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AUDIT PROCEDURES
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RelevanttoPaperF8/FAU

Auditproceduresareanimportantareaofthesyllabus,thoughcandidatesoftenuseinappropriate
auditprocedurestoanswerquestions.Thefollowingtipswillhelpyoutounderstandtheconceptsand
writeappropriateauditprocedures.

Everyproceduremuststate:
theassertiontested
theauditprocedure
thereasonfortheprocedure.

Eachofthesepointsisexplainedbelow.

STEP1IDENTIFYTHEASSERTIONTESTED
Auditproceduresareperformedinordertotestfinancialstatementassertions.Therefore,thefirststep
inexplaininganauditprocedureistoidentifytheassertionthatneedstobetested.

Theassertionsembodiedinthefinancialstatements,asusedbytheauditortoconsiderthedifferent
typesofpotentialmisstatementsthatmayoccur,maytakethefollowingforms:

Transactions Accountbalances Presentationand

andevents attheperiodend disclosure

Occurrence Existence Occurrenceand

rightsand
Completeness Rightsand obligations
obligations
Accuracy Completeness
Completeness
Cutoff Classificationand
Valuationand understandability
Classification allocation
Accuracyand
valuation

Abriefexplanationofthevariousassertionsisasfollows:

Completeness
Thismeansthatalltransactionshavebeenrecordedinthefinancialstatementsieallassets,liabilities,

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equityinterests(capitalandreserves)andotherdisclosureshavebeenincludedinthefinancial
statements.

Occurrence
Thisassertionmeansthattransactionsandeventsandothermattersthathavebeenrecordedactually
tookplaceandrelatetothisorganisation.

Valuationandallocation
Thismeansthatallitemshavebeenincludedinthefinancialstatementsatappropriateamounts
accordingtocompanypolicyandtherelevantfinancialreportingframework.Furthermore,anyallocations
orvaluationadjustmentsrequired(likeimpairment)havebeenmadeandfinancialandotherinformation
isdisclosedfairlyandatappropriateamounts.

Classificationandunderstandability
Financialinformationisappropriatelypresentedanddisclosed,anddisclosuresareclearlyexpressedso
astomakethemunderstandabletotheusers.Forthis,thedisclosuresshouldusesimplelanguageand
statemattersclearlyandconcisely.

Accuracy
Accuracymeansthatamountsandotherdatarelatingtotransactionsandeventshavebeenrecordedat
thecorrectamountsieattheamountsappearinginthesourcedocuments.

Rightsandobligations
Thismeansthattheentityhasarighttoitsassetsieitisfreetouseordisposeoftheassetsasitsees
fit.Furthermore,theentityisobligedtopayofftheliabilitiesthatareshowninthestatementoffinancial
position.

Existence
Thismeansthatassets,liabilitiesandequityinterests(capitalandreserves)arephysicallypresent/belong
totheentityonthereportingdate.

Cutoff
Thismeansthattransactionsandeventshavebeenrecordedinthecorrectaccountingperiodfor
example,ifgoodsaredeliveredpriortoyearend,theyareincludedinthecostofgoodssold,not
inventory.

STEP2:IDENTIFYTHEAUDITPROCEDURE

Explanation Exampleofsubstantive
procedurerelatingtovaluationof
property,plantandequipment(PPE)

1 Choosetheassertionthatwill Chooseanassertionfrom
betested Completeness,Valuationandallocation,
RightsandobligationsandExistenceif
youaretestingtheperiodendbalanceof
PPEvaluationofnoncurrentassetsis
theassertiontested

2 Identifytheriskthatwillcause Oneriskrelatestotherevaluedassets
amaterialmisstatementinthe notrepresentingfairvalues,thus
financialstatementsthe under/overstatingPPE
auditriskisthetotalvalueof
PPEthatmaybemisstated
duetoovervaluation/
undervaluationofPPE

3 Thinkoftheauditprocedures Theauditorwillagreetheavailabilityof
thatshouldbeperformedin arevaluationreport(asourcedocument
ordertoavoidtherisk fortherevaluation)andconfirmthatthe
mentionedinstep1(referto
valuementionedinthevaluationreport
AEIOUbelow)
matchestheamountatwhichthePPEis
revaluedandshowninthefinancial
statements.
Furthermore,theauditorwillrecalculate
therevaluationsurplusinaccordance
withtheprovisionsofIAS16,Property,
PlantandEquipmenttoconfirmthe
correctnessoftheaccountingentries
relatingtorevaluationsurplus.The

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amountaddedtorevaluationsurplus
shouldbethedifferencebetweenthenet
bookvalueofPPEandtherevalued
amounts.

Theauditorshouldagreethe
assumptionsusedinthereportfor
reasonableness.Forexample,thevalue
persquarefeetinthevaluationreport
shouldbesimilartothevaluepersquare
feetofothersimilarpropertiesinthat
locality.

Therearemanymoreproceduresthat
willapplytothisrisk.

