Introductory notes on auditing concepts and principles

1. BASIC CONCEPTS IN AUDITING
• Elvis A Amenyitor

2. BASIC CONCEPTS IN
PRINCIPLES OF
AUDITING
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3. • Walk through test is a test carried out in order to obtain a clear understanding of
the accounting and internal control system.
• It must however be noted that its objective is not to ascertain the effectiveness of
the system but to have a proper understanding of it.
• It involves tracing of transaction through to the accounts looking at all
documents and records produced, the manner of preparation and the internal
controls applied.
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WALK THROUGH TEST

4. WALK THROUGH TEST
• Walk through test is necessary when the auditor wants to confirm the
description of the system and as to whether there has been a change in
the financial information system or not for review purposes.
• This implies tracing a transaction through the entire accounting system in
order to confirm compliance with laid down procedures and controls and
to ascertain the strength or weakness in the system.
• Of course this test does not prove absolute reliability of the system of
internal control or the accounting system.
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5. COMPLIANCE TEST (TEST OF CONTROLS/PROCEDURAL
TEST)
• These are tests designed to obtain reasonable but not absolute assurance that
those internal controls on which the auditor wish to rely on were functioning both
properly and throughout the period.
• It seeks to provide audit evidence that internal control procedures are being
applied as prescribed.
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6. TWO POINTS MUST BE MADE ABOUT COMPLIANCE
TEST
• It is the control which is been tested by a compliance test and not the
transaction which may be the medium used for the test.
• If discovery is made that the system was not complied with in any way then:
• He may need to revise his system description and re-appraise its effectiveness.
• He will need to determine if the failure of compliance was not an isolated case or
exist in high degree.
• It is meant to determine the extent to which the auditor will place reliance on
the internal control. It is to assess the existent, effectiveness and continuity of
internal control
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7. SUBSTANTIVE TEST (TEST OF DETAILS/WEAKNESS TEST)
• Substantive tests are defined as those tests of transactions and accounts balances,
and other procedures such as analytical review, which seeks to provide audit
evidence as to the completeness, accuracy and validity of the information
contained in the accounting records or in the financial statements.
• Substantive tests are tests designed to obtain evidence as to the completeness,
accuracy and validity of data produced by the accounting system.
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8. • In short, substantive tests are tests of transactions and account balances to verify their
completeness, existence, ownership, valuation and correct disclosure.
• It is carried out:
• in areas where compliance test indicates that proper accounting procedures have not been
complied with.
• On all items not subjected to internal control procedures
• On all assets and liabilities
• In areas where internal control is weak
• Note: The Techniques of Audit Testing also referred to as “substantive test tools” are
discussed under “techniques for obtaining audit evidence” under Audit Evidence – (ISA 500)
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9. THE EXTENT OF SUBSTANTIVE TEST DEPENDS ON A
LOT OF FACTORS AND PERSONAL JUDGMENTS
INCLUDING:
• Reliability of the internal accounting system. – Where through compliance tests
the auditor obtains reasonable assurance as to the satisfactory adherence to
control procedures, he will decide to limit his substantive test work.
• How material the item is.
• The possibility of an account being wrongly stated through fraud and/or error.
• The extent to which exceptions are identified in the course of applying
substantive testing procedures
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10. DEPTH TEST
• These are compliance tests but conducted rather like a walk- through test.
• Test on different control features are together so they become in effect a walk-
through test. Unlike a walk through test, however, the sample must be
representative of the population to achieve the compliance objectives.
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11. DIRECTIONAL TEST
• Directional test is a test to check against overstatement and understatement of
balances. This is a method or test used to test balance sheet items e.g. Motor
Vehicle, Land, Long-term Loan etc.
• NOTE: Directional testing is a substantive testing
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12. ROTATIONAL TEST
• Audit emphasis
• This involves performing much audit work on selected items on a rotational basis.
Under a rotational audit emphasis (systems audit) a full systems audit would be
carried out on certain areas (for example the sales system) whilst others (eg
purchases, cash) will be covered by, for instance, walk-through-test and analytical
review. Care should always be taken that all areas do receive a full audit every 2-3
years.
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13. ROTATIONAL -VISIT EMPHASIS
• It may also mean visiting branches of client’s business on a rotational basis. An
auditor often cannot practically visit all the location of a client’s business every
year and find it difficult to test all aspects of a large and complex organization
within the time and fee constraint of the audit. Where the auditor is satisfied that
the client has good system of internal control, it may be possible to rotate the
audit work. A rotational audit of locations would involve audit visits to a number
of branches each year so that all branches would be covered in the course of 2 or
more years.
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MATERIALITY AND AUDIT RISK
• The wording of the auditor's report recognizes both of these
concepts by including the following terms:
• reasonable assurance
• in all material respects.

15. VOUCHING
• Vouching may be defined as the examination by the auditor of all the
documentary evidence which is available to support the authenticity of
transaction entered in the client’s records. It is therefore a substantive test
involving inspection.
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16. 3-16
MATERIALITY
A misstatement or the aggregate of all misstatements in financial
statements is considered to be material if, in light of surrounding
circumstances, it is probable that the decision of a person who is
relying on the financial statements, and who has a reasonable
knowledge of business and economic activities ( the user), would be
changed or influenced by such misstatement or the aggregate of all
misstatements.