APPROACH TO AUDIT WORK (PLANNING THE ENGAGEMENT)

Every successful audit is based on sound planning and an atmosphere of constructive

involvement and communication between the client and the auditor.
The auditor and the client must agree on the terms of the engagement, including the type,
scope, and timing of the engagement. This understanding reduces the risk that either party
may misinterpret what is expected or required of the other party.

AUDIT PLANNING
Audit planning is a vital area of the audit primarily conducted at the beginning of audit process
to ensure that appropriate attention is devoted to important areas, potential problems are
promptly identified, work is completed expeditiously and work is properly coordinated. "Audit
planning" means developing a general strategy and a detailed approach for the expected nature,
timing and extent of the audit. The auditor plans to perform the audit in an efficient and timely
manner.

An Audit plan is the specific guideline to be followed when conducting an audit. It helps the
auditor obtain sufficient appropriate evidence for the circumstances, helps keep audit costs at a
reasonable level, and helps avoid misunderstandings with the client.

ISA glossary of terms describes audit plan as the one that converts the audit strategy into a
more detailed plan and includes the nature, timing and extent of audit procedures to be
performed by engagement team members in order to obtain sufficient appropriate audit
evidence to reduce audit risk to an acceptably low level.

Audit plan is the formulation of general strategy for the audit, which sets the direction for the
audit, describes the expected scope and conduct of the audit and provides guidance for the
development of the audit programme.

An audit programme is a set of instructions to the audit team that sets out the audit procedures
the auditors intend to adopt and may include references to other matters such as the audit
objectives, timing, sample size and basis of selection for each area. It also serves as a means to
control and record the proper execution of the work.

Good audit planning can result in an efficient and effective audit. Failure to plan an
engagement properly can lead to the issuance of misstated financial statements, an
inappropriate audit report, or an audit that is not cost-effective. The work is to be adequately
planned and assistants, if any are properly supervised. Planning and supervision provides
extensive guidance on the implementation of field work.

The auditor should plan the audit so that the engagement will be performed in an effective
manner. Planning an audit involves establishing the overall audit strategy for the engagement
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and developing an audit plan, in order to reduce audit risk to an acceptably low level.
Planning involves the engagement partner and other key members of the engagement team to
benefit from their experience and insight and to enhance the effectiveness and efficiency of
the planning process.

Audit planning addresses the specifics of what, where, who, when and how:
 What are the audit objectives?
 Where will the audit be done? (i.e. scope)
 When will the audit(s) occur? (How long?)
 Who are the auditors?
 How will the audit be done?

Advantages of adequate audit planning

a) Adequate planning helps to ensure that appropriate attention is devoted to important
areas of the audit.
b) Ensure that potential problems are identified and resolved on a timely basis.
c) Ensure that the audit engagement is properly organized and managed in order to be
performed in an effective and efficient manner.
d) Adequate planning also assists in the proper assignment of work to engagement team
members, facilitates the direction and supervision of engagement team members and the
review of their work, and assists, where applicable, in coordination of work done by
auditors of components and experts.
e) It helps keep audit costs at a reasonable level.

Process of Audit Planning

It includes following procedures
 Knowledge of client's business
 Development of audit strategies or overall plan (who, when and how)
 Preparation of audit programme

Every person plans, as does every organization. Planning begins especially with an intended
goal, an end result or targeted outcome. A plan is basically a device for the achievement of
that goal. For instance, a company may have a goal to launch its newly developed product in
the market and the plan is a combination of marketing techniques designed to reach that goal.
Thus planning is a two-way function: setting the right goals and selecting the right means to
achieve those goals. Planning in audit operations too has been considered as an essential
prerequisite so as to produce maximum out of minimum. Adequate audit planning enables an
auditor to cover the different aspects of audit work including vouching, verification, valuation,
expression of independent opinion on financial statements and submission of audit report in a
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systematic and methodical manner. Audit planning helps in enhancing the quality of audit
work. It brings promptness (speed) and perfection in performance.

Considerations in Audit Planning

The Auditor should plan to conduct an effective audit in an efficient and timely manner. Plans
should be based on the knowledge of the client's business. The auditor should obtain
sufficient and appropriate audit evidence through the performance of tests of control and
substantive procedures to draw reasonable conclusions there from to base an opinion on the
financial information.
The following factors are to be considered while planning the audit.
i. Complexity of audit, i.e., size of the company and complexity of its operations.
ii. Environment in which the entity operates, particularly commercial environment.
iii. Previous experience with the client, and
iv. Knowledge of the client's business, besides the reporting requirements to which it is
subject to.

