Basics of Audit

Program
SALAHUDDIN K. SHAMEEM, ACA
Proprietor and CEO
Shameem Khaled Salahuddin & Co.
Chartered Accountants
 1. What is audit program, Its importance,
contents of audit program.

AGENDA 2. Audit procedures- meaning, necessity etc.

3. Basic procedures to be followed- Logic test,

Walkthrough test, variance analysis,
reasonableness test, 3-way match, Cut off
test etc.

2
 What is audit
program, Its
importance, contents
of audit program.
 What is audit
program?
• An audit program is a set of procedures,
processes, and activities designed to
perform an audit on a specific subject or
area.
• It is a detailed plan that outlines the
steps an auditor will follow during an
audit engagement, including the
objectives of the audit, the scope of the
audit, the audit procedures, and the
timeline for completing the audit.

Basics of Audit Program 4

Audit program
(cont’d..)
• The purpose of an audit program is to
provide guidance and structure to
auditors to ensure that they cover all
necessary areas of an organization's
operations or financial statements, and
to facilitate consistent and thorough audits
across different audit engagements.
• The program is developed based on the
organization's risks, controls, and
objectives, and it serves as a roadmap for
the audit team to follow.

Basics of Audit Program 5

 Audit program
(cont’d..)
• Audit programs can vary depending on
the type of audit being performed, such as
a financial statement audit, operational
audit, compliance audit, or information
technology audit.
• The program will typically include steps
to gather evidence, evaluate internal
controls, identify risks and weaknesses,
and make recommendations for
improvement.

Basics of Audit Program 6

Audit program
(cont’d..)
• An audit program typically includes an assessment of
the company's internal control systems, a review of
financial transactions and records, and an examination
of financial statements to ensure that they comply with
applicable accounting standards and regulations.
• The program may also include testing of specific
transactions or processes to identify any errors, fraud,
or other irregularities.
• Overall, the purpose of an audit program is to provide
a framework for auditors to plan, perform, and
document their work in a systematic and effective
manner. This helps to ensure that the audit is
conducted in accordance with applicable standards, and
that the auditor's findings are reliable and objective.

Basics of Audit Program 7

 Documentation
The working papers must be
sufficiently complete and detailed
Documentation means the to provide an overall
understanding of the audit.
material/working papers (WP)
prepared by, or for, or obtained In particular, the working papers
and retained by, the auditor in should record the auditor’s Permanent file – matters of
connection with the reasoning on all significant continuing interest e.g., loan
matters which require the exercise agreements, title deeds,
performance of the audit. Such of judgement, and the auditor’s systems documentation,
material may be in the form of conclusions thereon. TIN, BIN, Trade License,
paper or electronic media. MOA & AOA, IRC, ERC, etc.

Working papers are usually split

into two separate files:
Current file – matters of this
year’s interest e.g., bank
letter, results of audit tests.

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Materiality
• Assessing materiality is a matter of professional judgement and is not
a mechanical exercise.
• Each company must be considered with reference to its unique
circumstances and the informational needs of the users of the financial
statements.
• Common measures for initial assessment of materiality: 0.5% – 1% of
revenue; 5 – 10% of profit before tax; 1 – 2% of total assets
• Materiality should be reassessed during the audit in response to
further information or risk arising. 9
Materiality
• The threshold for materiality is
the amount or percentage
below which
misstatements are
considered trivial and
above which
misstatements are
considered material.

10
Materiality

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Audit Sampling

Audit sampling is the process The purpose of audit

of selecting and examining sampling is to draw
a subset of a population of conclusions about the
transactions or account entire population based on
balances, to obtain evidence the examination of a
about the entire population. sample.

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Financial Statements Assertions

13
Internal
Control
Systems
(Example)

14
Importance of audit
program
• An audit program is essential for ensuring that an audit is
conducted in a thorough, consistent, and objective manner.
• Key reasons why an audit program is important:
• Provides a systematic approach: An audit program
provides a systematic approach to conducting an audit. It
outlines the specific steps that need to be taken to ensure that
the audit is comprehensive and covers all relevant areas.
• Ensures consistency: An audit program helps ensure that
the audit is conducted consistently across different audits. This
is particularly important in cases where multiple auditors are
involved or where the same auditor conducts audits for
different clients.

Basics of Audit Program 15

Importance of audit
program
• Facilitates planning: An audit program helps auditors plan the
audit effectively. It enables them to identify the key areas to
focus on, allocate resources, and set timelines for
completing different parts of the audit.
• Improves efficiency: An audit program can help improve the
efficiency of the audit. It ensures that auditors are focusing on the
most important areas and not wasting time on less significant
areas.
• Increases reliability: An audit program helps to ensure that the
audit findings are reliable and objective. It provides a framework
for testing and reviewing financial records, transactions, and internal
controls, which helps to identify any errors, omissions, or irregularities.
Overall, an audit program is an important tool for auditors to conduct
effective and efficient audits that are reliable and objective. It helps to
ensure that the audit is conducted in accordance with applicable
standards, and that the auditor's findings are well-supported and
defensible.

