The Education Academy

An audit is similar to any other research project, it consists of gathering of a considerable amount of information and then evaluating that information fairly and impersonally.

Audit technique may be used to describe the basic method of collecting evidence used by auditor. The technique in itself is not evidence, it supplies the evidence required by the auditor to inform him sufficiently on the subject that he can give a professional opinion.

Types of Techniques

Following are the basic techniques or methods of securing information:

1. Physical examination.

2. Confirmation.

3. Examination of original documents.

4. Re-computation.

5. Re-tracking book keeping procedures.

6. Scanning.

7. Inquiry.

8. Examination of subsidiary records.

9. Correlation with related information.

1. Physical Examination

The auditor examines the particular thing to assure himself of its existence. Physical examination requires identification of the item. One must be convinced that he was examined the specific thing which he is supposed to be verifying. Physical examination implies count, identification, verification of genuineness and quality. The applicability of this technique is restricted to those assets which are either material or some tangible evidence of existence, such as cash, inventories, fixed property etc.

2. Confirmation

It consists of obtaining a written statement from some one outside the enterprise on a fact which that person is qualified to affirm. It can be used to verify such various facts as the amounts owed to the company. amounts owed to the company, amounts on deposit in banks, the existence of inventory stored in a public warehouse.

The requirements for confirmation are:

( i ). that a reliable independent party be informed on the matter of interest to the auditor.

( ii ). that the statement of the informed party be obtained directly by the accountant with no possibility for influence or change by the company under examination.

3. Examinations of Original Documents

Examination of original documents included in this idea of documentary evidence for transactions are purchase and sales invoices, checks, remittance advices, insurance policies, contracts, stock certificates, purchase orders, receiving reports and a host of specialized papers. Examination of original documents implied that:

( i ). At least reasonable insurance of the authenticity of the document is obtained.

( ii ). The property of the transactions as being one appropriate to the particular company should be established.

( iii ). Approval of the transaction as evidence by appropriate signatures or supporting documents must be ascertained.

( iv ). Proper recording of the transaction must be established.

"Resonance of the documentary evidence can be had in two different ways"

1. All entries of a certain type for a given test period may be verified by reference to the appropriate business papers.

2. Individual transactions and entries in accounts may require substantiation, in which case the auditor calls for the specific documents which evidence those transactions.

4. Re-computation

Re-computation is one of the most widely used techniques as it is necessary at a great variety of points in the accounting process. Footing of books of original entry, ledger account balances, inventory extensions, depreciation and patents, and any other similar simple calculations require verification. The rule "never accept a client's tape" is a very practical one and should never be broken without a recognition of the risk which follows. The finality of a total on an adding machine tape is very impressive and necessary.

5. Re-tracing Book Keeping Procedures

Re-tracing book keeping procedures to discover any errors which may have been made in such book-keeping procedures as posting from books of original entry to the ledger, or in taking trial balances, it is necessary for the auditor to repeat that particular procedure. Thus it is necessary to trace a certain number of postings and to repeat the taking of a trial balance both of the general and the subsidiary ledgers.

6. Scanning

To scan means to scrutinize or to examine point by point. In auditing it refers to the critical study of an account, a book of original entry, or any other record or summary of information. In scanning a journal entry one should question the propriety of that journal entry for the particular concern, the reason for debits and credits of that particular type and finally the propriety of the entry itself as an application of generally accepted accounting principles.

7. Inquiry

It consists of asking questions and of obtaining satisfactory answers to those questions. The answers range from formal statements in writing to casual conversational comments. By a careful use of the questioning procedure one can learn a great deal about matters which might otherwise be obscure.

8. Examination of Subsidiary Records

Subsidiary records do constitute some evidence of the authenticity of the data in the records or report which they support. An auditor must be alert to the possibility of forged records. He must compare the controlling and subsidiary records carefully for any inconsistencies which might indicate a lack of the real relationship which is supposed to be there. When there is any reason to suspect that the subsidiary record is of recent and improper origin he can request evidence of the regular re-conciliation with or adjustment to the controlling account at regular intervals in the past.

9. Correlation With Related Information

Correlation with related information within the double entry system of accounting, there is a great tendency for items in one place to relate to those in another. The expression reconciliation is used to describe the process of relating one ledger account balance or other piece of Information to another. For example, the interest expense account is reconciled to the notes outstanding during the period, and the Insurance expense is reconciled with the changed in the balance of the prepaid Insurance Account.