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TABLE OF CONTENTS

Description Page No.

1. Techniques Of Auditing 1

1.1 Ticking 1

1.2 Casting 1

1.3 Calling Over 1

1.4 Vouching 1

1.5 Verification 1

2. Procedures Affecting Audit 1

2.1 Compliance Procedures 1

2.2 Substantive Procedures 1

2.3 Analytical Procedures 1

3. Conduct Of Audit 2

3.1 Continuous Audit 2

3.2 Internal Audit 2

3.3 Interim Audit 2

3.4 Final Audit 2

4. Terms Of Audit Engagement 3

4.1 Introduction 3

4.2 Audit Engagement Letters 3

4.3 Principal Contents 3

4.4 Audits of Components 3

4.5 Recurring Audits 3

4.6 Acceptance of a Change in Engagement 4

5. Using the Work of Another Auditor 4

5.1 Introduction 4

5.2 Acceptance as Principal auditor 4

5.3 The Principal Auditor’s Procedures 5

5.4 Cooperation b/w auditors 5

6. Using the Work of An Expert 5

6.1 Introduction 5

6.2 Requirements 5

6.3 Understanding The Group 6

7. Organizational Setup of An audit Office 6

8. Commencement of a New Audit 7

8.1 Appointment 7

8.2 Document 7

8.3 Prospectus 7

8.4 Minute Books 7

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XUmair Ahmed(Okara)

Owner

8.5 contract 7

8.6 Technical Operations 8

8.7 List of Books 8

8.8 System of Accounting 8

8.9 Internal Check 8

8.10 Previous years Audited Accounts and Reports 8

8.11 Audit Repots 8

9. Audit Programme 8

9.1 Preparation 8

10. Audit Notebook 9

10.1 Audit Programme 9

10.2 Audit Review Notes 9

10.3 Audit Queries 9

10.4 Important Balances 9

11. Audit Working Papers 9

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1-Techniques of Auditing

1.1-Ticking Ticking indicates the placing of a mark against an entry in the book to denote that it

has been examined by the auditor for a certain purpose. To ensure consistency, most of the good auditors use a tick chart which is required to be learnt by the heart by all the members of the audit staff.

1.2-Casting Casting refers to the checking of additions of books accounts and financial statements. It is essential that arithmetical accuracy be checked so that frauds or errors (if any) may be detected. This job is normally done by the junior member of audit staff.

1.3-Calling-over A sizable part of the work of audit consistent of the comparison of entries in two or more books or of an entry in a book with its supporting evidence.

1.4-Vouching The function of the voucher is to authenticate an entry and the auditor must satisfy

himself that it does exist. It must correspond in date and account to the entry in the books.

1.5-Verification When an auditor has vouched the entries appearing in the books of account, his duty

is not thereby fully discharged. If appointed for audit under the Act, he has to report whether or not financial statements present true and correct view to the state of the

company.

1.6-Reporting After the above steps have been performed, the auditor will then be required to submit his report.

2-Procedures Affecting Audit

2.1-Compliance procedures These tests are designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect.

2.2-Substantive Procedures These are designed to obtain evidence as to the completeness, accuracy and validity of

the data produced by the accounting system.

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2.3-Analytical Procedures These are used to describe the analysis of significant ratios and trends including

investigation of unusual fluctuations and items.

3-Conduct of audit:

According to the conduct of audit the following are the types of audit:

3.1-Continuous Audit: A continuous audit is one where the auditor’s staff is occupied continuously on the accounts the whole year round, or where the auditor attends at intervals, fixed or

otherwise, during the currency of the financial year and performs an interim audit; such audits are adopted where the work involved is considerable.

3.2-Internal Audit: Internal audit as the term implies is an audit conducted within the organization by an

internal auditor appointed by the management of an enterprise. Normally, all large business organization often set up an internal audit department to exercise an

independent appraisal function within the organization. This department undertakes examination and evaluation of various accounting, financial and operating activities of the business enterprise. Internal audit aims at highlight the weak area of in the

organization, besides assisting the management to discharge its responsibilities effectively. Internal auditor’s work assists the external auditor in fixing the extent of the necessary work.

