Preparation Before Audit | Tips & Techniques
An Auditor should he prepare himself and proceed with audit is an important question to be examined by an auditor. How much time he should devote in auditing the accounts of a business concern will depend entirely upon the circumstances of a particular case, and the training, experience and knowledge of the auditor. However one thing is certain that the auditor must prepare himself well before he actually conducts audit. His preparation depends upon the scope of work assigned to him and the method in which he will proceed the work.
Table of Contents
Preparations Before the Audit
Preparation, which an auditor has to do before commencing an audit can be, discussed under four heads namely,
- Entering into a Contract with the Client.
- Determining the Quantum of Work.
- Knowing about the Business of the Concern.
- Informing about the Preparations to be made by the Client.
Entering into a Contract with the Client
When an auditor decides to accept a particular audit engagement, he should enter in agreement with his client. This is particularly important in case of concerns where there is no statutory requirement to conduct the audit. This will avoid conflicts and misunderstandings between the auditor and his client in future. The agreement should lay down the terms of the audit contract and the understanding reached between the auditor and the client. In case, the auditor is engaged to perform a special assignment, the same should be included in the engagement letter or audit contract. Such a letter or contract is highly desirable to avoid misunderstanding, if any, arise in future with the client. It will also prove to be handy, if he is accused of not performing the work promised by him.
Such an agreement should include the following:
- Date of commencement of audit.
- Date of completion of audit.
- Duties of the auditor.
- Powers of the auditor.
- Liabilities of the auditor.
- Remuneration to the auditor.
Determining the Quantum of Work
In the case of a statutory audit the scope of duties can be ascertained by referring to the relevant Statute. For example, in case of a Joint Stock Company, the scope of duty of the auditor can be ascertained from the Companies Act. In other cases, he should discuss the things with the person who is going to appoint him. For example, in case of a sole trading concern, the auditor should discuss with the proprietor of the concern who is appointing him regarding the nature of work he is expected to do.
Knowing about the Business Concerns
Once the contract is entered into and the quantum of work is determined the next task is that the auditor should try to acquire full knowledge of business and its affairs. Following information is highly useful to an auditor
Rules and Regulations of Business
The auditor should go through the rules and regulations which make the business in question run such as Memorandum of Association, Articles of Association, etc., in case of a joint-stock company and Partnership Deed in case of a partnership firm. As the study of such basic and guiding documents can make him familiar with the working of a business the auditor should obtain thorough knowledge of these rules.
Methods of Accounting
The auditor should examine the method of maintaining accounts. As different types of business houses, use different systems of keeping books of accounts, it is imperative on the part of the auditor to make himself familiar with the nature of business. It will enable him to satisfy himself with regard to the accounting system being satisfactory or otherwise.
List of Books Maintained by the Concerns
The auditor should ask for a list of books of accounts maintained and also the names of clerks who are assigned the role of keeping them from his client. Besides, he should also obtain the names of the responsible officials who control the various branches of work.
Knowing about the Internal Check System
After having obtained the details about the system of accounting employed, the auditor should examine the system of internal check in operation. The efficacy or otherwise of this system will help him in determining the main lines on which he should conduct the audit. The internal check system refers to a device by which the work of a business is so divided among various persons that the work of one is automatically checked by another. If the system is defective, there are chances of errors and frauds in the books of accounts. A sound system of internal check can minimize such chances.
Knowing about the Technical Know-how
The technical details of the business under audit are a must for an auditor to conduct the audit effectively. Hence he should enquire about the technical details of the business. He should fully acquaint himself with the technical nature of the transactions recorded.
Examining the Annual Accounts of Previous Year
Finally the auditor should go through if the Profit and Loss Account and Balance Sheet of the previous year and see whether objections, any, raised by the auditor in his previous year’s report. This should be done particularly when an auditor is appointed to supersede another auditor. lf necessary, the retiring auditor may be contacted.
Informing about the Preparations to be made by the Client
After having acquired an up-to-date knowledge of the affairs of a concern, the auditor should issue clear and precise instructions to his client about what preparations he should do for the conduct of the audit. The nature and volume of such instructions will depend upon the nature, and size of the business and the accounting system followed. Normally the auditor issues directions as to the following:
- The books of accounts should be totaled up. Trial balance and final accounts should be kept ready.
- All the vouchers should be serially arranged, numbered, and filed.
- The Schedules of debtors and creditors should be prepared.
- A list of bad and doubtful debts should be prepared.
- Schedules of outstanding expenses, prepaid expenses and accrued income should be prepared
- Stock-sheet should be drawn up. It should indicate the method of valuation adopted.
- A Schedule of investments indicating their cost price and market price should be prepared.
- A certified list of goods returned by different branches, agents and other similar institutions should be kept ready.
- A statement containing details about the permanent capital expenditure should be made available.
- Similarly, a list of deferred revenue expenditure should be prepared.
- A list of those documents to which the auditor will have the access should be prepared.
- Names, designation, and addresses of important executives such as Managers and Managing Director should be kept ready.
An auditor should pay attention to all the above aspects. It is emphasized that proper preparation is essential for a successful audit, and the auditor’s knowledge, experience, and training are critical factors that determine the amount of time needed for the audit.
Summary
- The preparation phase is essential before conducting an audit.
- The audit team should review the organization’s policies, procedures, and documentation to ensure they comply with applicable laws and regulations.
- The team should also assess the organization’s risks and identify any potential areas of concern.
- Prior to the audit, the team should communicate with key stakeholders to understand their expectations and address any questions or concerns they may have.
- The audit team should create an audit plan that outlines the scope, objectives, and methodology of the audit.
- The team should also assemble a checklist of audit procedures to follow during the audit.
- Before conducting the audit, the team should ensure that they have the necessary resources, including staff, equipment, and access to relevant systems and data.
- Finally, the team should conduct a pre-audit meeting to discuss the audit plan, procedures, and timelines with key stakeholders and obtain their agreement and support.
