General principles for audit

The outcome of an audit is a report, usually expressing

an opinion
That report and opinion must be supportable by the
auditor, if challenged
Therefore, the auditor will collect evidence on which to
base his report and opinion
The auditor carries out procedures known as audit
tests in order to generate this evidence

Procedures performed during audit

Inspection (of an item)
Observation (of a procedure)
Inquiry
External confirmation
Recalculation
Re-performance
Analytical procedures

Inspection
Looking at an item
Inspection can be of
Documents and records (invoices, agreements etc)
Intangible assets
Entries in accounting records

Observation
Watching a procedure (e.g physical inventory counts,
distribution of wages, Invoice generation)

Inquiry
Seeking information from knowledgeable persons inside
or outside the entity
Evaluating responses to those enquiries
Corroborating those responses with other audit
evidence

External confirmation

A specific type of inquiry seeking confirmation from a

third party
e.g. bank balances, trade receivables and payables

Recalculation
Checking the mathematical accuracy of documents or records
e.g. adding up the list of year-end trade receivables, calculating
interest already calculation by the company

Re-performance
Independently carrying out procedures or controls,
which were originally performed by the company
e.g. re-performing the aging of year-end trade
receivables

Analytical procedures
Evaluating and comparing financial and/or non-financial
data for plausible relationships and investigating
unexpected fluctuations
e.g.
comparing last years gross profit percentage to this years
and ensuring any change is in line with expectations
calculation of expected salary expense for the year (avg.
salary of employees * total number of employees)
calculation of expected interest expense (avg. amount of loan
* interest rate)

Audit Assertions
Assertions are representation made by the
management about an account head / transactions
during the year / disclosures required by regulatory
bodies
Three categories of Assertions
Assertions about classes of transactions and events for the
period under audit (i.e. income statement assertions)
Assertions about account balances at the period end (i.e.
statement of financial position assertions)
Assertions about presentation and disclosure (i.e. presentation
assertions)

Assertions about account

balances
Existence: Assets, liabilities and equity interests exist
as at year end
Rights and obligations: The entity holds or controls
the rights to assets, and liabilities are those of the entity
Completeness: There are no unrecorded assets,
liabilities or equity interests
Valuation and allocation: Assets, liabilities and equity
interests are included in the financial statements at
appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded

Assertions about classes of

transactions and events
Occurrence: Transactions and events that have been
recorded have occurred and relate to the entity
Completeness: There are no unrecorded transactions or
events
Accuracy: Amounts and other data relating to recorded
transactions and events have been recorded appropriately
Cut-off: Transactions and events have been recorded in
the correct accounting period
Classification: Transactions and events have been
recorded in the proper account types

Assertions about presentation and

disclosure
Occurrence and rights and obligations: Disclosed
events, transactions and other matters have occurred
and relate to the entity
Completeness: All disclosures that should have been
included in the financial statements have been included
Classification and understandability: Financial
information is appropriately presented and described
and disclosures are clear
Accuracy and valuation: Financial and other
information are disclosed fairly and at appropriate
amounts

Heads of Accounts
Assets

Fixed Assets
Intangible Assets
Investments
Inventory
Trade and other receivables
Cash and bank balances

Liabilities
Loans
Trade and other payables

Heads of Accounts
Equity
Share capital
Reserves

Profit and loss Account

Revenues
Cost of sales, administrative expenses, selling and distribution
expenses
Raw material
Conversion costs
Others

Finance Costs

 Object of auditor is to obtain sufficient and appropriate

audit evidence through audit tests to be able to draw
reasonable conclusion on which to base his audit
opinion
Sufficient (relates to the quantity of evidence)
Appropriate relates to the quality (relevance and
reliability of the evidence)

Sufficient (quantity)
Depends on auditors judgement
Quality of audit evidence (High quality audit evidence may
require lower quantity of audit evidence)
Materiality of item
Seriousness of risk of misstatement
Strength of internal controls

Appropriate (quality)
Depends on two factors, relevance (to purpose of audit
procedure) and reliability (of evidence)
Relevance deals with the logical connection with the purpose
of the audit procedure / audit assertion
E.g. Inspection of documents related to the receipts from
debtors after the period end may provide audit evidence
regarding existence and valuation, but not necessarily cut-of
Designing substantive procedures includes identifying
relevant assertion and set audit procedures to obtain
evidence for that assertion

Appropriate - reliable
Audit evidence is more reliable when it is obtained from
independent sources outside the entity under audit
Internally generated audit evidence is more reliable
when the related controls are efective
Audit evidence obtained directly by the auditor is more
reliable than audit evidence obtained indirectly or by
inference
Audit evidence is more reliable when it exists in
documentary form
Audit evidence provided by original documents is more
reliable than audit evidence provided by photocopies