Basics of Audit Program 16

 The contents of an audit program can vary depending on the specific
objectives of the audit and the scope of work. However, a typical audit
program will generally include the following components:
• Objective and Scope: The objectives and scope of the audit are
defined and documented to ensure that the audit is aligned with the
expectations of the stakeholders.

Contents of • Audit Plan: A detailed plan is created that outlines the specific
steps and procedures to be followed during the audit. This includes
identifying key risks, selecting appropriate audit procedures, and
audit determining the sample size and method of selection.
• Audit Procedures: The audit procedures are documented, including
program. the specific tests and techniques that will be used to verify and
validate the financial information and other data.
• Audit methodology: This section describes the specific audit
procedures that will be used, such as examining records, conducting
interviews, and reviewing internal controls.
• Risk assessment: This section identifies the key risks associated
with the audited area and describes the steps that will be taken to
mitigate those risks.

Basics of Audit Program 17

 • Timing: The timing of the audit is determined, including the period to
be audited and the dates for fieldwork and reporting.
• Audit Team: The personnel assigned to the audit are identified,
including their roles and responsibilities, qualifications, and
experience.
• Documentation: The documentation requirements for the audit
are defined, including the types of documents that will be reviewed
and the method of documentation.
Contents of • Quality control: The audit program should include procedures for
quality control. This includes reviewing the work of other auditors
audit involved in the audit and ensuring that the audit is conducted in
accordance with applicable standards and regulations.
• Reporting: The reporting requirements for the audit are defined,
program. including the format, timing, and contents of the audit report.
• Follow-up: Procedures for follow-up on audit findings and
recommendations are established to ensure that corrective actions
are taken in a timely and effective manner.
Overall, the purpose of an audit program is to provide a comprehensive
and structured framework for conducting an audit that meets the
objectives and expectations of the stakeholders. It helps to ensure that
the audit is conducted efficiently, effectively, and in accordance with
applicable standards and regulations.

Basics of Audit Program 18

Audit procedures-
meaning, necessity
etc.
What is the meaning of
audit procedures?
• Audit procedures are specific tasks or
actions performed by an auditor to obtain
audit evidence and to evaluate the accuracy,
completeness and validity of an
organization's financial statements, internal
controls, or other aspects of its operations.
• Audit procedures are designed to help an
auditor meet the audit objectives and to
gather sufficient and appropriate evidence to
support the auditor's opinion.

Basics of Audit Program 20

Examples of audit
procedures…
Examples of audit procedures include:
• Inspection of documents and records: This involves reviewing documents such as
invoices, receipts, bank statements, contracts, and other financial
records to verify their accuracy and completeness.
• Observation of activities: This involves observing physical activities, such as
counting inventory or observing internal control procedures, to evaluate
the effectiveness of internal controls.
• Inquiry of personnel/management: This involves interviewing employees or
management to gather information about the organization's operations,
internal controls, and financial transactions.
• Analytical procedures: This involves analyzing financial data and trends to identify
potential errors, fraud, or other irregularities.
• Tests of control and details: These are procedures that involve testing individual
transactions or account balances to determine their accuracy, completeness, and
validity.
Examples of tests of details include inspection of documents,
confirmation with third parties, and recalculations.
• Reconciliation of accounts: This involves reconciling financial accounts, such as
bank statements or accounts receivable, to verify their accuracy and
completeness.

Basics of Audit Program 21

 What is the necessity of audit
procedures?
• Audit procedures are essential in ensuring that an audit is
conducted in a thorough, effective, and objective manner. Here are
some of the key reasons why audit procedures are necessary:
• Provide a structured approach: Audit procedures provide a
structured approach to conducting an audit. They outline the
specific steps and methods that need to be followed to ensure
that the audit is comprehensive and covers all relevant areas.
• Enable risk assessment: Audit procedures help identify and
assess the risks associated with the audit. They enable auditors to
focus on the most critical areas of the audit and allocate
resources effectively.
• Ensure consistency: Audit procedures ensure that the audit is
conducted consistently across different audits. They provide a
standardized approach that enables auditors to conduct audits in
a consistent and reliable manner.

