Here is a term paper on ‘Audit Process’ for class 11 and 12. Find paragraphs, long and short term papers on ‘Audit Process’ especially written for school and college students.  

1. Term Paper on Audit Process: (Around 250 Words)

Q. What is an audit note book?

Ans. It is a record, used chiefly in recurring audits, containing data on work done and comments outside of the regular subject matter of working papers. It generally contains such items as the audit programmes, notations showing how sections of the audit are carried out during successive examinations, information needed for the auditor’s office and for staff administration, personnel assignments, time requirements and notations for use in succeeding examinations.

It is a diary, usually a part of permanent audit file, maintained by the audit staff for the purpose of recording certain points which require further clarification, explanation and investigation. This book generally includes any errors, difficulties observed, and doubtful queries of various accounting records, etc.

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The usual contents of A. N. Book are, progress of the audit work together with the dates on which the work was undertaken and completed, extracts from correspondence with different authorities (e.g., government, banks, debtors, creditors, etc.) system of accounts, notes on missing vouchers and invoices, suggestions, audit programme, extracts for minutes/contracts/agreements, notes on errors and/or irregularities, explanations of typical terminology used by the client, and such matters requiring future reference.

The importance or value of A. N. Book lies in the fact that it can be produced as an evidence to show the nature and type of audit examination done particularly when an auditor is charged with negligence. Thus, it acts as documentary evidence in the courts of law. Further, subsequent audits become easy as the book serves as a guide to audit staff.

2. Term Paper on Audit Process: (Around 250 Words)

Q. What is an audit memorandum? Also state its contents.

Ans. It is a kind of brochure which contains information about the client, its organisation, business and business policies. Thus, this should always be gone through by a new audit team, or where the audit is new. This record should be compiled at the very start of a new audit assignment by reference to various important documents, e.g., partnership deeds, memorandum and articles of association, etc. It should also be updated with changes in information from time to time.

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The contents of audit memorandum may be summarised as below:

1. The client’s name, address and those of factories and branches.

2. The ownership and control of business and brief history.

3. The details of products manufactured and sold marketing and distribution channels and advertisement methods adopted.

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4. Raw materials and their price trends and procurement sources.

5. The names of directors, principal officers and other responsible officials together with a detailed organisation chart outlining their rights and powers.

6. Details about a holding or subsidiary company, if any.

7. Details of books of accounts of the client and the names of personnel maintaining them and the accounting year as also its break-ups.

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8. Details of the client’s policies with respect to advertisement, accounting and costing, system of internal accounting and administrative controls, investments, marketable securities, tax returns, contingency reserves, product prices, etc. It can, therefore, be concluded that an audit memorandum should be reviewed every year and must remain open for the knowledge of all audit staff engaged.

3. Term Paper on Audit Process: (Around 300 Words) 

Q. Explain audit manual.

Ans. An audit manual is a written auditing document; it refers to the standard audit guides as to the objectives of auditing, detailed auditing mechanism, timing and extent of examination and preparation of audit report, etc. It provides broad guidelines to the development of audit programmes needed for adaptation to the functional or organisational scope of the review.

The form and contents of audit manual are not the same with all audit firms. The general feature is that it is flexible to incorporate new and improved ideas and techniques. The format usually contains audit objective, development of definitive audit programmes, preparatory activities, operational activities and procedures of audit.

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The following matters or information are covered in the audit manual:

1. Policies and procedures with respect to the minimum audit steps and audit supervision and review.

2. Different specimen of business or management letters and guidelines about the maintenance of audit records and files.

3. Guidelines in the form of solution-packages to various ticklish audit problems.

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4. Outlines of:

(i) Correspondence with the clients,

(ii) Audit working papers,

(iii) Audit programmes,

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(iv) Internal control questionnaires,

(v) Internal controls evaluation,

(vi) Instructions about the timing, extent and scope of the use of compliance tests, substantive tests and statistical sampling methods and

(vii) The important extracts of various legal and professional pronouncements concerning the audit.

Thus, in nutshell, it can be stated that the manual provides a mental flowchart of the important auditing functions and operations to the audit staff. Now-a-days, the elements of audit work quality controls and the extent and scope of delegation of audit work to staff and assistants and/or to experts or specialists are also incorporated in order to bring an uniformity in the auditing mechanism and standards.

4. Term Paper on Audit Process: (Around 600 Words)

Q. What are the two types of audit files?

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Ans. Auditors normally maintain two types of audit working-paper files. One is referred to as a ‘permanent or continuing audit file’ and the other one called the ‘current-year audit file’.