Developing an Audit Plan

An audit plan does help the auditor not only to understand the scope of audit but also facilitates
smooth conduct of audit. The auditor should consider the under mentioned matters while
developing the overall audit plan;
a) The terms of his engagement and any statutory responsibilities
b) The nature and timing of reports or other communication
c) The relevant legal or statutory requirements
d) The accounting policies adopted by the client and changes therein
e) The effect of new accounting or auditing pronouncements on the audit
f) The identification of significant audit areas
g) The conditions requiring special attention, e.g., possibility of material error or fraud, or
transactions with outsiders in whom directors are interested
h) The degree of reliance, the auditor should place on accounting system and internal control
prevailing in the organization
i) The possible rotation of emphasis on specific audit areas
j) The nature and extent of audit evidence to be obtained
k) The work of internal auditors and the extent of their involvement, if any, in the audit
l) The involvement of other auditors in the audit of subsidiaries or branches of the client
m) The involvement of experts
n) The allocation of work between joint auditors and the procedures for its control
and review
o) Establishing and coordinating staffing requirements.

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The overall plan should be documented as well. The form and extent of documentation vary
depending upon the size and complexity of the audit work.

Preliminary Preparations by the Auditor

Preliminary Preparation before audit refers to initial preparations by the auditor with regard to
auditing. An auditor must prepare well before he actually conducts audit. Upon being
appointed an auditor for the first time, the auditor will have to plan out the steps he would take
before commencing the actual work.

Before commencing a new audit, an auditor has to undergo seven (7) stages.
1) The 'Agreement' with the client
2) Ascertain the scope of audit work
3) Knowledge of the client's business
4) Knowledge of the accounting system in use
5) Information about client's staff
6) Ascertain technical details
7) Instructions to and information from client.

1. Agreement with the client

The auditor of a joint stock company, limited by shares or guarantee, is appointed by the
directors or by the shareholders and in certain cases by the Central Government. Generally the
names of first auditors are proposed by the directors in the first board meeting, i.e., meeting of
board of directors soon after its incorporation. The auditors so appointed resume their office
till the first annual general meeting of the shareholders. Thus shareholders appoint the
subsequent auditors of the company. The shareholders in their general meeting may re-appoint
however the auditors appointed by the directors. If the directors or shareholders fail to appoint
or re-appoint auditors, the Central Government can make the appointment.

The auditor should ensure that his appointment in case of a joint stock company is in
accordance with the provisions of the Companies Act, otherwise he will be held liable. He

must obtain the letter of his appointment or engagement or he should get a copy of resolution
passed by the shareholders or directors in connection with his appointment. This resolution is
the most important document for auditors. Before finalizing any audit agreement, the auditor
should discuss certain important aspects of audit with his client, viz., special circumstantial
enquiry, etc. Special circumstantial enquiry means if J has been appointed to supersede
(replace) another auditor before accepting the appointment, he should enquire from his
predecessor, the reasons for the changes. He should also communicate with the outgoing

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auditor to find out:
a) Nature of audit
b) Period by which the audit report is to be the finalized and submitted to the
clients
c) Remuneration and
d) Extent of duties and responsibilities.

2. Ascertain the Scope of Audit Work-Audit Engagement Letter

The auditor must ascertain the scope of his audit work from the Statute, governing the
auditee along with instructions received from his appointing authority. Normally the scope of
audit work and the extent of the auditor's responsibilities are determined through audit
engagement letter. The letter of engagement must spell out scope of audit work in explicit
terms so as to enabling the auditor to be well prepared accordingly. Sometimes a full audit is
required whereas in certain cases, the auditor may be required to conduct the audit for a
specific purpose, e.g., a joint stock company may ask for tax audit only.
In case of any ambiguity about the audit work to be undertaken, it is advisable for the auditor
to seek the explanations from the client and prepare a list of audit requirements and forward a
copy of the same to the client.

Principal contents of audit engagement letter

The form and content of audit engagement letters may vary from each client, but they
should generally include reference to:
 The objective of the audit of financial information
 Management’s responsibility for furnishing the financial information
 The scope of the audit including reference to applicable legislation, regulations,
or pronouncements of professional bodies to which the auditor adheres to
 The form of any reports or other communication of result of the engagement
 Access to whatever records, documentation and other information requested in
connection with the audit.

