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Old 11-06-2011, 01:55 PM
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Exclamation Audit Standards

Audit Standards

A standard is quality of work, which can be used to measure the performance of auditors. The audit staff can follow the stated principle and practice in the conduct of an audit. The business world is ever changing. In order to meet the business needs the professional accountants are busy in improving the rule of business audit. The audit standard applied in the early period is not acceptable at present. The introduction of computer in accounting separation of management from ownership, the establishment of big companies has increased the responsibilities of auditors. The association of professional accountants has framed rules for the guidance of their members. The International Federation of Accountants issues international auditing guidelines. The Chartered Accountants have also framed rules at national level. Anyhow with the passage of time further improvements will be made to meet the new challenges of auditing work.

International Auditing Standards (ISA)

1. Objectives and Scope of the Audit of Financial Statement

This standard state that objective of audit is to express an opinion. The management is responsible is responsible for preparing financial statement. The scope of audit is determined by an audit in according with the requirements of legislation regulation or relevant professional bodies.

2. Audit Engagement Letters
This standard relates to audit engagement letter, which is written by an auditor to his client for acceptance of the appointment. This letter confirms the objectives and scope of audit. This standard also states the possible contents of audit engagement letter. An example of audit engagement letter is also given at the end of it.

3. Basic Principle Governing An Audit
This standard describes the basic principle, which govern auditor's responsibilities. The auditor is bound to follow their principle during audit work. These principles include integrity, objectivity, independence, confidentiality skills and competence, work performed by others, documentation planning, audit evidence, accounting system and internal control, audit conclusion reporting.

4. Planning
This standard deals with the planning of audit work. Work auditor planning must be helpful to complete an audit work in an efficiency and timely manner. The plans should include accounting system, policies and internal control procedure, degree of reliance on internal control, the nature timing and extent of audit procedures to be performed and coordination of audit work.

5. Using the Work of an Other Auditor
This standard states procedures for using the work of other independent auditors with respect to the financial statements of one or more divisions, branches, subsidiaries or associated companies included in financial statements of one or more divisions, branches, subsidiaries or associated companies included in financial statements of an entity. This guideline also applies where the principle auditor report on other financial information.

6. Studies and Evaluation of Accounting System
The standard deals with accounting system and internal control. The management is responsible for proper accounting system and related internal control. The auditor require assurance system is reasonable and all accounting information has been recorded internal control contributes to the assurance.

7. Control of the Qualities of Audit Work
The high standard of audit profession requires high quality of audit work. The guideline states the individual audit and general quality control. There is relationship between these two. The general control facilitates control over individual audit. The delegation of work to assistants is stated. In order to control quality of work assistance is given to audit firm.

8. Audit Evidence
The audit evidence standard deals with information collected by the auditor. He can form an opinion about financial statements. The nature and sources of audit evidence are described. The methods used are stated. He can state whether it is sufficient and appropriate.

9. Documentation
The audit standard deals with documents. Guidance is provided about the contents and form of working papers. The example of working is also stated. The auditor can know how to prepare working papers. The ownership and custody of working paper remains with auditor.

10. Using the Work of Internal Auditor
Business employees who have skill and experience conduct the internal audit work. The internal auditor can check whether internal control is proper and effective. The independent auditor can use the work of internal auditor. The procedure for assessment of internal auditor work is stated in this standard.

11. Frauds and Error
This standard states the definition of fraud and errors. The responsibility of fraud and error is linked with management. The plan of the auditor must be effective to trace frauds and errors. When the auditor smells fraud and errors the procedures have been suggested. The condition and events are stated when risk of fraud and error increases.

12. Analytical Review
This standard provides detail of the nature of analytical review procedure. The purpose, timing and extent of reliance to be placed is stated in it. The auditor can check the unusual fluctuations.

13. Auditor's Report on Financial Statements
The guideline deals with the form and content of auditor report relating to independent audit of financial statement of a business concern. The wording for clean and qualified opinion is suggested. The examples state the unqualified, qualified, adverse and disclaimer of opinion.

14. Other Information in Documents
The guideline provides guidance as to the auditor's consideration of other information on which he has no obligation to report. When an auditor has an obligation to report specially on other information, his responsibilities are determined by the nature of his engagement. The other information may be financial or non-financial. It may include report of management on operations, financial summaries employment data. Planned capital expenditure, financial ratios name of officers and directors.

