What are the Audit Procedures and Its Objective?
Falsified or imprecise financial records bring no advantage to everyone. They are bad for the investors who want to decide if a firm worth their investment and bad for the managers who depend on the information they obtained from the accounts to help them in decision-making (Also see Compliance Tips New Business Owners Need to Know).
Therefore, when the auditors from the audit firms in Johor Bahru are performing audits, they need to review financial records so that they can identify the accuracy of the records. The objective of the auditor will influence the auditing procedures.
Objective And Procedures Of An Audit
Any audit aims to determine whether the financial statements of a firm fairly illustrate its cash flows and finances, which is within the scope of financial accounting (Also see Distinguishing Financial Accounting and Management Accounting). Nevertheless, there are numerous minor goals below that central purpose.
An Auditor May Accomplish Different Goals By Carrying Out Different Procedures
- Classification testing. This procedure examines whether a company has written up the transactions accordingly in its ledgers.
- Completeness testing. Auditors review the records to see if they are complete to identify whether the firm has left out any transactions.
- Cutoff testing. This test focuses on whether a company has recorded its transactions in the right period. For instance, some company may move a purchase from a particular month to the following as doing so makes the net income of the first month look better than the reality.
- Occurrence testing. Audits can identify whether the transactions have happened by checking the sales ledgers and the supporting documents carefully.
- Existence testing. This procedure examines the existence of the assets on a company’s books, for example, inventory.
- Rights and obligations testing. This test checks if the firm owns the assets it asserts.
- Valuation testing. This test identifies whether the accounts have fixed the right value for the assets as well as liabilities of a firm.
An auditor can achieve specific purposes by checking documents or recalculating the figures to check if the records are accurate and in accordance to the Financial Reporting Standards (Also see FRS 1).
The audit objective varies with the types of business. As an instance, if a firm does not hold any inventory, there is no point for an auditor to test for the inventory count (Also see FRS 2).
Regardless of the types of business and issues that the auditors are dealing with, they have the same purpose, that is, to collect sufficient evidence so that they can draw a conclusion. To back up the auditor’s audit results, they must possess “sufficient and appropriate evidence” to support the procedures they use and keep the audit working papers.
The term “sufficient” relies on the condition. If the quality of the evidence is high, an auditor will not require much. The relevance and reliability of evidence determine its quality. For instance:
If the controls of the company over that information are efficient, the internal evidence is more dependable.
It is better if the evidence is from independent sources rather than from the internal sources of a company.
Information in digital version or the photocopies is less preferred than the original documents.
The evidence that an auditor has gathered directly is more dependable than those he has collected indirectly.
On the other hand, the relevance of evidence relies on the way it relates to an audit’s objective.