Audit Procedures

8 General Types of Audit Procedures for Gathering Evidence

What are Audit Procedures?

Audit procedures help auditors gather sufficient appropriate evidence to support their audit opinion. The right audit procedure should be selected to test the relevant assertions.

Uses of Audit Procedures

Risk Assessment Procedures

Tests of Controls

Substantive Procedures

8 Types of Audit Procedures

1 Inspection of Records or Documents

Examining records or documents, whether internal or external.

Vouching Tracing Scanning

2 Inspection of Tangible Assets

Physical examination of tangible assets. Provides evidence about existence of assets.

3 Observation

Looking at a process or procedure being performed by others. Evidence is limited to the point in time when observation occurs.

4 Inquiry

Seeking information from knowledgeable persons, both financial and non-financial, throughout the entity or outside the entity.

5 Confirmation

A specific type of inquiry that involves obtaining a representation of information directly from a third party. Provides highly reliable evidence.

6 Recalculation

Checking the mathematical accuracy of documents or records. Provides evidence about accuracy and valuation.

7 Reperformance

The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control.

8 Analytical Procedures

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.

1. Inspection of Records or Documents

Definition: Examining records or documents, whether internal or external.

Key Characteristics

  • Can be internal (purchase orders, invoices, checks, general and subsidiary ledgers, journal entries, worksheets, copies of sales invoices, internal memos or reports)
  • Can be external (vendor invoices, bank statements, customer confirmations, government filings such as tax returns, contracts from third parties, credit reports or correspondence from outsiders)
  • Can be original documents or copies
  • Reliability depends on source and nature of the document

Sub-types

Inspection of records includes three important sub-types:

Vouching Tracing Scanning
  • Vouching: Tests whether recorded transactions actually occurred (Occurrence/Existence)
  • Tracing: Tests whether all transactions were recorded (Completeness)
  • Scanning: General alertness to unusual items and events

Examples:

An auditor inspects:

  • A sample of purchase orders to verify that they are properly authorized and contain required information such as vendor name, date, and amount
  • Bank statements to verify cash balances and reconcile them with the company's records

1. Inspection of Records - Vouching

Definition: Testing whether recorded transactions actually occurred by examining source documents.

Key Characteristics

  • Tests whether recorded transactions actually occurred
  • Relevant assertions: Occurrence/Existence
  • Direction: FROM Accounting records TO Source documents
  • Used when auditors are concerned about overstatement of an account

Vouching Direction

Source Documents

Purchase Orders
Invoices
Receipts

←

Accounting Records

Journal
Ledger
Financial Statements

FROM Accounting Records TO Source Documents
Tests Occurrence/Existence

Example:

Vouch a sales entry in the journal to the sales invoice / shipping doc / customer order

1. Inspection of Records - Tracing

Definition: Testing whether all transactions were recorded by following source documents to accounting records.

Key Characteristics

  • Tests whether all transactions were recorded
  • Relevant assertions: Completeness
  • Direction: FROM Source documents TO Accounting records
  • Used when auditors are concerned about understatement of an account

Tracing Direction

Source Documents

Purchase Orders
Invoices
Receipts

→

Accounting Records

Journal
Ledger
Financial Statements

FROM Source Documents TO Accounting Records
Tests Completeness

Example:

Trace a purchase order to see if it was recorded in the journal

1. Inspection of Records - Scanning

Definition: The way auditors exercise their general alertness to unusual items and events in clients' documentation.

Key Characteristics

  • An "eyes-open" approach of looking for anything unusual
  • Could be done with the help of computer-assisted audit techniques (CAATs)
  • Contributes some evidence related to the Existence of assets (starting from the balance sheet, auditors look for supporting evidence from records)
  • Contributes some evidence related to the Completeness of accounting records (starting from records, auditors look for supporting evidence to the balance sheet)

💡 Purpose

Scanning helps auditors identify unusual patterns, missing items, or anomalies that may require further investigation through more detailed audit procedures.

2. Inspection of Tangible Assets

Definition: Physical examination of the tangible assets.

Key Characteristics

  • Provides evidence about existence of assets
  • Does NOT necessarily provide evidence about ownership and completeness of assets
  • Often used for inventory and PPE (Property, Plant, and Equipment)

⚠️ Important Limitation

Some inventory might be held on consignment from others and is therefore not owned by the company. Inspection doesn't test the ownership or completeness of the inventory.

Example:

An auditor physically inspects inventory in a warehouse to verify that the items listed in the inventory records actually exist and are in saleable condition. However, some inventory might be held on consignment from others and is therefore not owned by the company. Inspection doesn't test the ownership or completeness of the inventory.

