December 15, 2021

Working papers should record the audit plan, nature, timing and extent of auditing procedures performed, and the conclusions drawn from the evidence obtained. The form and content of working papers are affected by matters such as : Nature of the engagement.  Form of the auditor’s report. Nature and complexity of the client’s business  Nature and condition of the client’s records and degree of reliance on internal controls. Need in particular circumstances for direction, supervision and review of work performed by assistants. Working papers should be designed and properly organised to meet the circumstances of each audit and the auditor’s needs in respect thereof. The standardisation of working papers (for example, checklists, specimen letters, standard organisation of working papers) improves the efficiency with which they are prepared and reviewed. It also facilitates the delegation of work while providing a means to control its quality. Working papers should be sufficiently complete and detailed for an auditor to obtain an overall understanding of the audit. The extent of the documentation is a matter of professional judgment since it is neither necessary nor practical that every observation, consideration or conclusion is documented by the auditor in his working papers. All significant matters which require the exercise of judgment, together with the auditor’s conclusion thereon, should be included in the working papers. To improve audit efficiency, the auditor normally obtains and utilises schedules, analyses and other working papers prepared by the client. In such circumstances, the auditor should satisfy himself that these working papers have been properly prepared. Examples of such working papers are detailed analysis of important revenue accounts, receivables etc. In the case of recurring audits, some working paper files may be classified as permanent audit files which are updated currently with information of continuing importance to succeeding audit, as distinct from current audit files which contain information relating primarily to the audit of a single period. A permanent audit file normally includes : Information concerning the legal and organisational structure of the entity. In the case of a company, this includes the Memorandum and Articles of Association. In the case of a statutory corporation, this includes the Act and Regulations under which the corporation functions. Extracts or copies of important legal documents, agreements and minutes relevant to the audit.  A record of the study and the evaluation of the internal controls related to the accounting system. This might be in the form of narrative descriptions, questionnaires or flow charts, or some combination thereof. Copies of audited financial statements for previous years.  Analysis of significant ratios and trends. Copies of management letters issued by the auditor, if any. Record of communication with the retiring auditor, if any, before acceptance of the appointment as auditor.  Notes regarding significant accounting policies. Significant audit observations of earlier years. The current file normally includes : Correspondence relating to acceptance of annual reappointment. Extracts of important matters in the minutes of Board Meetings and General Meetings as relevant to audit. Evidence of the planning process of the audit and audit programme.  Analysis of transactions and balances.  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.  Copies of communication with other auditors, experts and other third parties. Letters of representation or confirmation received from the client. Conclusions reached by the auditor concerning significant aspects of the audit, including the manner in which exceptions and unusual matters, if any, disclosed by the auditor’s procedures were resolved or treated. Copies of the financial information being reported on and the related audit reports.

The audit working papers constitute the link between the auditor’s report and the client’s records. Documentation is one of the basic principles listed in AAS 1. According to AAS 3 (reproduced in Appendix I), documentation refers to working papers prepared or obtained by the auditor and retained by him in connection with performance of his audit. The objects of an auditor’s working papers are to record and demonstrate the audit work from one year to another. Therefore, working papers should provide for : means of controlling current audit work;  evidence of audit work performed;  schedules supporting or additional item in the accounts; and  information about the business being audited, including the recent history. Working papers are varied in nature but the foundation of all working paper can be traced to : the basic constitutional documents like Memorandum and Articles of Association, Partnership Deed, Trust Deed, etc.;  the contents of the minute books; the contents of the balance sheet and the profit and loss account; and  the letter of engagement.

The auditor must gather sufficient competent evidential matter as a basis for forming his opinion on :  the truth and fairness of the accounts and also their compliance with the provisions of the related laws, rules and regulations;  the proper keeping of the accounting records, and other records and related registers of the client. These broad objectives may be amplified as follows : To determine whether :  all assets and liabilities are properly stated and classified on a basis consistent with that of the previous year;  proper disclosure is made of securities for liabilities and of assets charged or secured;  the client has complied with the provisions of the applicable laws and documents created under them, loan agreements and other documents to which he is a party; income and expenses are properly classified and disclosed and are properly matched. They relate to the period in which they are reported and have been determined on a basis consistent with that of the previous year;  all contingencies and commitments are properly disclosed; no material omissions have been made in the financial statements;  no material error or inaccuracy in reporting or disclosing income, expenses, assets and liabilities has been created in the financial statements; the books and records have been properly kept in accordance with the of the client. The expression of opinion on the overall balance sheet and profit and loss account involves initially forming an opinion on each of the balance sheet or profit and loss items; it is necessary first to decide what are the essential conditions or pre-requisites for each balance sheet or profit and loss account item in order to give a true and fair view of the particular assets or liabilities or item of income or expense being represented. These conditions are well established and may be illustrated by reference to the areas of sundry debtors and sales revenues. Sundry Debtors : The audit of sundry debtors should be sufficiently comprehensive to enable the auditor to form an opinion as to whether :  The amounts shown represent bonafide receivables of the company.  The receivables are properly classified.  Adequate provisions have been made for uncollectible receivables and for discounts and freight allowable, returns adjustments, etc.  Any receivables have been pledged, discounted, assigned or sold, and if so whether they are properly disclosed. Sales Revenues : Specific objectives in the audit of sales revenues are to determine whether :  Sales accounting procedures are operating effectively to produce reliable sales revenue figures for the period. Sales revenues have been recorded in the proper accounting period and are not overstated through improper credits for fictitious sales of goods neither supplied nor set aside. Conversely, whether sales or other revenues are understated through deferring the recording thereof to subsequent periods or omitting to record sales despatched as sales.  Allowance, returns and other sales deductions are fairly stated and properly treated in the financial statements and that adequate provisions have been made for any significant additional amount that may be anticipated to be paid but not yet finally settled.  Non-operating revenues have been segregated from sales revenues and have been appropriately treated in the profit and loss statement.