The auditor may also wish to include in the letter:

 Arrangements regarding the planning of the audit
 Expectation of receiving from management written confirmation concerning
representations made in connection with the audit
 Request from the client to confirm the terms of the engagement by acknowledging
receipt' of the engagement letter
 Description of any other letters or reports he expects to issue to the client
 Basis on which fees are computed and any billing arrangements.

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When relevant, the following points could also be made:
 Arrangements concerning the involvement of other auditors and experts in
some aspects of the audit
 Arrangements concerning the involvement of internal auditors and other client's
staff
 A reference to any further agreement between the auditor and the client.

3. Knowledge of the client’s business

This refers to the entity’s operations, its ownership and governance and the types of
investments it is planning to make. Furthermore auditor should also obtain an understanding of
the investment and financing activities.

4. Knowledge of the accounting system in use

The auditor should examine the accounting system followed by the company. He should
obtain a complete list of books maintained and in use, those who maintain them and their
specimen signatures. Where there is a definite system of internal control, an auditor should ask
for a written statement in this regard and evaluate its efficacy.

5. Information about Client's Staff

The auditor should collect a list of the different principal officials of the company together
with the particulars of the work performed by them, the scope of their authority and their
specimen signatures.

6. Ascertain Technical Details

In case the client's business is of a technical nature with which the auditor is unfamiliar, he
should visit the work place and acquire some technical knowledge to develop familiarity with
the nature of the business operations. The auditor cannot be expected to be a technical expert,
but he must acquaint himself as far as possible with the technical aspects of the business
of his client.

7. Instructions to and Information from Client

i. Information from the client. The auditor should procure under mentioned
information from his client.
Nature of business:
a) Historical background of business
b) Places or locations of business
c) Details of products manufactured or goods traded in or services rendered
d) Details of raw materials used.

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Organization and personnel:
a) The chart of the organization
b) The list of directors/partners and their spicier: signatures
c) Various departments and their functions
d) Extent of authority which can be exercised by each personnel, and
e) Work done at different locations or departments, etc.

Books of account, records, etc.:

a) List of various books of account maintained by the organization
b) Copy of the audited balance sheet of the previous year ensure that the opening
balances of the current year with the closing balances of the last year.
c) Auditor's report of the previous year.
d) Copies of minutes of the resolution passed at the meeting concerning accounting
matters of the come

ii. Instructions to the client. After the above knowledge has been acquired, the
auditor will instruct the client to keep all the account ready for audit. In particular
he should issue clear instructions to his client with regard to the following:
a) The final accounts, i.e., Statement of Comprehensive Income and Statement of
Financial Position should be kept ready.
b) The cashbook and bank passbook should be duly balanced.
c) Ledger postings should be complete and all ledgers are duly balanced.
d) The vouchers should be kept serially, i.e., arranged date-wise.
e) Trial balance should be kept ready.
f) The statements/schedule concerning other financial matters should be
prepared.

i. Statement of bad/doubtful debts,

ii. Schedule of debtors and creditors,
iii. Statement of investment including cost price and market values, etc.
iv. Statement of outstanding income and expenses,
v. Statement of prepaid expenses,
vi. Stock sheet showing the value of closing stock indicating the method of valuation
of stock.
vii. A statement showing capital expenditure incurred during the period. Similarly a
list of deferred revenue expenditure should also be enclosed .

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AUDIT PROGRAMME
An auditor prepares a plan after the selection of senior and junior staffs allocating the jobs to
them, mentioning when to start, how to do the work etc. This plan is known as audit program.

An auditor should include all the procedures in written form, objectives of each sector and all
the directions which are to be given to the staffs which helps to control their works and helps to
implement such programs into action.

An audit programme is nothing but a list of examination and verification steps to be

applied set out in such a way that the interrelationship of one step to another is clearly shown
and designed on the basis of an appraisal of the accounting records of the client. Before
commencing audit, the auditor outlines the whole procedure of the audit from beginning till
its completion, from the preliminary stage of the audit till the finalization of audit report and his
signatures thereon.

Audit programme is, therefore, an outline of procedures to be followed in order to arrive at an

opinion concerning the financial statements of a business undertaking. One audit programme is
prepared for a particular audit.

Features of Audit Programme

i. Audit programme is a set of procedures to be followed to support an opinion on
the financial statements.
ii. The audit programme is invariably in black and white.
iii. It is the auditor's plan of action.
iv. It is a scheme according to which the audit work will be distributed among the
audit staff.
v. It enables the auditor to delegate work to the audit staff as per their capabilities.
vi. It enables the auditor to specify the work to be done and the manner in which it
should be completed within the estimated time.
vii. It determines the various audit techniques to be adopted and applied for
conducting the audit in efficient and effective manner.