3.3-Interim Audit: Interim audit is one that relate to interim period and not to the full accounting period. It is conducted between two regular audits. It lies between final and continuous audit.

It is conducted to know the reliability of the financial statements of the company for a part of the year. For example, if the directors of the company desire to pay the interim dividend, as a rule, the dividend only can be paid only out of profit and profit shall be

determines only after the completion the financial year, so the directors may want to know the figure of profit which the company earned up to that date.

Hence to get assurance about the reliability of financial statements and keeping in view some interim purpose, Board of Directors may decide to get the account audited by the independent auditor.

3.4-Final Audit: A final audit is one where the auditor undertakes the audit work only at the end of the financial year. In such a case, the audit work commences after all the accounts are closed and balance sheet and trading and profit and loss accounts are prepared. The

auditor visits his client only once a year and completes the entire work in only one session.

The final audit is very useful in case of a small concern. But in case of large business it takes more time to check accounts and submit their report, and therefore, final audit is not sufficient for large business houses.

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4-Terms of Audit Engagement According to ISA 210 these terms should be considered regarding to engagement.

4.1-Introduction: 1) The purpose of ISA to establish standards and provide guidance on:

a) Agreeing the terms of the engagement with the client b) The auditor’s response to a request by a client to change the terms of a

engagement to one that provides a lower level of assurance.

2) The auditor and client should agree on the terms of the engagement. The agreed terms need to be recorded in an audit engagement letter or other suitable form of contract.

4.2-Audit engagement letters: It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before the commencement of the engagement, to help the avoiding

misunderstanding with respect to the engagement. It involves the acceptance of the appointment, the objective and scope of the audit.

4.3-Principal contents: The form and content of audit engagement letter may vary for each client, but they

would generally include reference to: 1) The objective of the audit of financial statements. 2) Management’s responsibilities for the financial statements.

3) The scope of audit, including regulations and legislations. 4) The form of any reports or other communication of result of the engagement.

5) Unrestricted access to whatever records, documentation and other information requested in connection with the audit and

6) Management’s responsibility for establishing and maintaining effective

internal control.

4.4-Audits of the components: The auditor of the parent entity is also the auditor of the subsidiary, branch or division. Then we have to send a separate engagement letter to the component include

the following: 1) Who appoint the auditor of components?

2) Whether a separate auditors report is to be issued on the components. 3) Legal requirements. 4) Degree of ownership by parent.

5) Degree of the independence of the component’s management.

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4.5-Recurring audits: On recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be revised and whether there is a need to remind the

client of the existing terms of the engagement.

4.6-Acceptance of a Change in Engagement: An auditor, who, before the completion of the engagement, is requested to change the engagement to one which provides a lower level of assurance, should consider the

appropriate of doing so.

5-Using the Work of another Auditor

ISA 600 is in respect of Using the Work of another Auditor and is currently effects. This is given below:

5.1-Introduction: 1) When the principal auditor uses the work of another auditor, the principal

auditor should determine how the work of the other auditor will affect the audit.

2) “Principal Auditor” means the auditor with the responsibility for reporting on

the financial statements of an entity when those financial statements include

the financial information of one or more components audited by another auditor.

3) “Other Auditor” means an auditor, other than the principal auditor, with responsibility for reporting on the financial information of a component which

is included in the financial statement audited by the principal auditor. Other auditors include affiliated firms, whether using the same name or not, and correspondents, as well as unrelated auditors.

4) “Components” means a division, branch, subsidiary, joint venture, associated

company or other entity whose financial information is included in financial statements audited by principal auditor.

5.2-Acceptance as Principal Auditor:

1) The auditor should consider whether the auditor’s own participation is sufficient to be able to act as principal auditor. For this purpose the principal

auditor would consider:

2) The materiality of the portion of the financial statements which principal

auditor audits;

3) The principal auditor’s degree of knowledge regarding the business components;

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4) The risk of material misstatements in the financial statements of the components audited by the other auditor;

5.3-The Principal auditor’s Procedures:

1) The principal auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for

the principal auditor’s purposes, in the context of specific assignment.

2) The principal auditor might also, discuss with the other auditor the audit

procedure applied, review a written summary of the other auditor’s procedures or reviews working papers.