15. Auditing in an EDP Environment
The guideline deals with the auditing through computers. The skill and competence needed by the auditor is stated. He is responsible for delegating the work to assistants. he is not free from liability where he uses the work of others.

16. Computer Assisted Audit Techniques
The guidelines provides information to audit for using computer assisted techniques especially software and test data. The instances are stated when such techniques are to be used. The application in small business is also possible.

17. Related Parties
The standard deals with audit evidence to be collected from relating parties. The transactions can take place with debtors and creditors. The auditors can guidance to see whether management has properly disclosed the related party relation ship and transactions with such parties.

18. Using the Work of an Expert
The guideline provides guidance to the auditor for using the work of an expert engaged by the client or auditor. The examples of cases are stated when an auditor may depend upon experts. Guidance is also providing relating to expert's skills, competence and objectivity. The way of evaluation of work of expert is stated.

19. Audit Sampling
The auditing guideline states the factors when an auditor can design and select and audit sample. The evaluation of audit procedures is stated. The statistical and non-statistical sampling methods are provided. The elementary guidance is provided about sampling risk, stratification selection methods and projection of errors.

20. Date of Auditor's Report
The guidelines states guidance on date of auditor's report. The events may occur after balance sheet date. The facts may be discovered after the issue of financial statements. The auditor can take steps to identify subsequent events. The auditor can issue revised report about the audited financial statements after their revised by management.

21. Going Concern
The financial statement are prepare under the accounting assumption as going concern. When such assumption does not seem good the entity is unable to realize assets at recorded costs. The guideline provides example when going concern assumption should be questioned. The collection of audit evidence, following audit procedure and reporting about going concern is stated.

22. Materiality and Audit Risk
The auditing guideline states the concept of materiality and risk and their relationship. The auditor can use these concepts in planning and conducting audit and evaluating the result of his procedures. The definition of materiality and audit risk is given. The components of audit risk are explained. The interrelationship is also stated.

23. Special Purpose Reports
The guideline state the issue of report other then issued in routing matters. The report may be issued on compulsive basis other than accepted standards, specified accounts or any item of financial statements, compliance with agreement and summarized financial statements. The examples are given at the end of it.

24. Audit of Accounting Estimates
The auditing guideline provides guidance to auditors on the audit procedures that should be performed in order to obtain reasonable assurance as to the appropriateness of the accounting estimates contained in financial information. An accounting estimate is an approximation of the amount of an item in the absence of a precise means of management.

Principles of Auditing

1. Integrity
Integrity is a principle of auditing. The auditor is straightforward, honest and sincere in his approach. He must be fair towards his work. The auditors are known for their discretion and tactfulness. The loyalty toward his work and profession must be beyond doubt.

2. Objectivity
Objectivity is a principle of auditing. The auditor maintains an impartial attitude. He cannot allow prejudice or bias to avoid the purpose of audit. He can protect the right of shareholders through this principle.

3. Independence
Independence is a principle of audit. The auditor maintains an impartial attitude. He should be an appear to be free of any interest. No doubt he receive fee from his client even then independence is essential. His personal views must not be included in his report.

4. Confidentiality
Confidentiality is a principle of auditing. The auditors can maintain secrecy of information acquired in the course of his work. He can not disclosed any information to a third party without specific authority. He can provide facts and figures to other under legal or professional duty.

5. Skill
Skill is a principle of auditing. The auditors must acquire skill of doing audit work. He must get training from his principle. The experience of all audit steps must be obtained. It is a stage of learning by doing. This skill will help him when becomes independent auditor.

6. Competence
Competence is a principle of auditing. There is a need of best training in the field of audit. The competent person has the right to sign the report. The practical knowledge and training with expert firm of auditors can make the trainee as competent.

7. Work Performed By Others
Work performed by other is a principle of auditing. The auditor can rely on the work of other auditors. The sole duty lies on the head of principle auditor who is depending upon of others. The information is available for reliance on others.

8. Planning
Planning is a principle of auditing. The auditing should plan his work in an efficient manner. The audit planning includes accounting system, internal control procedure and degree of reliance on internal control. The nature timing and extent of audit procedures to be performed are part of planning.