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Objectives of Audit Programs
Audit program is the detail work plan of audit. So, it has the following objectives:
1. Audit program helps to check systematically the books of accounts which help to conduct
fair audit.
2. Audit program specifies the time period clearly, which helps to complete the work of audit
in less time.
3. To have a fair allocation of audit job amongst audit staff.
4. Assistant should sign after the completion of work which specifies the responsibility and
accountability of staffs. It also helps to prove the completion of task.
5. Review of proposed scope of audit preparing proper plan.
6. Audit program shows the way to the new staffs to perform work of audit.

Factors to be considered while Developing an Audit Programme

The audit programme must be developed with due care and Particular attention should be
given to the following:
 Exact scope of the duties of an auditor. Books of original entry and ledgers in use.
The system of bookkeeping employed, and its weaknesses if any.
 System of internal check and the extent of its reliability.
 Special provisions contained in the legal documents
(Partnership Deed, Memorandum and Articles of Association
etc.) affecting the duties of the auditor.
 General nature and routine of the business.
The audit programme should not be very rigid; it must be capable of being reviewed in view
of changing circumstances.

Types of Audit Program

Audit program can be classified into following two groups:
1. Fixed Audit Program
Generally, auditor prepares audit program on the suggestions and recommendation of assistant
staffs but such program cannot be changed during the course of audit which is known as fixed audit
program. Such program, due to pace of time or change in the situation and size of the client needs

9
to change even though it cannot be changed. Fixed audit Program can be used in all the
organizations.

Advantages of Fixed Audit Program

 Fixed audit programs are prepared once and program is used in all the organizations. So, it
saves time and cost.
 All the works are completed within the stipulated time because auditor does not change
such program on the request of assistant staff.
 Audit program fixes the responsibility of assistant staffs. So, they know their responsibility
and complete their work in time which helps to prepare and present report in time.

Disadvantages of Fixed Audit Program

 Such program is rigid. So, it cannot be used in all organizations because nature and size of
all the businesses do not remain same.
 Same program will not be useful in the big and small organizations.
 Fixed audit program is unscientific and impracticable because it does not incorporate the
changes caused by time and situation.
 Fixed audit program harasses the staffs because intelligent staffs cannot use their skill and
knowledge.
2. Flexible Audit Program
An audit program which can be changed as per the need, time, nature of business and auditing
standard is known as flexible audit program. Such program should be reviewed on the
recommendations and suggestions of assistants. Such change can be made due to change in number
of work, nature of business, change in management and their feelings. It is just taken as helping
part but assistants can use their knowledge, calibre and intelligence.

Advantages OF Flexible Audit Program

 Auditing remains effective because it can be changed if the change is made in the nature
and size of business.
 Assistant staffs remain happy because such programs are prepared incorporating to the
problems of assistant staffs.
Contents of Audit Programme

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It is somewhat difficult to mention all the items to be included while drafting an audit programme
as it varies from company and depends on the type of audit work to be carried, fresh audit
programme is required for each audit. Generally preparation for an audit programme needs the
following information:
i. Name of the company.
ii. Nature of operations of the company.
iii. A review of the system of internal check.
iv. Date of commencement of audit.
v. Tentative period of audit exercise.
vi. Accounting system followed by the company for recording its
financial transactions.
vii. Preparation of the audit report.
viii. Instructions or points of caution as mentioned by previous
year's auditor in his audit report.
ix. Schedule of checking of various subsidiary books including
journal proper.
x. Schedule of checking of ledger accounts including profit and loss account items and
balance sheet items.

Advantages of Audit Programme

Audit programme is one of the basic instruments to train the audit staff and can be used as guide
for the performance of the audit job. It offers the following advantages:
1. Audit Program Saves Time and Labour
All the directions which are to be given to assistant are clearly stated in the audit program which
helps to complete the task in time. Audit program also helps to conduct the audit of the business in
coming years which saves time and labour.

2. Audit Program Increases Efficiency

All the responsibilities of auditor are divided among the number of staffs considering their skill and
intelligence which helps to complete the work of audit properly. Similarly, the works are divided
among the assistant staffs on the basis of their calibre which helps to increase efficiency.

