Audit procedures are used by auditors to determine the quality of the financial information being provided by their clients. The exact procedures used will vary by client, depending on the nature of the business and the audit assertions that the auditors want to prove. Here are several general classifications of audit procedures:
- Classification testing. Audit procedures are used to decide whether transactions were classified correctly in the accounting records. For example, purchase records for fixed assets can be reviewed to see if they were correctly classified within the right fixed asset account.
- Completeness testing. Audit procedures can test to see if any transactions are missing from the accounting records. For example, the client's bank statements could be perused to see if any payments to suppliers were not recorded in the books, or if cash receipts from customers were not recorded. As another example, inquiries can be made with management and third parties to see if the client has additional obligations that have not been recognized in the financial statements.
- Cutoff testing. Audit procedures are used to determine whether transactions have been recorded within the correct reporting period. For example, the shipping log can be reviewed to see if shipments to customers on the last day of the month were recorded within the correct period.
- Occurrence testing. Audit procedures can be constructed to determine whether the transactions that a client is claiming have actually occurred. For example, one procedure might require the client to show specific invoices that are listed on the sales ledger, along with supporting documentation such as a customer order and shipping documentation.
- Existence testing. Audit procedures are used to determine whether assets exist. For example, the auditors can observe an inventory being taken, to see if the inventory stated in the accounting records actually exists.
- Rights and obligations testing. Audit procedures can be followed to see if a client actually owns all of its assets. For example, inquiries can be made to see if inventory is actually owned by the client, or if it is instead being held on consignment from a third party.
- Valuation testing. Audit procedures are used to determine whether the valuations at which assets and liabilities are recorded in a client's books are correct. For example, one procedure would be to check market pricing data to see if the ending values of marketable securities are correct.
A complete set of audit procedures is needed before the auditor has enough information to decide whether a client's financial statements fairly represent its financial results, financial position, and cash flows.