As stated in the previous chapter, materiality is an important consideration for an auditor to evaluate whether the financial statements reflect a true or fair view or not. AAS 13 on “Audit Materiality” requires that an auditor should consider materiality and its relationship with audit risk while conducting an audit. When planning the audit, the auditor considers what would make the financial information materially mis-stated. The auditor’s preliminary assessment of materiality related to specific account balances and classes of transactions, helps the auditor decide such questions as what items to examine and whether to use sampling and analytical procedures. This enables the auditor to select audit procedures that, in combination, can be expected to support the audit opinion at an acceptably low degree of audit risk. Students may note that the auditor’s assessment of materiality and audit risk may be different at the time of initially planning of the audit as against at the time of evaluating the results of audit procedures.

Final or Completed or Periodical Audit : A final or completed audit is commonly understood to be an audit which does not begin until the books have closed at the end of the accounting period and thereafter is carried on continuously until completed. Whether an audit ought to be conduct continuously after the close of the financial year should be decided on a consideration of the size of the business and the extent of detailed checking required. Advantages of such an audit are : Work can be carried on till the audit is over, thus, avoiding the necessity of having to return on separate occasions to complete the work.  The possibility of figures being altered after work has been done is also avoided. Allocation of work for staff also becomes easier. Disadvantages of final or completed audit include may be mainly on account of delay which may occur after the end of the financial period particularly if size of the business is large; accounting periods of several clients may end on the same date, and thus difficulties may be experienced in allocating audit staff. Continuous audit : A continuous audit is one in which the auditor’s staff is engaged continuously in checking the accounts of the client the whole year round or when for this purpose the staff attends at intervals, fixed or otherwise, during the currency of the financial period. Strictly speaking, when auditor’s staff attends the audit work at fixed intervals it may be strictly called interim audit. This is when an audit is conducted up to a particular date within the accounting period. The auditor may attend to audit the figures for a month or for a quarter, as the work may require. It would differ distinctly from the final audit in the extent of the work carried out; verification of assets, for example would be left until the final audit. In case of continuous audit, the work is conducted throughout the course of the financial year but is not taken to a specific accounting period, as is an interim audit. It might be that during the course of the continuous work interim figures are being audited, but the significant factor here is that the auditor will be engaged continuously on the audit throughout the financial period. Staff may be in residence throughout the period or may come and go at irregular intervals, but most of the time, the audit staff is present at the location. Thus, in case of continuous audit, the audit staff is present as the client’s premises almost during the entire accounting period. Advantages : Errors are discovered earlier with the result that there is adequate time for making the necessary rectification.  Because of the frequent attendance of the auditor, the opportunities of committing frauds are reduced.  Fraud, if perpetrated, is detected sooner with the result that size of the fraud is limited and also the chances of recovering the amount lost are improved.  The attendance of the audit staff acts a moral check on the client’s staff.  The client’s accounts are always kept up-to-date.  Since audit can be carried on throughout the year, there is more time for detailed checking of the accounts when the audit is taken up at the close of the year.  If the audit of routine transactions is completed before the close of the year, the final accounts can be prepared and reported upon much earlier.  If the auditor carries on a continuous audit, he remains constantly in touch with the client’s affairs thereby able to carry out his duties efficiently.  In the case of continuous audit, the work of the auditor is greatly facilitated since he is in a better position to plan out his engagements and take up the job at his convenience, avoiding the pressure at the close of the financial year when most of the business firms usually close their accounts. Disadvantages : There is a danger that the records of transactions after they have been audited may be altered either innocently or fraudulently. The examination of an item left incomplete on a visit for being undertaking on the next visit may be overlooked.  A continuous audit may involve good deal of waste of time and effort if the size of the concern is small. The disadvantages of a continuous audit can be avoided if the following precautions are taken : During the course of each visit, work should be completed upto a definite stage so as to avoid loose ends. At the end of each visit, important balances should be noted down and the same should be compared at the time of the next visit. The visits should be at irregular intervals of time so that the client’s staff may not in advance know the exact date when the audit would be resumed and thus may be able to prepare themselves in advance for the same.  The nominal accounts should be checked only at the time of final closing.  The client’s staff should be instructed not to alter or correct audited figures. The auditor should also device a special form of ticks for being placed against figures which have been altered and neither its purpose nor significance should be disclosed to the client’s staff. Thus, it is clear from the above that final or completed audit approach is advisable in case size of the entity is very small. On the other hand, continuous audit may be followed only in case size of the entity is very large and system of internal control is weak since the great disadvantage of continuous audit is that the cost would be very high and continuous presence of audit staff may impair auditor’s independence. The interim audit conducted on quarterly or half-yearly basis is the most practicable solution.