Basics of Audit Program 22

Necessity of audit
procedures (cont’d…)
• Facilitate documentation: Audit procedures facilitate
documentation of the audit process and findings. They
ensure that auditors record their observations,
conclusions, and recommendations accurately and
objectively.
• Enhance credibility: Audit procedures enhance the
credibility of the audit process and the resulting audit
report. They provide a transparent and objective
framework for evaluating the organization's financial
statements and other aspects of its operations.
Overall, audit procedures are essential in ensuring that an
audit is conducted in accordance with applicable standards,
regulations, and best practices. They help to ensure that the
audit process is thorough, effective, and objective, and that
the resulting audit report is reliable and credible.

Basics of Audit Program 23

 Basic procedures to be
followed- Logic test,
Walkthrough test, variance
analysis, reasonableness test,
3-way match, Cut off test etc.
 Logic test is a type of audit procedure that checks the
accuracy and completeness of calculations and data in
financial statements and other financial records. The
logic test examines the relationships between different
pieces of financial data to ensure that they are
consistent and make logical sense.
• For example, suppose an auditor is reviewing the financial
Logic Test statements of a manufacturing company. The auditor wants to
perform a logic test on the company's inventory turnover ratio,
which is calculated as the cost of goods sold divided by average
inventory.
• To perform the logic test, the auditor would first calculate the
inventory turnover ratio using the data in the financial
statements. The auditor would then compare the calculated ratio
with industry benchmarks and the company's historical
performance to assess the reasonableness of the result.

Basics of Audit Program 25

 Next, the auditor would examine the data used to
calculate the ratio to ensure that it is accurate and
complete. The auditor would verify that the cost of
goods sold (COGS) and the inventory balance are
correctly recorded in the financial statements and that
the average inventory is calculated correctly.
• Finally, the auditor would evaluate the relationship
between the inventory turnover ratio and other
financial data, such as sales revenue and gross profit
Logic Test margin. The auditor would ensure that these data are
consistent with the calculated inventory turnover ratio
and make logical sense.
Overall, the logic test is an important audit
procedure that helps to identify errors and
inconsistencies in financial data and ensure the
accuracy and completeness of financial
statements
Basics of Audit Program 26
 Walkthrough test
• A walkthrough test is a type of audit procedure that
involves following a transaction or process from
start to finish to evaluate its effectiveness and
identify any potential risks or control weaknesses.
• The purpose of a walkthrough test is to gain a
comprehensive understanding of the
transaction or process and to evaluate its design
and implementation.
• Here's an example of a walkthrough test in an audit
program for accounts payable:
• Objective: To test the effectiveness of the accounts
payable process and identify any control
weaknesses or risks.

Basics of Audit Program 27

 Procedure:
• Obtain a copy of the accounts payable process flowchart and review it to
gain an understanding of the process.
• Select a sample of accounts payable transactions and follow them from the
point of receipt of the invoice to the point of payment.
• Review the supporting documentation for each transaction, such as
purchase orders, invoices, and payment authorization forms, and ensure
that they are properly authorized and approved.

Walkthrough • Verify that the invoice amounts are accurate and that they match the
purchase order and receiving report.

test • Trace the payment from the accounts payable ledger to the general ledger
and ensure that it is properly recorded and classified.
• Review the accounts payable aging report and ensure that outstanding
invoices are properly aged and that payments are made in a timely
manner.
• Evaluate the effectiveness of controls such as segregation of duties,
authorization and approval procedures, and review and reconciliation of
accounts.
• Document the results of the walkthrough test and report any findings to
management.
Basics of Audit Program 28
 In this example, the walkthrough test involves following a
sample of accounts payable transactions from start to
finish to evaluate the effectiveness of the accounts
payable process and identify any control weaknesses or
risks.
By reviewing the supporting documentation and tracing
Walkthrough the payment from the accounts payable ledger to the
general ledger, auditors can ensure that the process is
test functioning effectively and accurately. Evaluating the
effectiveness of controls such as segregation of duties and
authorization procedures helps to identify any potential
risks or control weaknesses in the process.
This helps to ensure that the accounts payable process is
functioning effectively and that the financial statements
accurately reflect the organization's liabilities.

Basics of Audit Program 29

 Variance Analysis
• Variance analysis is a type of audit procedure
that involves analyzing the differences
between actual results and expected results to
identify any significant variances and
investigate the reasons for them.
• The purpose of variance analysis is to
evaluate the accuracy of financial information
and to identify any potential risks or control
weaknesses.
• Here's an example of variance analysis in an
audit program for sales revenue:
• Objective: To test the accuracy of sales
revenue and identify any significant variances.

Basics of Audit Program 30

 Procedure:
• Obtain a copy of the sales revenue budget and compare it to the
actual sales revenue for the period under audit.
• Calculate the variance between the budgeted sales revenue and
the actual sales revenue and identify any significant variances.
• Investigate the reasons for the significant variances by
reviewing the sales records and other relevant documentation.
• Verify the accuracy of the sales records and ensure that they are
Variance properly authorized and approved.

