Audit procedures definition
/What are Audit Procedures?
Audit procedures are used by auditors to determine the quality of the financial information being provided by their clients, resulting in the expression of an auditor’s opinion. 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. Several general classifications of audit procedures are noted below. 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.
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. This can have a significant impact on a fixed asset’s reported depreciation expense, if the depreciation method and useful period varies by 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 may occur when someone is skimming cash receipts before they can be 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.
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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. This can be a key area for fraud, since the books can be kept open to record additional sales that would otherwise have been recorded in the following 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. This procedure can detect cases of fraud, where fake sales can be detected due to a lack of supporting 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. This approach is also used to test for the existence of fixed assets.
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. This is a particular issue in smaller retail establishments.
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.