inquiries may provide the auditor with information not
previously possessed or with corroborative audit evidence. Reliability of this type audit
evidence depends on the competence, experience independence and integrity of
respondents.
 Computation: Computation consists of checking the arithmetical accuracy of source
documents and accounting records or of performing independent calculations.
 Routine Checking: Routine checking is a total process of accounting control, which
includes the following:
 Examination of the totaling and balancing of the books of prime entry
 Examination of the posting from the primary books to the ledger accounts
 Examination of totaling and balancing of the ledger accounts and of the trial balance
prepared with those balances.
 Overall examination of writing up the transactions properly
 In short the routine checking is concerned with ascertaining the arithmetical accuracy of
casting, posting and carry forwards. For the purpose of confirming the arithmetical
accuracy and detecting frauds and errors of very simple nature, this method is adopted as
basic to all types of audit work.
 Objectives: Objectives of routine checking can be described as follows:
 To ensure the arithmetical accuracy of the books of accounts
 To form the basis of vouching
 To prevent alteration of figures
 To increase reliability of financial statements
 To detect errors and frauds
 Advantages:
 Errors and frauds of simple nature can be detected very easily.
 The books of accounts can be thoroughly checked.
 Arithmetical accuracy of all the transactions can be confirmed by this method.
 It offers an opportunity to train the new entrants to the profession
 Disadvantages:
 It is not generally considered as an important part of audit work where self-balancing
system is maintained.
 As the audit staff are engaged in same type of work the possibility of becoming
monotonous may grow in this system.
 Negligence of work, taking the advantage of internal check system, are frequent.
 It fails to detect errors and frauds arising from the fraudulent manipulation in accounting
principles.
 Auditor’s duty regarding routine checking:
 Although routine checking is a monotonous and time consuming process and is not very
effective in detecting planned fraud, the auditor cannot skip it. It is an important part of
audit. It should deserve equal emphasis from auditor from auditor as other techniques of
audit. His duties in connection with routine checking are as follows:
 The auditor will first evaluate the internal control and internal check system existing
in the organization. Based upon his evaluation, he will determine the extent of
routine checking to be adopted.
 In a small firm it is possible for the auditor to undertake thorough routine checking
in such cases.
 Incase of audit of large organizations, it is not possible for him to undertake
thorough routine checking. So, in such cases, he will apply his judgment, experience
and knowledge in determining the extent of routine checking.
 The auditor should frequently supervise the work of routine checking being done by
his subordinates and ensure the adherence to his instructions in this regard.
 Computerization of accounting system obviates the necessity of casting carry forward,
posting from journal to ledger etc. So the auditor will determine his duty after examining
the degree of computerization.
  Test Checking
The term “Test Checking” stands for the method of auditing, where instead of a complete
examination of all the transactions recorded in the books of accounts only some of the
transactions are selected and verified.
 The underlying intention is to test some of the transactions to form an opinion for the
whole and examine a representative sample from a large number of similar items.
.
 Factors to be considered before resorting to test checking:
 The auditor should consider the following factors before starting test checking:
 Nature of transactions: The nature of transactions should be carefully considered
determining the extent of test checking. If the transactions of a particular categories
repetitive nature, the size of sample may be small. However, if the transactions of
particular category are of divergent nature, sample size of test checking should be large.
 Effectiveness of internal control: The internal control system existing in the
organization should be evaluated. If the internal control system is found to be sound the
auditor may adopt test checking determining the suitable sample size. But if the internal
control system is found ineffective, the reliance on test checking should be minimum.
 Materiality of items: An item becomes material when any misstatement is likely to
influence the decisions of the users of financial statements. The extent of test checking to
be adopted should depend upon the materiality of the items.
 Previous experience: Previous experience should also be considered while determining
0the extent of test checking. For example, the auditor might have noticed in the
management had the tendency to inflate the value of work in progress but the cashier
had honestly and sincerely recorded all the cash transactions. Based on his experience
the auditor may undertake checking of the details of valuation of work in progress
while restricting his checking to few transactions in the cashbook .
 Advantages:
 It is one of the best techniques of auditing through which cost of Audit is reduced.
 It can ensure the speed of audit work
 It can easily locate the deficient area and thus help to come to the conclusion the
acceptability of financial records.
 It is a labor saving device.
 It acts as a guide to the auditor to arrive at a conclusion regarding the view of the state
of affairs of the business.
 Disadvantages
 It will prove inefficient where internal check and control system are not operating or
found ineffective.
 It is not suitable for small concerns
 It will show incorrect results if the samples are no proper representatives of the
population
 It does not offer any consistency in selecting the percentage of check that will be adopted
by all concerns.
 It is not applicable in case of diversified transactions.
 Cut-off Examination:
 Cut-off examinations are the procedures designed to ensure that at the year end trading
transactions are entered in the period to which they relate. In other words, the term
“cutoff” refers to the procedure adopted to ensure the separation of transactions as at end
of one accounting year from those at the commencement of the next following year,
specially for items which may overlap, e.g. sales purchase, stock etc.
Significance of cutoff examination in auditing:
 The cutoff procedure is very significant in auditing to ensure that the revenue and
expenditure of one year is not recorded in the following year, as that will distort the true
expenditure of one year is not recorded in the following year. An obvious way in which
account can be manipulated is for purchase invoices in respect of goods purchased
shortly before the year end to be held over and entered in the following accounting
period.
 Surprise Checking:
 Surprise checking means audit verification on a non routine and surprise basis. Usually
the routine checking plan of the auditor as well as its timing is known to the client. As a
result the client staff try to cover up incompleteness in the books and records before the
visit by the auditor. .
 For carrying out surprise check, the auditor visits the client’s office without prior
intimation and verifies certain specific matters, the regularity of which is vital for audit.
For example the correctness of cash balance in hand is immensely important because of
the nature of this asset.
 Purpose of surprise checking: Surprise checking can be effectively applied:
 For the verification of cash, stock and similar type of assets, which are kept at other
places.
 For checking of cash balance on a non routine basis.
 For checking of investment on a non routine basis
 For the verification of ht regularity of the maintenance of books of accounts, statutory
registers and other important documents.
 For the physical verification of stock and stores on a non routine basis
 For verification of the operation of any specific internal control procedures