9. Documentation
Documentation is principles of auditing. The auditor can document matters, which are important in providing evidence that the audit was carried out in according with the basis principles. The working papers are prepared at the time of audit. The auditor as proof of audit work can keep these papers.

10. Audit Evidence
Audit evidence is a principle of auditing. The auditor can collect audit evidence through working papers. He can frame an opinion based on the audit evidence. The principle states the nature and sources of audit evidence. The methods to be used are also stated.

11. Accounting System
According system is a principle of auditing. It is a series of tasks in an entity by which transaction are processed for maintaining financial record. This system should recognize, calculate, clarify, post summarized and report transactions.

12. Internal Control
Internal control is a principle of auditing. Internal control means all measures used with in an organization to assure management that the organization is operating in accordance with planes and policies of management.

13. Audit Conclusion
A conclusion is a principle of auditing. The auditing can draw conclusion based on the evidence obtained from the books and records. He can note that accounting policies have been followed, financial information relates to legal requirements, the financial statement show the affairs of business, the disclosure has been made as required.

14. Reporting
Reporting is a principle of auditing. The auditing can report on the matters relating to business functions. A report may be short or detailed. It may be conditional or unconditional. There may be disclaimer or adverse opinion relating to business activities.

15. Disclosure
Disclosure is a principle of auditing. The facts and figures are disclosed for general information. The auditor can note that financial information has been presented in full all disclosure formalities are complete. The auditor must provide full information to the shareholders.

16. Capitals Or Revenue
The capital or revenue is a principle of auditing. According to the nature of business the accounting staff can record the item as capital or revenue. The wrong allocation cannot provide true information. The auditor must know the real position of each item in order to report the matter.

17. Compliance with Legal Formalities
The follow up of legal formalities is an auditing principle. The rules and regulation must be applied in order to protect the rights of interested parties. The business activities can run on lines through compliance with law.

18. Consistency
The consistency is an auditing principle. The accountant has the right to select the rate of depreciation, provision for bad debts and valuation of stock. He must follow these rates for the year to come. The changes are not acceptable at all.

Auditing Standards and Auditing Procedures

Auditing Standards

An auditing standard is a measurement of performance set up by professional authority and consent. A standard is a measuring device of applied procedures resulting in general acceptability of the result of the performance.


Audit Procedures

Auditing procedures are acts to be performed during the course of an examination. By applying perfect technique, procedure lead to proof of accuracy of the accounts and financial statements. Audit procedures constitute the course of acting available in determining the validity of standards and principles. In every audit, there must be review and observation, inspection and count, evidence, proof, accuracy of proof and reconciliation.

Audit Techniques

1. Inspection
Inspection is concerned with review or examination of records, documents or tangible assets. The auditors can check many documents in order to examine the business transactions. Vouchers support every entry. Inspection of record is made note recording, authority and validity of data. The auditors commonly use this technique.

2. Observation
Observation means looking at an operation or procedure being performed by others in order to determine the manner of its performance. The auditor can observe the physical stock taking by management. He can that accounting principles are applied in preparing accounting recorded. The audit staff commonly uses observation.

3. Inquiry
Inquiry means obtaining relevant information either written or oral from resource persons within or outside the enterprise through formal or informal manner. The auditor can collect data from management through representation letter. He can inquire from debtors, creditors, bankers and other experts in the field to form an opinion.

4. Confirmation
Confirmation is a reasonable to an inquiry to prove certain data recorded in the books of business concern. The auditor can ask the management to inform the debtors for confirmation of their accounts balance. The auditor can collect information from debtors to ensure the accuracy of data. He can write letters to bank for supply of account balance kept by the bank.

5. Computation
Computation is concerned with checking the arithmetical accuracy of accounting records or doing independent calculations. An auditor may follow the accounting procedure to check the accuracy of data. The journal entry, position and balancing accounts can be compared with the vouchers to test the reliability of data.

6. Sampling
Sampling is concerned with selecting few items from whole accounting information. Audit sampling is the application of a compliance or substantive procedure to less than 100 percent of the items within an account balance or class of transactions to enable the auditor to obtain and evaluate evidence of some characteristics of the balance or class and to from or assist informing a conclusion concerning that characteristics.

7. Compliance Test
Compliance tests are designed to obtain reasonable assurance that those internal controls on which audit reliance is being placed are in affect. In obtaining audit evidence auditor is concerned with existence of internal control, effectiveness and continuity of internal control.