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 3. Audit Program Helps To Control
An auditor can compare the work performed by the assistants on the basis of audit program which
helps to control their work if there are any deficiencies.
4. Audit Program Helps To Maintain Uniformity
Works are divided among the assistant staffs; so there is no any chance of leaving non audited
statements. If the work of audit is performed on the basis of audit program every year, uniformity
can be maintained in the work of audit which helps to compare the report of various years.

5. Audit Program Helps To Make Responsible

Work of assistant is clearly defined in the audit program and assistant puts signature in the
completed work. So, if any work is left out, assistant can be made liable for such work.

6. Audit Program Helps To Maintain Continuity

Audit program clearly shows the completed task and procedures of doing work. So, if any staff
leaves the job or remains absent, new staff can easily continue the job of audit.

7. Audit Program Helps To Present As Proof

Auditor can present audit program as proof if he/she has been accused of misfeasance or
negligence and can get clearance from such accusation. Audit program can be presented in the
court also.

Disadvantages of Audit Program

Even though audit program has number of advantages, it is not free from limitations. Some of the
major disadvantages of audit program are as follows:

1. Audit Program Harasses To Staffs

All the staffs should perform task within the limitation given in audit program. So, staffs cannot use
their knowledge and calibre which harasses to them. The audit work may become too
mechanical as an audit programme gives the staff the main direction of work.

2. Possibility of Being Unsuitable

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Nature and size of business differs. So, the program which is prepared at the beginning of the year
remains unsuitable. Different organizations may have their own problems. So, similar type of
program may not be applicable to all.
3. Audit Program Increases the Chance Of Fraud
Staffs of the client get information about the audit program in advance which increases the chance
of committing frauds. Similarly, it harasses the audit staffs so they perform the work of audit
carelessly which also increases the chance of committing frauds.

4. Audit Program Is Unsuitable To Small Concern

Small concern has less transactions and work of audit can be completed in short period of time. So,
audit program is not essential to audit such concern.

5. Exclusion of Problems Of New Technology

New techniques and technologies are used in the work of accounting. Such technology creates the
problem in the work of audit but such problems and remedial measures are not included in the
audit program.

AUDIT WORKING PAPERS

Audit working papers refer to all documents prepared or gathered by the auditor, relating
primarily to set of accounts being audited and some basic information of continuing importance
affecting the company or the audit.

Working papers are the connecting link between the client'; records and the audited
accounts. These include all the evidence gathered by the auditor indicating what work has
been done by him and the procedure he has followed in verifying a particular asset or a liability.
These would come to the help of the auditor in future in case the client files a suit against the
auditor's negligence.
Audit working papers are used to support the audit work done in order to provide assurance that the
audit was performed in accordance with the relevant auditing standards. They show the audit was:

 Properly planned;
 Carried out;

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  There was adequate supervision;
 That the appropriate review was undertaken; & finally and most importantly;
 That the evidence is sufficient and appropriate to support the audit opinion.

Form and Contents of Working Papers

Auditing and Assurance Standards (AAS 3), 'Documentation', offers following guidelines in this
regard:
i. Working papers should record the auditor's planning, the nature, timing and extent of
the auditing procedures perfect: med, and the conclusions drawn from the evidence
obtained
ii. Working papers should be sufficiently completed and detail to enable an auditor to obtain
an overall understanding of an audit. The extent of documentation is a matter of
professions judgment since it is neither necessary nor practical for auditor to document
in his working papers every observation consideration or conclusion made.
iii. All significant matters, which require the exercise of judgment with the auditor's conclusion
thereon, should be included the working papers.
iv. The form and content of working papers are affected by matters such as:
a) The nature of the engagement.
b) The form of the auditor’s report.
c) The nature and complexity of the client's business.
d) The nature and condition of the client's records and degree
of reliance on internal controls.
e) The need, in particular circumstances for direction, supervision and review of
work performed by assistants.
v. Working papers should be designed and properly organized to meet the
circumstances and the auditor's need for each individual audit. The use of
standardized working papers (e.g., checklists, specimen letters) may improve the
efficiency with which they were prepared and reviewed. They facilitate the
delegation of work while providing a means to control its quality.
vi. To improve audit efficiency, the auditor normally plans with
the client to utilize schedules, analyzes other working papers
prepared by the client. In such circumstances, the auditor

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 should satisfy himself that those working papers have been
properly prepared.