Followtheabovemethodfortestingotherassertionstoo.

ChooseauditproceduresfromAEIOU

A:Analyticalprocedures
E:Enquiryandconfirmationdirectlyfromathirdpartyieinquiry
I:Inspectionofrecordsandassets
O:Observation
U:recalcUlationandreperformance

STEP3:NOTETHEFOLLOWINGWHILEWRITINGDOWNTHEAUDITPROCEDURE
1Writeitclearly
Auditproceduresshouldbewritteninsuchawaythatevenajuniorauditorwillbeabletounderstand
whatistobedone.Forexample,avoidvagueprocedureslikecheckgoodsreceivednotes.Thisis
vagueasitdoesnotexplainwhatistobeexaminedinthegoodsreceivednotes.Isitthedescriptionof
itemsreceived,thequantityreceivedorthenameofthevendor?

2Writedownthereasonforperformingtheauditprocedure
Theauditprocedurecheckgoodsreceivednotesdoesnotmentionwhythegoodsreceivednotesareto
bechecked.Instead,writetheauditprocedureas:agreethedescriptionofitemsandthequantities
orderedmentionedonthegoodsreceivednotewiththedescriptionsonthepurchaseordersraisedonthe
vendor.Thisconfirmsthattheentityhasprocuredgoodsbasedonanauthorisedpurchaseorder.

3Useauditterminology
Useterminologyrelatingtoauditlikecast,agree,trace,etc.
Usethewordcasttomeantotallingupalistforexample,castthetrialbalance.

Usethewordsagreeortracetomeanmatchinginformationfromtwodocuments/recordsfor
example,agreethetotalsalesofthesalesdaybooktothegeneralledgeraccountortraceasampleof
tradepayablestothepurchaseinvoices,toconfirmtheexistenceoftherightstothegoodspurchased.

Acompleteauditprocedurewouldreadasfollows:
Theauditorwillagreeasampleofitemsfromtheinventorysheetstotherawmaterialinventory(1)to
ensurethattheinventoryrecordedonthesheetsactuallyexists(2).Thiswillconfirmtheassertionof
existenceofinventoryasanassetinthefinancialstatements(3).

(1=theauditprocedure2=thereasonfortheauditprocedure3=theassertion).

IftheabovementionedprocedureiswrittenasTheauditorwillcheckasampleofitemsfromthe
inventorysheetstotherawmaterialinventory,itisincompleteasitdoesnotmentionwhytheaudit
procedureisbeingperformed.

COMMONERRORSTHATMUSTBEAVOIDED
Theexaminersreportsmentionvariouserrorsthatcandidatesmakewhilewritingauditprocedures.
Hereisasummaryofthecommonerrors.

Whilewritingauditprocedures,avoidthefollowing:
Writinganauditprocedurewithoutexplainingthereasonfortheprocedureforexample,Theauditorwillchecka
sampleofitemsfromtheinventorysheetstotheinventory.

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Statinganassertionwordasareasonforperformingaprocedureforexample,confirmingtheoccurrenceof
sales.
Writingwhattheinternalcontrolsystemshoulddoratherthanstatingtheauditprocedureforexample,forall
goodsreceived,thereshouldbeagoodsreceivednoteraised.
Writingvagueproceduresforexample,checktheinvoice,checkthegoodsreceivednote,etc.Theseprocedures
areinappropriateastheydonotmentionwhatistobecheckedandthereasonforcheckingthem.
Quotingincorrectassertionsforexample,tracingdetailsfromthepurchaseorderstothegoodsreceivednotesin
ordertoconfirmexistenceofthegoodsthecompletenessassertionwouldapplyhere.
Includingproceduresthatcannotbecarriedoutforexample,agreeindividualitemsofphysicalinventorytothe
salesinvoice.Itwillnotbepossibletoagreethephysicalgoodstothesalesinvoiceasthegoodswillalreadybesold.
Includingproceduresthatareincorrectforexample,agreedetailsfromthepurchaseorders(likedescriptionof
itemsordered,quantitiesordered)tothegoodsheldintheinventorystore.Thisisanincorrectauditprocedureas
goodsreceivednotes(notpurchaseorders)areusedtoupdateinventory.
Writingimpracticalproceduresforexample,suggestingasegregationofdutiesbetweenthepersonauthorising
pettycashvouchers,recordingpettycashvouchersanddispensingthepettycash.
Writingirrelevantauditproceduresforexample,whenyouareaskedtowriteauditproceduresrelatingto
depreciationofanoncurrentasset,itwillbeinappropriatetoprovidegeneralauditproceduresrelatingtoauditof
noncurrentassets.

AuditproceduresareavitalpartofPaperF8andPaperFAU.Therefore,youneedtopractise
explainingtheauditproceduresassuggestedaboveinordertoperformwellintheexam.

VijayaSwaminathanisatechnicalauthorforPaperF8atGetThroughGuides

Lastupdated:20Apr2015

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