In addition to these, the auditors sometimes maintain:

(i) Tax working-paper files (to maintain a record in connection with the review or preparation of a client’s tax returns),

(ii) Correspondence files (to maintain a record of all communications with each client),

(iii) Billing files (to maintain the current status and historical record of billings to and collections from each client) and

(iv) Client files (for developing a record of the relationship with each client).

Permanent Audit Files:

It is composed of documents, schedules and other data that are of continuing significance to several years’ audits. For example, an auditor requires a copy or an extract of the client’s articles of incorporation to verify the types (ordinary and preferred) par values and number of authorised shares that the client company may issue, as well as restrictions on payment of dividends, or other matters requiring disclosure in the financial statements.

The auditor need not ask for the same document each year and he can place one such copy in his permanent file, which is a part of each year’s audit evidence. In that case, he must check each year the nature and kind of amendment to the articles of incorporation and note down the changes on the document in the permanent file.

Although there are variations in the arrangement and organisation of permanent files from one audit firm to another, most would contain the following particulars:

1. Historical information about the client company:

It includes a memorandum describing the company and its operations, major plants and processes of manufacture, products, distribution network and important customers, organisation chart and recurring audit administrative matters.

2. Description of accounting procedures and internal accounting controls:

It consists of narrative descriptions of the client’s accounting procedures and internal accounting controls, internal accounting control check lists, flow-charts, decision tables, or any combination of these items; a chart of accounts and samples of certain records or forms that aid in understanding the company procedures.

3. Corporate documents:

It may include:

The articles of incorporation, copies or extracts of loan agreements, prospectus, import or export agree­ments, bond indentures, minute books, management contracts, labour or employees’ union agreements, pension plans, important long-term operating contracts. The auditor must have evidence of the provisions of these documents and reviews thereof, as they could significantly affect the company’s operations and financial statements.

4. Continuing analysis of certain accounts:

Some auditors suggest to maintain cumulative or carry-forward schedules in the permanent file for certain accounts than to prepare them each time during the current year. Such schedules for continuous analysis may include: capital stock, long-term debt, check-lists against loan agreements, equity earnings, gross profit ratios by major product line, etc.

5. Audit planning:

This could include a master copy of the audit programme; schedules of plant capacity, volumetric measurement data for tanks/vessels, etc.; schedules of cost centres, bank accounts and of branch offices/subsidiaries, etc.; EDP accounts systems and the description of previous audit tests.

Current Audit Files:

The current-year audit files may contain the information such as : evidences gathered and conclusions reached, schedules and analyses of accounts, memorandum of audit work performed, audit problems considered and resolved, audit programme, correspondence with third parties confirming balances, review sheets containing questions and comments, time schedule of audit engagement, etc.

5. Term Paper on Audit Process: (Around 300 Words)

Q. What do you mean by audit working papers?

Ans. They refer to the records kept or prepared by the independent auditor of the following:

1. Procedures applied,

2. Tests performed,

3. Information obtained,

4. Pertinent conclusions reached. Examples are audit programme, analysis, memorandum, letters of confirmation, representation letters.

The preparation of audit working papers is of prime necessity for auditors to conduct their examination properly and provide adequate support for their opinion. According to Meigs, the term ‘working papers’ is a comprehensive one and it includes ‘all the evidence gathered by the auditor to show the work he has done, the methods and procedures, he has followed, and the conclusions he has developed’, “Audit working papers are the ‘bridge’ or ‘connecting link’ between the opinion of the auditor and the different books and records of the client”.

Taylor and Gleezen have listed the following general guidelines as to what working papers should include or show:

The work has been adequately planned, su­pervised and reviewed, indicating observance of the first standard of field work.

The system of internal accounting control has been studied and evaluated as a basis for reli­ance thereon and for determining the extent of tests to which auditing procedures are to the restricted, indicating observance of the second standard of field work.

The audit evidence obtained, auditing pro­cedures followed and the testing performed pro­vide sufficient competent evidential matter to af­ford a reasonable basis for opinion, indicating ob­servance of the third standard of field work.

Thus, there is no denying the fact that the audit working papers should:

(i) Show how the work was planned (primarily by the use of audit programmes);

(ii) Show the extent of supervision of assistants (indications of reviews made by the auditor) and

(iii) Contain sufficient and competent evidence (such as internal accounting control check-lists, confirmations from creditors, bank reconciliations, etc.) on which to base an opinion.