3. Observation

Definition: Looking at a process or procedure being performed by others.

Key Characteristics

  • Evidence is limited to the point in time when the observation occurs
  • Useful for understanding internal controls and processes

💡 Timing Limitation

Since observation only provides evidence at a specific point in time, auditors may need to combine it with other procedures to obtain evidence about the effectiveness of controls throughout the period.

Examples:

  • An auditor observes the inventory counting process to ensure that company employees are following proper procedures for counting and recording inventory
  • An auditor observes the cash handling process at a retail store to verify that cashiers are following proper procedures for handling cash transactions

4. Inquiry

Definition: Seeking information of knowledgeable persons, both financial and non-financial, throughout the entity or outside the entity.

Key Characteristics

  • Can be formal (written) or informal (oral)
  • Provides less reliable evidence than other procedures
  • Should be corroborated with other evidence
  • Used throughout the audit process

⚠️ Reliability Consideration

Inquiry alone is not sufficient to provide sufficient appropriate audit evidence. Auditors should corroborate responses with other audit procedures.

Examples:

  • An auditor inquires of management about the company's policies for recognizing revenue and whether there have been any changes during the year
  • An auditor inquires of the accounts payable clerk about the process for processing vendor invoices and what controls are in place to prevent duplicate payments

5. Confirmation

Definition: A specific type of inquiry that involves obtaining a representation of information or an existing condition directly from a third party.

Key Characteristics

  • Provides highly reliable evidence because it comes from independent third parties
  • Commonly used for accounts receivable, accounts payable, and bank balances

Types of Confirmations

Positive Confirmations

  • Requests that the third party respond whether or not they agree with the information stated in the request
  • Provides stronger evidence because non-responses must be followed up
  • Used when individual balances are large, errors are expected, or internal controls are weak

Negative Confirmations

  • Requests that the third party respond only if they disagree with the information stated in the request
  • No response is interpreted as agreement
  • Provides less reliable evidence due to risk of non-responses going unnoticed
  • Suitable when the assessed level of risk is low, many accounts are involved, and individual balances are small

Examples:

  • An auditor sends confirmations to customers asking them to verify the amount they owe the company as of the balance sheet date
  • An auditor sends confirmations to the company's bank asking the bank to verify the cash balance and any outstanding loans as of year-end

6. Recalculation

Definition: Checking the mathematical accuracy of documents or records.

Key Characteristics

  • Involves rechecking computations performed by the entity
  • Can be done manually or using computer-assisted audit techniques
  • Provides evidence about accuracy and valuation

Examples:

  • An auditor recalculates depreciation expense by applying the company's depreciation method and rates to the asset balances to verify the accuracy of the recorded depreciation
  • An auditor recalculates the total of an accounts receivable aging report by adding up all the individual customer balances to ensure the total matches the general ledger balance

7. Reperformance

Definition: The auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control.

Key Characteristics

  • Involves independently performing the same procedure
  • Provides evidence about the effectiveness of controls
  • More reliable than observation because auditor performs it independently

💡 Difference from Observation

While observation involves watching someone else perform a procedure, reperformance involves the auditor independently executing the same procedure. This provides stronger evidence because the auditor directly experiences the procedure.

Examples:

  • An auditor reperforms the bank reconciliation that was prepared by the company's accounting staff to verify that it was done correctly and that all reconciling items were properly identified
  • An auditor reperforms the control procedure of reviewing and approving purchase orders by independently reviewing a sample of purchase orders to verify they meet the company's approval criteria

8. Analytical Procedures

Definition: Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.

Key Characteristics

  • Involves comparing current period data with prior periods, budgets, or industry data
  • Used for planning, testing, and final review
  • Can identify unusual relationships or trends that require investigation

Types of Analytical Procedures

  • Trend Analysis: Compare data over time to identify patterns
  • Ratio Analysis: Calculate and analyze financial ratios
  • Reasonableness Tests: Develop independent expectations
  • Regression Analysis: Statistical modeling of relationships
  • Industry Comparisons: Compare to industry benchmarks
  • Budget vs. Actual: Compare results to expectations

💡 When Most Effective

Analytical procedures are most effective when relationships are predictable and data is reliable. They are more efficient for completeness and valuation assertions when relationships are stable.

Examples:

  • An auditor performs analytical procedures by comparing the current year's gross profit margin (40%) with the prior year's margin (35%) and investigating the significant increase to understand if it's due to pricing changes, cost reductions, or potential misstatements
  • An auditor performs analytical procedures by calculating the accounts receivable turnover ratio and comparing it to industry averages to assess the reasonableness of the accounts receivable balance and identify potential collection issues