3) The principal auditor should consider the significant findings of the other

auditor.

5.4-Cooperation between Auditors: The other auditor, knowing the context in which the principal auditor will use the other auditor’s work, should cooperate with principal auditor.

6-Using the Work of an Expert

ISA 620is in respect of Using the Work of an Expert. This is effective for Audit of Financial Statements for period beginning on or after December 15, 2004 which is

given below:

6.1-Introduction:

1) The purpose of this ISA is to establish standards and provide guidance on

using the work of an expert as audit evidence.

2) When using the work performed by an expert, the auditor should obtain

sufficient appropriate audit evidence that such work is adequate for the purposes of the audit.

3) “Expert” means a person or firm possessing special skill, knowledge and

experience in a particular field other than accounting and auditing.

4) The auditor’s education and experience enable the auditor to be

knowledgeable about business matters in general, but the auditor is not

expected to have the expertise of a person trained for or qualified to engage in the practice of another profession or occupation, such as an actuary or engineer.

6.2-Requirements

6.2.1-Responsibility:

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The group engagement partner is responsible for the direction, supervision and performance of the group audit engagement in compliance with professional standards

and regulatory and legal requirements, and whether the auditors report that is issued is appropriate in the circumstances.

6.2.2-Terms of engagement:

The group engagement partner shall agree on the terms of the group audit

engagement in accordance with proposed standards. 6.2.3-Overall audit strategy and audit plan:

The group engagement team shall establish on overall group audit strategy and shall develop a group audit plan.

The group engagement partner shall review the overall group audit strategy and group audit plan.

6.3-Understanding the group: The auditor is required to identify and assess the risk of material misstatement

through obtaining the understanding of the entity and its environment . the group engagement shall:

a) Enhance its understanding of the group its components and environment

including group wide controls ,obtained during the acceptance or continuance

stage;

b) Obtain and understanding of the consolidation process including the instructions issued by group management.

7-Organizational Set Up Of An audit Office

An auditor is required to have a sound organizational set-up in his office. Suggested organizational chart is given the chapter. This organizational chart has been developed

on the assumption set-up will be different if the auditor were to deal in tax, Management Consultancy and Cost consultancy also. If the magnitude of work is big, the audit department will be divided into several

sections. Each section will be under the charge of a qualified assistant (i.e. chartered Accountant). An audit manager is required to be there who will distribute the audit

work amongst the staff in liaison with the qualified assistants (generally called as Principals). Besides this, he should maintain a record of the following:

1) Allocation of jobs amongst the senior in charge of the jobs.

2) Daily posting of audit staff to various jobs. 3) Audit work to be done (classified as monthly audit/inspection, quarterly, half

yearly and yearly audits). 4) Details of jobs where targets are involved. 5) Dates as and when cash count and physical stock check (annual/monthly or

surprise) are to be conducted. 6) Audit jobs to be started, in progress and completed.

In order to ensure that the above record is maintained efficiently, audit completion register and audit work register should be maintained.

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The audit manager should also maintain an up-to-date list of the clients. It is generally advisable to review it periodically, specially marking new audit jobs undertaken.

Generally one or two jobs should be allocated to a senior who would be assisted by a semi-senior and a few junior members of the audit staff in the conduct of the audit

work. The senior would be accountable to the qualified principal for getting the audit work finalized who would then submit his work to the auditor to go through in the synthesis of final stage and reporting.

The auditor should also keep and use job Completion register. This should include a snapshot of the total jobs in hand. From this register a periodical summary should be

prepared indicating jobs completed and jobs still in hand (making separately in progress, to be shortly taken up and arrears, if any).

8-Commencement of a New Audit

Before the commencement of a new audit the following instructions must be given by the auditor to his client:

1) A complete list of books use together with a list of employees engaged upon them

with their respective duties, a note on the system of book-keeping in operation

and a statement of the system of the internal control in practice should provide to the audit staff.

2) All the books of original entry should be totaled and all the ledgers should be balanced and ruled off. The final trial balance and the draft final account should kept ready for the audit and the examination.

3) All supporting vouchers to all books should be kept properly arranged.