In order than an audit may be carried out in a systematic and efficient manner, the following steps should be taken : (1) Work must be carried on regularly and record kept of time of arrival/departure of the staff and also of the work done each day; (2) As far as possible, a definite portion of the work should be completed each day so that loose ends are not left over for being tied up at a later date; (3) Entries should be made in the audit note book and the audit programme initialled as a routine; (4) Coloured pencils and different type of ticks must be employed to indicate the various audit processes which have been applied and their significance must not be disclosed to the client; (5) All the vouchers after examination must be immediately cancelled with an audit stamp; (6) Staff members should refrain from discussing the client’s affairs amongst themselves and with outsiders.

It provides the assistant carrying out the audit with total and clear set of instructions of the work generally to be done.  It is essential, particularly for major audits, to provide a total perspective of the work to be performed.  Selection of assistants for the jobs on the basis of capability becomes easier when the work is rationally planned, defined and segregated.  Without a written and pre-determined programme, work is necessarily to be carried out on the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or overlooking certain books and records. Under a properly framed programme, the danger is significantly less and the audit can proceed systematically.  The assistants, by putting their signature on programme, accept the responsibility for the work carried out by them individually and, if necessary, the work done may be traced back to the assistant.  The principal can control the progress of the various audits in hand by examination of audit programmes initiated by the assistants deputed to the jobs for completed work.  It serves as a guide for audits to be carried out in the succeeding year.  A properly drawn up audit programme serves as evidence in the event of any charge of negligence being brought against the auditor. It may be of considerable value in establishing that he exercised reasonable skill and care that was expected of professional auditor. Some disadvantages are also there in the use of audit programmes but most of these can be removed by taking some steps which otherwise also contribute to the making of a good audit. The disadvantages are : The work may become mechanical and particular parts of the programme may be carried out without any understanding of the object of such parts in the whole audit scheme.  The programme often tends to become rigid and inflexible following set grooves; the business may change in its operation of conduct, but the old programme may still be carried on. Changes in staff or internal control may render precaution necessary at points different from those originally decided upon.  Inefficient assistants may take shelter behind the programme i.e. defend deficiencies in their work on the ground that no instruction in the matter is contained therein.  A hard and fast audit programme may kill the initiative of efficient and enterprising assistants. All these disadvantages may be eliminated by imaginative supervision of the work carried on by the assistants; the auditor must have a receptive attitude as regards the assistants; the assistants should be encouraged to observe matters objectively and bring significant matters to the notice of supervisor/principal.

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

The auditor should prepare a written audit programme setting forth the procedures that are needed to implement the audit plan. The programme may also contain the audit objectives for each area and should have sufficient details to serve as a set of instructions to the assistants involved in the audit and as a means to control the proper execution of the work. In preparing the audit programme, the auditor, having an understanding of the accounting system and related internal controls, may wish to rely on certain internal controls in determining the nature, timing and extent of required auditing procedures. The auditor may conclude that relying on certain internal controls is an effective and efficient way to conduct his audit. However, the auditor may decide not to rely on internal controls when there are other more efficient ways of obtaining sufficient appropriate audit evidence. The auditor should also consider the timing of the procedures, the coordination of any assistance expected from the client, the availability of assistants, and the involvement of other auditors or experts. The auditor normally has flexibility in deciding when to perform audit procedures. However, in some cases, the auditor may have no discretion as to timing, for example, when observing the taking of inventories by client personnel or verifying the securities and cash balances at the year-end. The audit planning ideally commences at the conclusion of the previous year’s audit, and along with the related programme, it should be reconsidered for modification as the audit progresses. Such consideration is based on the auditor’s review of the internal control, his preliminary evaluation thereof, and the results of his compliance and substantive procedures.