Classification of Working Papers

Audit working papers contain information from accounting and statistical records, personal
observations, the results of interviews and inquiries, and other available sources. Audit working
papers may also include contract briefs, copies of correspondence, excerpts from corporate
minutes, organization charts, copies of written policies and procedures, and other substantiating
documentation. The extent and arrangement of working paper files will depend to a large measure
on the nature of the audit assignment.
Working papers are generally classified in two categories: the permanent file and the current file.
1. Permanent file.
The permanent file on each contractor is a central repository of information gathered during the
course of an audit which has continuing value and use to subsequent audits expected to be
performed at the same contractor. Permanent files are useful in preparing the audit program and in
determining the appropriate scope of subsequent audits. They also provide ready means for
auditors to become familiar with the contractor's operations and any existing audit problems or
contractor system weaknesses.

Items which would logically be included in the permanent file as having continuing value in future
audit assignments include:
i. Information concerning the legal and organizational structure of the entity such as
Memorandum and Articles of Association in case of a joint stock company and other
appropriate statutory or legal regulations.
ii. Extracts or copies of important legal documents, agreements and minutes.
iii. Analysis of significant ratios and trends.
iv. Notes regarding significant accounting policies.
v. A short description of the type of business carried on and places of business.

2. Current file

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A current file contains information primarily related to the set of accounts under audit
during the current year. The current file usually consists of working papers which have limited
use on future assignments.

Contents of current file

Following are some of the examples of audit working papers to be placed in a current file.
a) Correspondence relating to acceptance of annual appointment.
b) Evidence of the planning process of the audit and audit
programme.
c) A record of the study and evaluation of the accounting system and related internal
control. This might be in the form of narrative descriptions, questionnaire or
flowcharts, or combination thereof.
d)Analysis of transactions and balances.
e) A record of the nature, timing and extent of auditing procedures performed, and
the results of such procedures. Evidence that the work performed by assistants was
supervised and reviewed.
f) An indication as to who performed the audit procedures and when they were
performed.
g) Copies of communication with other auditors, experts and third parties.
h) Copies of letters or notes concerning audit matters communicated to or discussed
with the client including the terms of the engagement and material weaknesses in
internal control.
i) Letters of representation or confirmation received from the client.
j) The working trial balance, bank reconciliation statement.
k)Conclusion reached by the auditor concerning related aspects of the audit, including
how exceptional and unusual matters (if any) disclosed by the auditor's procedures,
were resolved or treated.
l) Copies of the financial information being reported on and the related audit reports.

The preparation of working papers assists the auditor in accomplishing the objectives of an audit
assignment. Working papers serve as the basis for the conclusions in the audit report; provide a
record of the work done for use as substantiating data in negotiations, appeals, and litigation;

16
provide guidance for subsequent examinations; and serve as a basis for the review and evaluation
of the work performed.

Audit working papers are generally prepared at the time audit work is performed and are
maintained on a current basis. Working papers normally reflect the progress of the audit and are
designed to ensure continuity of the audit effort.

Working papers should be relevant to the audit assignment and not include extraneous pages.
Superseded (outdated) working papers should be clearly marked as such and retained as part of the
working paper package.

The nature of audit working papers requires that proper control and adequate safeguards be
maintained at all times. Working papers frequently reflect information considered confidential by
the contractor and are marked “For Official Use Only” or are classified for government security
purposes.

Ownership and Custody of Working Papers

A question often arises as to who is the real owner of the audit working papers. Regarding
their ownership there has been a controversy as to whether they belong to the client or the
auditor. The client claims that these papers belong to him. He justifies his claim on the plea that
since the auditor is his agent, he has no right to retain these papers with him. On the other
hand, the auditor argues that these papers are his property on the ground that he has collected
the information for discharge of his duties. Also as a matter of professional obligation the auditor
should handover these working papers to his successor. Another argument of the auditors to have a
claim over the working papers is that the working papers provide evidence of the audit work
performed by them. These papers might come to their rescue in future in case the client files a
case against the auditors for negligence, etc.

In Sockockinsky vs. Bright Grahm and Co. (England, 1938) case, it was held that the working
papers belonged to the auditor and were not the property of the client. The court gave judgment in
favor of the auditors on the grounds that auditors were independent contractors and not the
agent of the clients. Again in Chantrey Martin and Co. vs. Martin (London, 1953) case, the court

17
held the same view and further added that where the auditor acted as a mere agent to the client
any correspondence between him (the auditor) and a third party (e.g., the Inland Revenue Authority
concerning client's tax liabilities) belonged to the client.