The auditor of a newly-established limited company should carry out the following preliminary work before commencing the actual audit:

8.1-Appointment: He should ascertain whether his appointment is in order. He should obtain a certified

true copy of the resolution of Board of Directors or shareholders and keep it is in the permanent audit file. I an auditor is being appointed in place of the retiring auditor he should see that the requirements if the Companies Ordinance, 1984, have been

compiled with.

8.2-Document: A copy of the Memorandum and Articles Association should be obtained and studied

carefully. Particulars affecting the auditor in relation to account books and internal procedures relating ti relevant matters should be noted.

8.3-Prospectus: Relevant matters affecting the accounts and allied information should be examined.

8.4-Minute Books: He should go through the directors and shareholders minute books and job down notes of important decisions.

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8.5-Contract: Service contracts concerning the terms of appointment and the scope of authority in

respect of officers of the company should be scrutinized. All material contracts entered into by the company with the outsiders should be procured and studied.

Important matters should be noted.

8.6-Techonical Operations: He should acquaint himself as far as possible with the technical operations of the company. It is advisable that he should visit works before starting the audit.

8.7-List of Books: He should obtain a list of books –statutory, statistical and accounting, which are in use together with names and duties of various clerks who are to write them up.

8.8-System of Accounting: A note on the system of accounting employed by the company should be obtained.

8.9-Internal Check: He should ascertain whether the whole internal check system on operation appears in black and white in some accounting manuals. If so, he should go through the same

and carefully note any loopholes. The system, whatever exists in practice, should be tested in all practical aspects.

8.10-Privious Years Audited Accounts and Reports: With the exception of a new company, the auditor should examine the last balance

sheet for the for the purposes of checking the opening entries for the period under audit. The previous year auditor’s report should also be inspected and if ant qualifications are contained in it, the possibility of their being applicable the year

under audit should be carefully examined.

8.11-Audit Report: He should then draft an audit programme and commence the work of audit.

9-Audit Programme

An audit programme is a written scheme of the exact details of the work to be done by

the auditor and his staff in connection with a particular audit. It is generally contained in the audit notebook and is variably in black and white. A space is also provided in

the audit programme against each of the work to be done so that each audit clerk, responsible for any portion of the particular work, may put done his signature or initial. One audit program is prepared for one audit. The details of the audit

programme will depend upon the adequacy or otherwise of the system of internal control, special provisions of Memorandum and Articles of Association affecting the

duties of an auditor and the nature of the business etc.

9.1-Preparation

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The audit programme must be developed with due care and skill. Particular attention should be given to the following:

1) Exact scope oh the duties of an auditor. 2) Books of original entry and ledgers in use.

3) The system of book-keeping employed, and its weaknesses (if any). 4) System of internal check and the extant of its reliability. 5) General nature and routine of the business.

The audit programme should not be very rigid; it must be capable of being reviewed in view of changing circumstances.

A similar audit programme is required to be prepared in respect of all books of original entries and ledgers. The scope of contents of the audit programme should cover all the routine checking and vouching.

10-Audit Notebook

It is a book in which a permanent record is kept of the following:

10.1-Audit Programme: It has already been explained at length earlier.

10.2-Audit review notes: During the conduct of the audit, certain points do crop up which need further

elucidation and discussion with the management. Therefore notes are taken during the conduct of work. A record of the progress of the disposal of audit notes is also

maintained.

10.3-Audit Queries: During the conduct of the audit, all those vouchers which remain insufficiently

vouched are to be noted in query list of the audit notebook.

10.4-Important Balances: A note of the important closing balances particularly in respect of cash and bank

should be noted so that after the work has been done in alteration of any of the closing balances may be made difficult.

11-Audit Working Papers

Working papers are the connecting link b/w the client’s records and the audited accounts. These include all the evidence gathered by the auditor indicating what work

has been done by him and the procedure he has followed in verifying a particular asset or liability. These provide a permanent historical record logically arranged in order, in which each item appears in the balance sheet. These also serve as a great

guide to the staff to whom the work of audit has been assigned after the previous year audit. These would come to the help of the auditor in future in case the client files a

suit against the auditor’s negligence.