Selection of the appropriate audit procedure is again a matter of experience and judgment. Take extreme example of contingent liability in respect of pending suits : no entry or other records for this would be available to the auditor; verification of the estimate of the liability would become difficult for lack of basis. In such cases it would be more reasonable for the auditor to get the estimate confirmed by the solicitors of the company. In addition, he should examine the correspondence pertaining to the case and should discuss the matter with the company’s officials. If the company was involved in a similar suit in the past, by going through the records thereof; the auditor would be able to pull out relevant considerations for estimating the liability. In any case the auditor is not precluded from making his own estimate on the basis of similar cases reported in the law journals.
The normal procedure for verification of cash balance is counting but this is not practicable in respect of the cash-in-transit. The auditor has to think in advance about the possibilities of departure from the normal procedure and the areas likely to be affected thereby. The procedure should provide for such situations in the programme.
It has been emphasised earlier that all available evidence should be used by the auditor but it is not intended to stretch it too far. Sometimes evidence collection becomes costly both in terms of money and time involved. If you are checking the cost of a building constructed by the client in addition to having recourse to all internal evidence, you may have the temptation of getting an independent valuation certificate by a professional valuer. This would be an unwise course in the absence of any suspicious circumstances- it would cost the company a lot of money for procuring that evidence for the satisfaction of the auditor; it may also give rise to an unwarranted feeling suspicion about the bonafide of the management, though there was no evidence available with the auditor to suggest it. The auditor must be cautious and reasonable in his attitude. If, however, the situation was otherwise, i.e., the evidence
normally made available to the auditor failed to provide him with satisfactory evidence about the cost incurred, it may be absolutely necessary for him to insist on an independent valuation. While collecting audit evidence through an audit procedure, the auditor collects the same by employing different techniques. In order to verify a particular item in financial statements, say, cash, he may have to collect audit evidence from different sources. For instance, in case of cash at bank, reference may be made to bank column in cash book, reference to bank reconciliation statement followed by examination of bank statement/bank pass book. Further, the auditor may like to obtain confirmation from the client’s asset. During all this process, the auditor would have to see that audit evidence obtained from different sources does not contradict each other and the cost of obtaining more and more audit evidence is
justified by the benefit flowing from obtaining such evidence.
Possibility of fraud and error is ruled out while framing the audit programme. The auditor should prescribe procedures and techniques keeping this possibility in view. If he undertakes a review and testing of internal controls and checks before or while drawing up the programme, he would reasonably be in a position to focus his attention on the matters where this possibility is rather great. The consideration of the auditor should be specifically directed to provide for the discovery of serious errors and frauds, the potential of which is great. The possibility of other errors which are generally not of great consequence can be left open to be observed and discovered in the course of normal evidence collection process.
Co-ordination of the procedures : Knowledge about accounting may be conveniently used in assembling the procedures in the most rational and natural manner. Fixed assets, like plant and machinery or buildings are directly linked with charges for repairs, maintenance and depreciation; purchase is linked with inward freight and sales with outward freight, sales tax and excise duty; earnings from investments bear a relationship with the investments. Hence, in assembling the procedures and methods, if the related items are grouped together, the programme becomes cohesive, comprehensive, purposeful and easy to coordinate; the work can also he conveniently distributed amongst assistants on the basis of the groupings so that, say the assistant assigned the work in connection with plant and machinery would be responsible for carrying out also the related work, e.g., repairs and depreciation. This would help easy flow of work with the least possibility of any information gap to the assistant concerned.