As per AAS 3, 'Documentation', issued by the Institute of Chartered Accountants of India, working
papers are the property of the auditor. The auditor may, at his discretion, make portions of or
extracts from his working papers available to his client. They should not, "however, be a substitute
for the client's accounting records.

The auditor should adopt reasonable procedures for safe custody and confidentiality of his
working papers and should retain them for a period of time sufficient to meet the needs of practice
and satisfy any pertinent legal or professional requirements of record retention.

AUDIT NOTEBOOK
An audit notebook refers to a record of some important and meaningful information
gathered or experienced prior to or during the course of audit. Audit note book contains
information regarding day-to-day work performed by the audit staff on any particular date. While
conducting an audit, the auditor comes across certain points which require further
clarification, explanation and investigation and he records the same in a diary
maintained for the purpose known as the audit notebook. It contains significant audit
observations, objections, queries raised and replies received thereafter correspondence
with the client, etc.
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
program, 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 may be a
part of the permanent file.

Contents of Audit Notebook

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In an audit notebook, a permanent record is kept of the following
1. Audit programme.
It has already been explained at length arty

2. Audit review notes.

During the conduct of the audit, cert. points do crop up which need further elucidation
and discussion with management. Therefore notes are taken during the work.

3. Audit queries.
During the conduct of the audit, all those vouchers, which remain insufficiently vouched,
are to be noted in the query list of the audit notebook. A complete record as to how they
were cleared and those, which remained unclear and reported to management, is also
maintained.

4. Important balances.
A note of the important closing balances particularly in respect of cash and bank
account should be noted so that after the work has been done alterations if any, in the
closing balances may not be carried out.

5. Extracts from documents.

Extracts from Memorandum and Articles of Association, agreements, contracts,
minutes of the proceedings of the directors or shareholders, etc. must be noted in the audit
notebook for ready reference.

6. Accounting statistics.
Statistics in respect of the pages of each book of original entry and the number of the
vouchers must be noted in this section. This serves two purposes. Firstly, it is a check on
the staff so that they may not indulge in wasting time. Secondly, it is intended to help
the auditor for requesting for increase in the audit fee if the comparison of accounting
statistics of the present year with the previous one reveals that the quantum of work has
gone up.
It is clear from the above discussion that an audit notebook contains general information

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in respect of audit and such significant matters observed during the audit, which may be of
considerable use at the time of finalization of reports, as well as during successive audits.

Further, if the notes have been properly taken in the audit notebook, they might prove of
great value to the auditor subsequently, in case a suit is filed against him for negligence or
misfeasance.

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Advantages or Usefulness of Audit Notebook
The main advantages of an audit notebook are as under;
1. It records all the significant information affecting the audit. The information so
recorded may be of considerable use at the time of preparation of audit reports as
well as during successive audit.
2. It ensures uniformity and assists in knowing the extent of work completed at a
particular point of time.
3. It serves as a source of information about the audit work and the points, which
deserve special attention.
4. It facilitates smooth conduct of audit.
5. It ensures that the audit programme has been followed I sincerely. Any deviation can be
traced immediately and the reasons there for can be investigated into.
6. Certain modifications are also possible in audit programme: case audit staff faces certain
practical difficulties in following j the audit programme.
7. It helps the auditor in judging the efficiency of his staff.
8. It may also help the auditor to prove that he has not acted negligently. In future, if the auditor
is charged with negligence, there audit notebook can be produced as an evidence to defend
him and to show what actual work he has done in the course of audit.

AUDIT EVIDENCE (ISA 500)

ISA 500 Audit Evidence is one of the International Standards on Auditing. It serves to expect the
auditor to obtain audit evidence from an appropriate mix of tests of control systems and substantive
tests of transaction and balances.
It requests the auditor to obtain 'sufficient' and 'appropriate' audit evidence in order to draw
reasonable conclusions on which to base the audit opinion.

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The auditor considers reliability of audit evidence collected. For instance, audit evidence is more
reliable when it exists in documentary form rather than subsequent oral representation of the
matters. Auditors consider reliability of information but involve little authentication of evidence.

Evidence in context of auditing refers to any information used by the auditor to determine
whether the quantifiable information being audited has been stated in accordance with the
established criteria. Audit evidence include data generated by accounting system in
operation, actual physical inspection of assets, documents created outside the organization as
well as internally generated, comparison of account balances between and within periods
besides ratios and other computations.