The auditor should consider the following matters in developing his overall plan for the expected scope and conduct of the audit :  The terms of his engagement and any statutory responsibilities.  The nature and timing of reports or other communication.  The applicable legal or statutory requirements. The accounting policies adopted by the client and changes in those policies. The effect of new accounting or auditing pronouncements on the audit.  The identification of significant audit areas.  The setting of materiality levels for audit purposes.  Conditions requiring special attention, such as the possibility of material error or fraud or the involvement of parties in whom directors or persons who are substantial owners of the entity are interested and with whom transactions are likely.  The degree of reliance he expects to be able to place on accounting system and internal control. Possible rotation of emphasis on specific audit areas. The nature and extent of audit evidence to be obtained.  The work of internal auditors and the extent of their involvement, if any, in the audit. The involvement of other auditors in the audit of subsidiaries or branches of the client.  The involvement of experts.  The allocation of work to be undertaken between joint auditors and the procedures for its control and review.  Establishing and coordinating staffing requirements. The auditor should document his overall plan. The form and extent of the documentation will vary depending on the size and complexity of the audit. A time budget, in which hours are budgeted for the various audit areas or procedures, can be an effective planning tool.

It is one of the important principles in developing an overall audit plan. Infact without adequate knowledge of client’s business, a proper audit is not possible. AAS-20 on “Knowledge of the Business” deals in detail about the significance of such knowledge on the part of the auditor. The auditor needs to obtain a level of knowledge of the client’s business that will enable him to identify the events, transactions and practices that, in his judgment, may have significant effect on the financial information. Among other things, the auditor can obtain such knowledge from :  The client’s annual reports to shareholders.  Minutes of meetings of shareholders, board of directors and important committees.  Internal financial management reports for current and previous periods, including budgets, if any.  The previous year’s audit working papers, and other relevant files. Firm personnel responsible for non-audit services to the client who may be able to provide information on matters that may affect the audit. Discussions with client.  The client’s policy and procedures manual.  Relevant publications of the Institute of Chartered Accountants of India and other professional bodies, industry publications, trade journals, magazines, newspapers or text books.  Consideration of the state of the economy and its effect on the client’s business.  Visits to the client’s premises and plant facilities. With respect to the previous year’s audit working papers and other relevant files, the auditor should pay particular attention to matters that requires special consideration and decide whether they might affect the work to be done in the current year. Discussions with the client might include such subjects as :  Changes in management, organisational structure and activities of the client. Current Government legislation, rules, regulations and directives affecting the client. Current business developments affecting the client.  Current or impending financial difficulties or accounting problems.  Existence of parties in whom directors or persons who are substantial owners of the entity are interested and with whom transactions are likely. New or closed premises and plant facilities.  Recent or impending changes in technology, type of products or services and production or distribution methods.  Significant matters arising from previous year’s financial statements, audit report and management letters, if any.  Changes in the accounting practices and procedures and in the system of internal control.  Scope and timing of the examination.  Assistance of client personnel in data preparation. Relevance of any work to be carried out by the client’s internal auditors. In addition to the importance of knowledge of the client’s business in establishing the overall audit plan, such knowledge helps the auditor to identify areas of special audit consideration, to evaluate the reasonableness both of accounting estimates and management representations, and to make judgments regarding the appropriateness of accounting policies and disclosures.

As per Auditing and Assurance Standard 1, “Basic Principles Governing an Audit”, Audit Planning is one of the basic principles. Accordingly, it states : “The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business. Plans should be made to cover, among other things :  acquiring knowledge of the client’s accounting systems, policies and internal control procedures;  establishing the expected degree of reliance to be placed on internal control;  determining and programming the nature, timing, and extent of the audit procedures to be performed; and  coordinating the work to be performed. Plans should be further developed and revised as necessary during the course of the audit.” AAS-8 further expounds this principle. According to it, planning should be continuous throughout the engagement and involves : developing an overall plan for the expected scope and conduct of the audit; and  developing an audit programme showing the nature, timing and extent of audit procedures. Changes in conditions or unexpected results of audit procedures may cause revisions of the overall plan of and the audit programme. The reasons for significant changes may be documented. Objectives of Planning : Adequate audit planning helps to : ensure that appropriate attention is devoted to important areas of the audit; ensure that potential problems are promptly identified;  ensure that the work is completed expeditiously;  utilise the assistants properly; and co-ordinate the work done by other auditors and experts. In planning his audit, the auditor will consider factors such as complexity of the audit, the environment in which the entity operates, his previous experience with the client and knowledge of the client’s business. The auditor may wish to discuss elements of his overall plan and certain audit procedures with the client to improve the efficiency of the audit and to coordinate audit procedures with work of the client’s personnel. The overall audit plan and the audit programme, however, remain the auditor’s responsibility.