Techniques of Auditing
Audit is a documented process and provides assurance to interested parties. There are many types of audit. Depending on the type of audit and objectives set for the audit, an experienced audit can navigate an audit process using combination of tools and techniques. We will therefore review techniques that have contributed to an effective audit.
Audit techniques stand for the methods that are adopted by an auditor to obtain evidence. SAP5 describes various techniques of auditing to be applied by the auditor under different circumstances. ISO 19001 –Guidelines on auditing of management systems also suggested methods that will facilitate an effective audit.
They are tools, methods or processes by means of which and auditor collects necessary evidence to support his opinion in respect of the propositions or assertions submitted by the client to him for his examination.
Gathering audit evidence as part of an audit involves a mix of techniques that are used interchangeably, visual observation, examination of records and interviews. Let’s take a closer look at each of these major techniques used for gathering objective evidences.
Documents and records:
Records are historical artifacts. They tell what has happened in the past. Auditors generally accept records as statements of fact. If we have a credible record that indicates something happened, then we can usually conclude the action happened. Of course, records are not required of everything that happens in an organization. If a company procedure or the applicable standard (such as ISO 9001) requires a record, then obviously we need a record.
While verifying various transactions, the auditor examines the supporting documents and records. This technique is otherwise called vouching. The purpose of examining the documents and records is to
- Confirm the authenticity (genuineness) of the transaction. That’s to validate the information provided by the key participant in an audit process ,also referred to as an Auditee
- To find whether the transactions and the supporting document are appropriate and are in alignment with the criteria being reviewed.
- To ensure whether the transactions are authorized (approved).
- To ensure whether the classification of the transaction is proper and there is consistency in implementation to planned arrangement or requirements.
The auditor walks through processes, interview people, reviews operations, examine records and a mix of other activities key to effective validation that facilitate good judgement in reaching a finding so important to the objective of the audit.
To the extent possible, an auditor rely on the documents depending on the origin (source) of the documents and the efficiency of the internal control system in operation in the location or the area being audited.
Documents which have their origin in the hands of the third parties and held by third parties are more reliable than the documents which have their origin in the organization itself and held by the organization. One can classify the documents into 4 major categories according to their origin and availability.
- Documents which have their origin in the hands of the third party and held by them – Most reliable evidence.
- Documents which have their origin in the hands of the third party and held by the organization – More reliable.
- Documents which have their origin in the hands of the organization and held by the third party – Reliable.
- Documents which have the origin in the hands of the organization and held by the organization – Reliable only if the internal control is effective.
“Credible” records are records that we can have faith in as being an accurate representation of the activities it vouches for. These are some characteristics that help make a record credible:
- Completely filled out.If the record starts as a blank form, then we would expect all spaces to be completed. Any blanks should have clear explanations for the omission.
- Records need verifiable dates in order to have any credibility.
- If the record was a meeting, then a listing of participants would help tell the story of what happened. If the record was simply proof of something happening, then who carried out the action would need to be recorded.
- Actual results.What actions took place? If the record was proof inspection, then the inspection results would be needed. If the record was taken from a meeting, what was decided?
- Subsequent actions.Many records will include action items or follow-ups. If the activity being recorded includes these types of actions, the record should clearly indicate it.
If an item can be measured in physical term, the same may be verified for quantity and quality (if possible). By physical examination, the auditor ensures the availability of the item. However, the ownership of the items cannot be verified through this method.
This is the most basic ways to gather evidence during an audit. Simply looking around is a very powerful way to understand how an organization works. Is the place organized or cluttered? Is communication formal or informal? Smart auditors immerse themselves in the organization they are auditing and look at it from every angle. Here are some especially powerful pieces of audit evidence you can look for:
- Uncontrolled documents. Look around for “bandit documents” posted on walls, machines, and desks. These are often informal specs or procedures that are not controlled in any way. Bandit documents often take the form of Post-It notes, marker settings written on machines, old memos, printed emails, and photocopies of external documents. If the document provides information on product requirements, process control guidelines, or decision making criteria, you need to inquire how the information is supposed to be controlled.
- Product outside the normal flow.Look for large piles of product that appear to be outside the normal flow of production. These are often nonconforming products, moved to the side so they can be addressed. If you find nonconforming products, make sure they are being handled in accordance with the company’s process for controlling nonconforming products.
- Measuring instruments.The presence of measuring instruments usually means that there are important characteristics that must be verified. When you see measuring instruments, you need to find out what they’re used for. If we’re using them to check product, verify service, or control a process, then the organization should have a process for ensuring the fitness of the instruments. These range from complex measurement devices to include very simple gauges (such as templates, patterns, jigs, rulers, tape measures, and limit samples), and everything in between.
- Housekeeping and organization.It doesn’t take an expert to identify a mess. That’s really what you’re looking for. Problems with housekeeping and clutter are symptoms of larger issues. Delve deeper into these conditions and try to find out what is happening. Lack of housekeeping often points to issues with product preservation, defects, identification, and traceability.
- Product identification.Look to see that all products has some sort of identification. Identification could be achieved through a variety of methods such as stickers, tags, bar codes, paint dabs, assigned location, special bins, boxes, or bags. If you’re not clear what the identification is, ask someone in the area.
- Improvised fixes and repairs.Look for evidence that employees have had to make improvised fixes and repairs. Amateur repairs often use duct tape, rope, shims, and other crude methods. If employees have improvised repairs, then it could be evidence that the maintenance program is not being carried out or that adequate resources are not being provided by management.
- Informal record keeping.Look for informal record keeping in notebooks, logbooks, scratch sheets of paper, etc. If the records relate to anything that ISO 9001 or the company’s system addresses, then the records should be handled in a formal manner.
The auditor observes a particular procedure being carried by the organization. Examples are observation of the internal control measures that are adopted in transactions involving cash, procedures followed on receipt or issue of material, etc. The auditor makes his observations to evaluate the efficiency and effectiveness of the system followed by the organization.
Inquiry and Confirmation
- Inquiry: Seeking information from persons belonging to the organization or from outside organization is called inquiry.
- Confirmation: Confirming the information available with the records of the organization or with the persons mostly from outside the organization through an inquiry is confirmation.
Inquiry and confirmation can take place either orally or in writing. The best example for inquiry and confirmation is confirming the balances of debtors shown in the accounting records with the debtors of the organization.
An auditor makes appropriate calculations and verifies the accuracy of the accounting records. For example, the auditor computes the depreciation to be charged for the year, by taking into consideration. the value of the asset (cost), the date of purchase, the rate of depreciation, etc., to verify the accuracy of the depreciation charged by the organization. The auditor also traces a particular transaction from the origin to check the book keeping procedure.
The purpose of analysis is to ensure consistency of accounting methods and also to evaluate the efficiency of the management by comparing the results of several years. The several analytical procedures are
- Ratio Analysis and Variance Analysis.
The auditor also applies the analytical procedures to help the management in decision making. Such analytical techniques are
- Marginal Costing
- Standard costing
The auditor studies the nature of the business and also the prevailing circumstances and selects the techniques to be applied. While conducting the audit, he may change his technique according to the changes observed in the circumstances. The suitable audit techniques adopted by the auditor helps him to carry on the audit efficiently.
Essentially, it is better to use combination of methods while gathering audit evidences and conducting interviews at auditor points. This is key and auditors should apply principles of auditing in the discharge of his/her responsibilities.
By Omobola Oropo
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