It is desirable that in respect of each audit and more particularly for bigger audits an audit programme should be drawn up. Audit programme is nothing but a list of examination and verification steps to be applied set out in such a way that the inter-relationship of one step to another is clearly shown and designed, keeping in view the assertions discernible in the statements of account produced for audit or on the basis of an appraisal of the accounting records of the client. In other words, an audit programme is a detailed plan of applying the audit procedures in the given circumstances with instructions for the appropriate techniques to be adopted for accomplishing the audit objectives. Businesses vary in nature, size and composition; work which is suitable to one business may not be suitable to others; efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor are the other factors that vary from assignment to assignment. Because of such variations, evolving one
audit programme applicable to all business under all circumstances is not practicable. However it becomes a necessity to specify in detail in the audit programme the nature of work to be done so that no time will be wasted on matters not pertinent to the engagement and any special matter or any specific situation can be taken care of.
To start with, an auditor having regard to the nature, size and composition of the business and the dependability of the internal control and the given scope of work, should frame a programme which should aim at providing for a minimum essential work which may be termed as a standard programme. As experience is gained by actually carrying out the work, the programme may be altered to take care of situations which were left out originally, but are found relevant for the particular concern. Similarly, if any work originally provided for proves beyond doubt to be unnecessary or irrelevant, it may be dropped. The assistant engaged in the job should be encouraged to keep an open mind beyond the programme given to him. He should be instructed to note and report significant matters coming to his notice, to his seniors or to the partners or proprietor of the firm engaged for doing the audit. There should be periodic review of the audit programme to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions. Unless this is done, any change in the business policy of the client may not be adequately known, and consequently, audit work may be carried on, on the basis of an obsolete programme and, for this negligence, the whole audit may be held as negligently conducted and the auditor may have to face legal consequences. For example, if the audit programme for the audit of a branch of a financing house, drawn up a number of years ago, fails to take into consideration that the previous policy of financing of a vehicle has been changed to financing of real estate acquisition, the whole audit conducted thereunder would be entirely
misdirected and may even result into nothing more than a farce. [Pacific Acceptance Corporation Ltd. v. Forsyth and Others.]
The utility of the audit programme can be retained and enhanced only by keeping the programme as also the client’s operations and internal control under periodic review so that inadequacies or redundancies of the programme may be removed. However, as a basic feature, audit programme not only lists the tasks to be carried out but also contains a few relevant instructions, like the extent of checking, the sampling plan, etc. So long as the programme is not officially changed by the principal, every assistant deputed on the job should unfailingly carry out the detailed work according to the instructions governing the work. Many persons believe that this brings an element of rigidity in the audit programme. This is not true provided the periodic review mentioned earlier is undertaken to keep the
programme as up-to-date as possible and by encouraging the assistants on the job to observe all salient features of the various accounting functions of the client.
An audit programme consists of a series of verification procedures to be applied to the financial statements and accounts of a given company for the purpose of obtaining sufficient evidence to enable the auditor to express an informed opinion on such statements. For the purpose of programme construction, the following points should be kept in view :
1. Stay within the scope and limitation of the assignment.
2. Determine the evidence reasonably available and identify the best evidence for deriving the necessary satisfaction.
3. Apply only these steps and procedures which are useful in accomplishing the verification purpose in the specific situation.
4. Consider all possibilities of error.
5. Co-ordinate the procedures to be applied to related items.
Amplification is not necessary of the above points except the one under evidence : that is the very basis for formulation of opinion and an audit programme is designed to provide for that by prescribing procedures and techniques. What is best evidence for testing the accuracy of any assertion is a matter of expert knowledge and evidence. This is the primary task before the auditor when he draws up the audit programme. Transactions are varied in nature and impact; procedures to be prescribed depend on prior knowledge of what evidence is reasonably available in respect of each transaction. By evidence we mean the material, documentary or otherwise, available to prove or disprove the assertions made in the statement of accounts through the entries in the books of account. For example sales is evidenced by :
- invoices raised by the client;
- price list;
- forwarding notes to client;
- stock-issue records;
- sales managers’ advice to the stock section;
- acknowledgements of the receipt of goods by the customers, and
- collection of money against sales by the client.
In most of the assertions much of the evidence be drawn and each one should be considered and weighed to ascertain its weight to prove or disprove the assertion. In this process, an auditor would be in a position to identify the evidence that brings the highest satisfaction to him about the appropriateness or otherwise of the assertion.
You may recall from chapter 2 on basic concepts in auditing that an auditor picks up evidence from a variety of fields and it is generally of the following broad types :
- Documentary examination
- Physical examination
- Statements and explanation of management, officials and employees
- Statements and explanations of third parties
- Arithmetical calculations by the auditor
- State of internal controls and internal checks
- Inter-relationship of the various accounting data
- Subsidiary and memorandum records
- Minutes
- Subsequent action by the client and by others.
By “good evidence” we mean a highly satisfactory evidence available without any special effort or cost. For cash in hand the best evidence is ‘count’; in respect of investment pledged with a bank, the banker’s certificate. For verifying assertions about book debts, the client’s ledger invoices, debit notes, credit notes, monthly accounts statement sent to the customers are all evidence : some of these are corroborative, other being complementary. In addition, balance confirmation procedure is often resorted to, to obtain greater satisfaction about the reliability of the assertion. The auditor, however, has to place appropriate weight on each piece of evidence and accordingly should prescribe the priority of verification. It is true that in all cases one procedure may not bring the highest satisfaction and it may be
dangerous for the auditor to ignore any evidence that is available. By the word “available” we do not mean that the evidence available with the client is the only available evidence. The auditor should know what normally should be available in the context of the transaction having regard to the circumstances and usage. For testing the authenticity of the client as regards amount lying with bank, the auditor adopts the following procedure :
1. Examination of the counterfoils of cheques and paying-in-slips and comparing them with the entries in the concerned ledger account of the client.
2. Checking the castings, carry over and balances of the ledger account.
3. Comparison of the entries in the ledger with the bank statement (this is the reproduction of the
ledger account maintained by the bank for recording the transactions with the client).
4. Examination of the bank reconciliation statement to know the items that explain the difference, if
any, between the balance shown by client’s ledger and the bank statement.
5. Scrutiny of the subsequent period’s bank statement to ensure that items entering for reconciliation
have been duly entered by the bank on clearance or presentation.
6. Verification of official confirmation of the balance by the bank.
If you analyse these procedures, you will see that each provides the auditor with some evidence which by itself is not adequate even if the result is satisfactory. The first one proves that the entries conform to the underlying records, but the prima facie authenticity of the underlying record is corroborated by a checking of the bank statement. The second provides evidence of the arithmetical accuracy. Procedure under step four, screens the items of difference between the two records and the bonafide of that statement is proved by step five. Sixth and the last step is most significant because the reliability of the bank statement is much enhanced by confirmation of the balance on a specified date made by a responsible official of the bank. But all these cannot give the auditor a degree of confidence or conclusiveness because he has no access to the bank’s books and records. Therefore, he must be contended with the best available evidence to arrive at a reasonable opinion. At times, the available evidence on a single assertion may be found to be contradictory. For example, sales in quantity and value, as evidenced by some of the procedures enumerated above, may not be corroborated by a quantitative analysis of the opening stock, production, sales and closing stock. In such a situation, it would be the duty of the auditor to call for the explanation of the management before he accepts or rejects any of the contradictory evidence for the purpose of formulation of his opinion on
the particular matter. Only by properly considering and evaluating the explanation of the management, the auditor is in such a situation as would enable him to accept or reject any of the evidence.