8. Substantive Test
Substantive test are designed to obtain evidence as to the completeness accuracy and validity of the data procedure by accounting system. They are of two types
  • test of details of transaction and balance
  • analysis of significant ratio and trends including the resulting investing of unusual fluctuation and items.

9. Analytical Review
The analytical review consists of studying significant ratios and trends and investigation unusual fluctuations and items. The application of analytical review procedures is based on the expectation that relationship among data exists and continues in the absence of known conditions to the contrary.

10. Computer Assisted Audit
Computer assisted audit techniques include audit software test packs embedded audit facilities, system software data analysis, application programme, examination, teaching, flow charting and mapping. These techniques show how the computer has various uses in accounting.

11. Reliance on Auditors
Reliance on auditors is an audit technique. The independent auditor can rely on internal auditors or other auditors for completing the work of his own audit.

12. Reliance on Experts
Reliance on experts is an audit technique. The auditor is no expert in every field. Basically he knows accounting and audit work. He is not an engineer, architect, lawyer and valuers. He has relied on auditors for seeking their expert opinion about business matters.
Functions of Audit

1. Accounting System
The function of audit is to study accounting system. It can be stated as a series of tacks in an entity by which transaction ahere processed as a means of maintaining financial records. Such a system should recognize, calculate, clarify post summarize and report transactions. The auditor should understand the accounting system in operation in order to determine the nature timing and extent of other audit procedures.

2. Internal Control
Internal control is a function of auditing. Internal control is a process, which determine that management policies are carried out and accounting principles are followed. This functions helps to safeguards assets, location and prevention of errors and frauds. Moreover the management is able to prepare reliable financial statements in time. When the auditor notes that he can rely on internal control, the audit procedure may be less extensive. The effectiveness of internal control is to be determined by an auditor.

3. Vouching
Vouching is the function of auditing. An auditor can inspect the document, which support and prove the business transactions. The data amount and other details are checked. All entries in books of accounts are made on the basis of relevant vouchers. This function is essential to determine the accuracy of accounting records.

4. Arithmetical Accuracy
I is a function of auditing to check the arithmetic accuracy of account books and books and other papers. The audit staff verifies the figures. The errors and fraud are discovered. The management can take steps to rectify the mistakes. The responsibility of fraud can be fixed. This function helps the auditors to show true and fair view of accounting statements.

5. Capitals and Revenue
It is a function of auditing to make different between capital and revenue items. The revenue items are compared to determine income. The capital items are compared to note the financial position of any business. The income and expense relating to many years can be divided into current and coming years.

6. Verification As Assets
The verification of assets is a function of auditing. Verification is concerned with determination of value, ownership, possession and any charge on the assets of any business. The auditor can check the existence of asset. The documents and books can show the purchase price. If any loan is taken on security of an asset, such information can be collected. It is duty of an auditor to verify these assets.

7. Verification of Liabilities
The verification of liabilities is a function of auditing. The auditor can verify the liabilities from the books of accounts. The auditors must receive a certificate from management that all liabilities are included in the balance sheet. The auditors can write letters to creditors for verification of liabilities.

8. Valuation of Assets
The valuation of assets is a function of auditing. The auditors can apply accounting conventions and principles to examine and test the values of assets. The management calculates the value to assets. The auditor must critically check the assigned values. He can get help from technical personnel.

9. Valuation of Liabilities
The valuation of liabilities is a function of auditing. The value of liabilities is stated in the balance sheet. The management can examine the value on the basis of dealing made. The auditor can examine the value of liabilities from books of accounts and other papers. The auditor can confirm the value from outside sources. Independent experts should determine the value of contingent.

10. Legal Requirements
The functions of auditing are to follow the legal requirements. There are various laws like companies ordinance 1984. Income tax ordinance 1979 and stock exchange rules 1971. It is the duty of auditor to check that financial statement are prepared under the legal requirements. The auditor can note this point in the report that management has followed the legal formalities.

11. Reporting
The reporting is a function of auditing. It is the duty of auditor to submit his opinion in writing. The report may be clean or conditional. An auditor is an independent person. If he is satisfied about true and fair view, he can present clean report in case of some weakness he can give qualified report.






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