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    Audit Methodologies

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    Ahmed639
    The document describes various audit methodologies used by auditors: risk based audit, top down approach, system audit, balance sheet approach, and directional testing. It provides details on each methodology, including that risk based audit focuses more procedures on higher risk areas like inventory rather than lower risk areas like property, and that the top down approach emphasizes high-level controls and governance over detailed procedural controls with reduced substantive testing. Directional testing checks for errors by starting with accounting records and tracing transactions, or checks for omissions by starting outside records and tracing back.

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    Audit Methodologies

    Uploaded by

    Ahmed639
    458 views3 pages
    The document describes various audit methodologies used by auditors: risk based audit, top down approach, system audit, balance sheet approach, and directional testing. It provides details on each methodology, including that risk based audit focuses more procedures on higher risk areas like inventory rather than lower risk areas like property, and that the top down approach emphasizes high-level controls and governance over detailed procedural controls with reduced substantive testing. Directional testing checks for errors by starting with accounting records and tracing transactions, or checks for omissions by starting outside records and tracing back.

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    Audit Methodologies p7

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    The document describes various audit methodologies used by auditors: risk based audit, top down approach, system audit, balance sheet approach, and directional testing. It provides details on each methodology, including that risk based audit focuses more procedures on higher risk areas like inventory rather than lower risk areas like property, and that the top down approach emphasizes high-level controls and governance over detailed procedural controls with reduced substantive testing. Directional testing checks for errors by starting with accounting records and tracing transactions, or checks for omissions by starting outside records and tracing back.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    458 views3 pages

    Audit Methodologies

    Uploaded by

    Ahmed639
    The document describes various audit methodologies used by auditors: risk based audit, top down approach, system audit, balance sheet approach, and directional testing. It provides details on each methodology, including that risk based audit focuses more procedures on higher risk areas like inventory rather than lower risk areas like property, and that the top down approach emphasizes high-level controls and governance over detailed procedural controls with reduced substantive testing. Directional testing checks for errors by starting with accounting records and tracing transactions, or checks for omissions by starting outside records and tracing back.

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    You are on page 1of 3

    AUDIT METHODOLOGIES

    The audit strategy document describes the audit methodology to be used in


    gathering evidence.
    Following are the main methodologies currently used by the auditors:
    1.
    2.
    3.
    4.
    5.

    Risk Based Audit.


    Top down approach.
    System audit.
    Balance sheet approach.
    Directional testing

    Risk based audit:


    Consider for example you are auditing a small manufacturing company. The
    company owns the land and building in its statements of financial position which it
    depreciates over 50 years and has always been valued at cost. The other major
    item is inventory.
    Now considering the nature of business, inventory is likely to be far more complex.
    The chance of audit engagement partner drawing an inappropriate conclusion about
    inventory is higher than the risk in connection with land and building.
    Under risk based auditing the auditor will do less work on land and building and will
    apply more audit procedures on inventory.

    Top down approach:


    With a top down approach also known as business risk approach, controls testing is
    aimed at high level controls and substantive testing is reduced. Following such
    approach the auditor:
    1. Pays greater attention to high level controls such as control environment and
    corporate governance rather than the detailed procedural controls testing
    under traditional approaches
    2. Apply analytical procedures more heavily to understand the entitys business
    rather than to prove financial statement figures.
    3. Reduce its substantive testing.

    Page

    Advantages:
    1. Added value to the clients as the approach focuses on the business as a
    whole.
    2. Increase efficiency and reduce cost as substantive testing is reduced.
    3. Responds to the importance that regulators and government have placed on
    corporate governance in recent years.
    4. Lower engagement risk through broader understanding of the clients
    business and practices.

    Systems audit:
    Also known as traditional approach to auditing in which auditor assesses the system
    of controls (such as for sales, purchases, payroll, receipts and disbursements) put in
    place by the management and ascertain whether they are effective enough for the
    auditors to reduce their substantive procedures.

    Balance sheet approach:


    Under this approach the auditor seek to concentrate efforts on substantiating the
    closing position in the year, shown in the statement of financial position, having
    determined that the closing position from the previous year has been correctly
    transferred to be the opening balance in the current year.
    Such an approach can be undertaken with reduced element of substantive testing
    under business risk approach.
    Such approach is effective for small companies whose financial statement contains
    very few material items and there are no sophisticated controls in such a company.
    But it can be costly as substantive procedure usually takes time to be performed.

    Directional testing:
    It is a method of undertaking detailed substantive testing. Substantive testing seeks
    to discover errors and omissions and the discovery of these will depend on the
    direction of the test.
    Broadly speaking, substantive procedures can be said to fall in to two categories:
    1. Test to discover errors (resulting in over or understatement)
    2. Test to discover omissions (resulting in understatements)
    Test to discover errors:
    Such test starts with accounting records in which transactions are recorded and
    then trace to supporting documents.

    Page

    Example if the test is to check sales are priced correctly, the test would begin with a
    sales invoice selected from the sales ledger. Prices would then be checked to the
    official price list.

    Test to discover omissions:


    These test start outside the accounting record and then check back to those
    records.
    Example if the test is designed to discover whether all raw material purchases have
    been properly processed, the test would start say with goods received notes, to be
    checked to the inventory records or purchase ledger.
    Directional testing is particularly useful when there is high level of detailed testing
    to be carried out for example when the auditors have assessed the companys
    controls and accounting systems as ineffective.

    Page

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