6. Term Paper on Audit Process: (Around 300 Words)

Q. Explain the concept of working-paper triangle.

Ans. The concept of working-paper triangle refers to the organisation of audit working papers. Here, the term ‘organisation’ denotes ‘indexing’ of work­ing papers.

The concept, according to Taylor & Gleezen, can be illustrated by the following triangle:

Financial Statements

Considering the financial statements at the apex, the auditor identifies the individual financial statements to a stage at which these can be effectively audited. The uppermost portion of the triangle refers to ‘audit trial balance’ — which should agree with the amounts shown in the client’s financial statements.

Again, the total accounts balances shown in the financial statements are difficult to be audited effectively unless these are broken down into sub-accounts (such as, customers, notes, officer, interest and accounts receivables).

These break-ups on a schedule are referred to as the ‘lead schedules’ indicated at the mid-level in the triangle. This level illustrates the division of the total amount into sub-groups by stage of completion. The nature and type of subgroups shown on the lead schedules are determined by the classifications used by the client in its accounting records. Thus, in this, as in many other aspects of auditing, no single format is applicable to all audit engagements and each must be tailored to the particular aspects of each audit.

Thereafter, the more significant of the subaccounts or subgroups would be analysed further by such classification that the auditor can subject to audit tests. The base of the working-papers triangle symbolizes these classified analysis schedules the ‘detail audit schedules’, which is ‘a myriad of schedules and document’, each representing a specific piece of evidence gathered, Thus, the base expands as each account is analysed in greater detail.

7. Term Paper on Audit Process: (Around 550 Words)

Q. “Planning and programming are essential to the efficient conduct of an audit regardless of its size”. — Justify the statement highlighting the various ‘phases’ involved in planning and programming the flow of audit work.

Ans. Audit Planning & Programming by ‘Phases’:

Proper planning and programming of audit is advantageous to both the auditor and the client as much of the detailed audit work can be performed outside the peak audit period.

However, the total audit work can be split into:

Phases:

I. Scheduling, planning and programming;

II. Preliminary audit work;

III. Year-end audit work;

IV. Final audit work;

V. Post-audit work.

Phase I: The auditor should consider the following pertinent aspects:

(a) Employment of more efficient audit meth­ods and procedures.

Such as  the use of:

(i) More clerical assistance form the client,

(ii) Statistical sampling techniques,

(iii) Generalized computer- assisted audit programmes, and

(iv) Better orga­nisation of audit working papers.

(b) Shifting of additional work to a preliminary period out of the busy audit period, such as study and evaluation of internal control systems. If the auditor is satisfied with the reliability of internal controls, he may decide to perform some audit procedures, which are normally done after the end of the year, at this phase.

(c) Elimination of non-essential work, parti­cularly those which have become embedded in an audit programme over a period of time.

Phase II: At this phase, the auditor should do the following:

(a) Review of the minutes of meetings of share­holders and board of directors (and any sub-committees thereof);

(b) Review, test and evaluation of internal ac­counting control;

(c) Substantive tests, such as confirmation of accounts receivable/accounts payable, observation of physical inventories and review of transactions in the accounts from the interim date to year-end to be satisfied of the validity of the account balances at the year-end;

(d) Substantive tests of additions to and reductions of accounts with balances that tend to carry forward rather than turn over rapidly (examples are. property and equipment, deferred charges, long-term debt and shareholders’ equity) and of the transactions in these accounts;

(e) Tests of all transactions (by choosing a population) from one preliminary date to the next so as to secure an additional assurance of consis­tency of accounting procedures.

Phase III:

This phase begins at the end of a client’s year. The auditor should do substantive tests with respect to: observation of physical inventories (i.e., annual stock-taking), physical count of cash, inspection of marketable or investment securities. This audit work must be done on the specific year- end date with a view to determining that the asset was actually on hand at that date.

Phase IV:

This phase begins as soon as the cli­ent has prepared and posted the final accounting entries, and totalled, balanced and closed the ac­counting records. Auditing procedures, not previ­ously performed, are executed at this phase. These could include: tests of accrued liabilities, review of loan agreements for compliance with restrictions, examination of stock-books. The preparation and issuance of audit report to the client organisation are finalised at this stage.

Phase V:

This phase in not actually a part of the total audit planning and programming process. Some audit firms, at this phase, prepare staff evalu­ation reports, send billings to clients and review audit programmes with the incorporation of ideas that are fresh in the minds of those who performed the audit-work for increasing audit efficiency.

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