The audit evidence enables an auditor to form an opinion on financial information. In forming
such an opinion, the auditor needs not to examine all of the information available to him. He
can re conclude about an account balance, class of transactions or by way of judgmental or
statistical sampling procedures.

Obtaining evidence
Audit procedures are the procedures followed or methods used by the auditor during the
course of audit. In short obtaining audit evidence involves performing audit procedures.
Example;
If the auditors are engaged in checking the accounts payables, they will perform the following
procedures:
i. Obtain suppliers’ statements or confirmation certificates from the suppliers
ii. Compare the balances in the statements with the balances in the entity’s books.
iii. Obtain reconciliation and list outstanding invoices, debit notes and outstanding cheques
etc, for large amounts.
iv. Enquire into old and unusual items
v. Compare the balances of major suppliers with the related names and amounts in the
trial balance.
vi. Compare the total amount of account payables in the trial balance with the total amount
in the general ledger.

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Methods of obtaining audit Evidence (audit procedures)
The auditor obtains evidence through compliance and substantive procedures by one or more
of the following methods:
1. Inspection
2. Observation
3. Inquiry and confirmation
4. Computation
5. Analytical review.
6. Analytical procedure

These points are briefly explained below;

1. Inspection.
Inspection consists of examining records, documents, or tangible assets. Inspection of
records and documents provides evidence of varying degrees of reliability depending on
their nature and source and the effectiveness of internal controls over their processing. Three
major categories of documentary evidence, which provide different degrees of reliability to the
auditor, are:
a) Documentary evidence created and held by third parties;
b)Documentary evidence created by third parties and held by the
entity; and
c) Documentary evidence created and held by the entity.

Inspection of tangible assets provides reliable evidence with respect to the existence but not
necessarily as to their ownership or value.

2. Observation.
Observation consists of looking at a process or procedure being performed by others. For
example, the auditor may observe the counting of inventories by client's personnel or the
performance of internal control procedures that leave no scope for audit trial.

3. Inquiry and confirmation.

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Inquiry consists of seeking appropriate information of knowledgeable persons inside or outside
the entity. Inquiries may range from formal written inquiries addressed to third parties to
informal oral inquiries addressed to persons inside the entity. The response to an inquiry to
correct information contained in the accounting records. For example auditor normally requests
confirmation of receivables by communication with debtors.

4. Computation.
Computation consists of checking the arithmetic’s accuracy of source documents and
accounting records or independent calculations.

5. Analytical review.
Analytical review consists of studying ratios and trends and investigating unusual fluctuations in
it

Preliminary Work to be carried out by the Auditor before Commencing Actual Audit
The auditor of a newly established limited company should carry the following preliminary work
before commencing the actual audit;
A. Appointment. He should ascertain whether his appointment is in order. He should obtain a
certified true copy of the resolution of Board of Directors or shareholders (whichever is
relevant) and file it in the permanent audit file. If an auditor is being appointed in place of
the retiring auditor, he should see the requirements of the Companies Act.
B. Documents. Memorandum and Articles of Association should be obtained and
studied carefully. Particulars affecting the auditor in relation to accounts, books and
internal procedures should be noted.
C. Prospectus. Relevant matters affecting the accounts and allied information should be
examined.
D. Minute books. He should go through the directors' and shareholders' minute
books and jot down notes of important decisions.

E. Contracts. Service contracts concerning the terms of appointment and the scope of
authority in respect of officers of the company should be scrutinized. All material
contracts entered into by the company with the outsiders (e.g., with the vendors,
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 underwriters, managing agents, etc.) should be studied and important matters should be
noted.
F. Technical operations. An auditor should acquaint himself as far as possible with the
technical operations of the company. It is advisable that he should visit workshop before
starting the audit.
G. List of books. He should obtain a list of books statutory, statistical and accounting,
which are in use together with the names and duties of various clerks who are to write
them up.
H. System of accounting. A note on the system of accounting employed by the
company should be obtained.
I. Internal check. He should ascertain whether the internal check system in operation
appears in black and white in some accounting manuals. If so, he should go through the
same and carefully note any loopholes. The system, whatever exists in practice, should be
tested in all practical aspects.
J. Previous year's audited accounts and reports. With the exception of a new
company, the auditor should examine the last statement of financial position for the
purposes of checking the opening entries for the period under audit. The previous
auditor's report should also be inspected and if any qualifications are contained in it, the
possibility of their being applicable for the year under audit should be carefully examined.
K. Audit programme. He should then draft an audit programme and commence the work
of audit.

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