Audit procedures refer to the different methods used by an auditor in obtaining the evidence necessary for making an opinion on the financial statements of the firm. The different types of audit tests that can be used by the auditor include the substantive tests and tests of control. The substantive tests that are used include analytical reviews which examine financial statements of the company to verify whether they have been prepared in accordance with the required principles. The internal control tests check on the suitability of the company’s internal control systems.
The procedures may be carried out using audit software. Audit software is software used by the auditor to read a client file to provide information for the audit and perform procedures carried out by the client program. They are generalized software, specialized writers software, utility software and audit software.
The generalized software is for general application and can be used on different types of computers. The specialized software is programs written to be used on a particular client file only. Kingsmead can use this software to record all the transactions involving all its major customers for ease of tracing and evaluation. The utility program is the software that is used by the firm to perform common data processing such as sorting and printing files. Kingsmead can use this software to classify its debtors according to their compliance to paying their debts, and also for monitoring the percentages of discounts and provisions for bad and doubtful debts.
These audit software can be used in calculation checks, completeness check, selecting items for audit test, detecting violation of system rules, such as credit limits, unreasonable checks, such as hours worked, as well as the equivalent pay for the hours worked. The embedded software is used by the auditor to examine transactions passing through the system. This is done by placing an auditor’s own program with a set of programs which are used for processing and real time testing of data. There are also test data/test facts which are compliance tests designed to test the performance of client’s programmes.
The different audit records that can give evidence of work done include working papers. Working papers are documents for recording work done by the auditor while conducting his audit. They provide assurance that the audit was carried out following the required standards. Audit papers usually show how the work was planned, how the audit process was carried out, the level of supervision involved and whether proper review was carried out. They also show that sufficient evidence was obtained to enable the auditor to make an opinion. Audit papers have to be signed and dated by the relevant staff, and any matters outstanding have to solved in the due course.
The other records which can be kept by the auditor include working files. There are primary audit files and secondary files which are used at different stages of the audit.
An audit report is the final product of the audit engagement which enables the auditor to express his opinion on the financial statements of the company. The following is a draft audit report of Kingsmead plc.
Independent Auditors Report
To the shareholders,
We have audited the financial statement of Kingsmead plc which includes the balance sheet of the company as at 30.06.2011, the income statement, the statement of changes in equity, the cash flow statement for the year then ended, a summary of significant accounting policies and other explanatory notes.
The management is responsible for the preparations of the financial statements and fair presentation of these statements in accordance with international standards of reporting. If deemed necessary by the management, internal control enables to prepare of financial statements that are free from material misstatement caused by either fraud or error.
Our responsibility is to express an opinion on those financial statements based on our audit. We conducted our audit in accordance with the international standards of auditing. These standards require that we comply with ethical requirements and plan and perform our audit to obtain reasonable assurance about whether the financial statements are free from material misstatements (Gonzalo Villalta Puig 2000).
As the audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements, the procedure selected depends on our judgment, including the assessment of the risk of material misstatement of the statements, whether due to fraud or error. The audit was carried out on a test basis. The audit also involved evaluating the appropriateness of accounting policies used, reasonableness of entities need as well as evaluating the presentation of the financial statements and the level of management. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion the financial statements of the company show the inapplicability of the going concern concept of the company as at 30.06.11. Our opinion is based on the financial difficulties the firm is going through, as well as a threat of a takeover. The company also has adverse gearing ratios meaning that it will not be able to pay its liabilities when they fall due. The company’s share price dropped drastically and it is an indication of poor management. Also the company’s board chairman resigned and there was no replacement. The company has changed its operations and the future is uncertain. Therefore, the financial position show the inapplicability of the going concern concept, and it is in the interest of the shareholders and creditors that we issue a qualified report, in accordance with the international auditing standards.
A management letter is a letter written by the auditor to the management of the firm drawing the attention of the management to the shortcomings and weaknesses in the internal control of the organization. The letter is written after the evaluation of the internal control system but before the issue of the audit report. A draft management letter is as shown below;
POSTAL ADRESS 2643456
The company needs to evaluate its authorization procedures in order to avoid cases of fraud. The management should oversee the change of selling on credit to cash basis and for the goods sold on credit; the firm should institute measures to recover the debt. The internal control system regarding bad debts is not sufficient, and there is no proper authority for declaring debts as bad. There should be regular rotations of staff managing the internal control of the company. If the recommendations are not implemented it will have an adverse effect on the financial statement of the company (Sandra Berns & Paula Baron 1998).
The purpose of the management letter is to report to management about the accounting system and the related forms of control. It provides advice to the management on how to ensure reliability of the company’s records. It enables the auditor to bring to the attention of management areas of weaknesses that might lead to material errors and fraud. It enables the auditor to communicate matters relating to internal control system that may have an impact on the future audit. The letter also provides the basis for planning subsequent audits through identification of risk areas (Gonzalo Villalta Puig 2000).
If the management is not willing to sign the letter, the auditor should consider discussing the issue with the management, and if the management is still reluctant to sign the letter, the auditor should consider qualifying the report.