Analysis • Review the sales invoice processing and ensure that it is

functioning effectively and that sales invoices are being recorded
accurately and in a timely manner.
• Test the completeness and accuracy of sales revenue by comparing
the sales records to the supporting documentation such as
customer orders, shipping records, and payment receipts.
• Evaluate the effectiveness of controls such as review and approval
of sales orders and invoices, and segregation of duties.
• Document the results of the variance analysis and report any
findings to management.

Basics of Audit Program 31

 Variance analysis involves comparing the budgeted sales
revenue to the actual sales revenue and identifying any
significant variances. By investigating the reasons for the
significant variances and verifying the accuracy of the sales
records, auditors can ensure that the sales revenue is accurate
Variance and reliable.

Analysis Testing the completeness and accuracy of sales revenue

helps to identify any potential risks or control weaknesses in
the sales process.
Summary Evaluating the effectiveness of controls such as review and
approval of sales orders and invoices, and segregation of
duties helps to ensure that the sales process is functioning
effectively and that the financial statements accurately
reflect the organization's sales revenue.

Basics of Audit Program 32

 • Reasonableness testing is a type of audit procedure that
involves evaluating financial information to
determine whether it is reasonable based on
expectations and industry norms.
• The purpose of reasonableness testing is to evaluate the
Reasonableness accuracy and completeness of financial information and
identify any potential risks or control weaknesses.
test Here's an example of reasonableness testing in an audit
program for accounts receivable:
• Objective: To test the accuracy and completeness of
accounts receivable and identify any potential risks or
control weaknesses.

Basics of Audit Program 33

 Procedure:
• Obtain a copy of the accounts receivable aging report and compare it to the
general ledger balances.
• Review the supporting documentation for a sample of accounts receivable
transactions, such as customer invoices, shipping documents, and payment
receipts.
• Evaluate the reasonableness of the accounts receivable balances by
comparing them to historical trends and industry norms.
• Verify that the accounts receivable balances are properly aged and that
Reasonableness payments are being received in a timely manner.
• Test the completeness and accuracy of accounts receivable by
test comparing the balances to the general ledger and the supporting
documentation.
• Evaluate the effectiveness of controls such as review and approval of sales
orders and invoices, segregation of duties, and review and reconciliation of
accounts.
• Investigate any significant variances or anomalies in the accounts
receivable balances or transaction documentation.
• Document the results of the reasonableness testing and report any
findings to management.

Basics of Audit Program 34

 • In this example, the reasonableness testing involves evaluating the accuracy
and completeness of accounts receivable by comparing the balances to
historical trends and industry norms.
• By verifying the aging of accounts receivable balances and comparing them to
supporting documentation, auditors can ensure that the accounts receivable balances
Reasonableness are accurate and reliable.
• Testing the completeness and accuracy of accounts receivable helps to identify any
test summary potential risks or control weaknesses in the accounts receivable process.
• Evaluating the effectiveness of controls such as review and approval
of sales orders and invoices, segregation of duties, and review and reconciliation of
accounts helps to ensure that the accounts receivable process is functioning effectively
and that the financial statements accurately reflect the organization's accounts
receivable balances.

Basics of Audit Program 35

 3-way match
The 3-way match is a common procedure used in auditing to verify the accuracy of financial transactions
and ensure that there are no discrepancies or errors. It involves comparing three key documents
or pieces of information to ensure they all match and are consistent with each other. The
three documents typically compared in a 3-way match audit program are:

Goods Receiving Notes

Purchase Order (PO) (GRN): Vendor Invoice (VI): This
is a document generated by
This is a document This is a document generated the vendor or supplier that
generated by the by the receiving department
purchasing department requests payment for the
that confirms the receipt of goods or services delivered.
that details the items or goods or services ordered on
services to be purchased, the PO. It includes details such
It typically includes details
their quantities, agreed- as the actual quantities such as the agreed-upon
upon prices, and other received, condition of the items prices, quantities delivered,
terms and conditions. received, and any discrepancies and payment terms.
noted.

Basics of Audit Program 36

• The purpose of the 3-way match audit program is to
verify that these three documents match
and are consistent with each other.
• The auditor will typically compare the quantities,
prices, and other relevant details on the PO, GRN,
and VI to ensure they align.
• Any discrepancies or differences between these
documents may indicate errors or irregularities, such as
overbilling, underbilling, or incorrect
quantities received. 3-way Match
• By conducting a 3-way match, auditors can ensure
that the company is being billed accurately by
the vendor, and that the goods or services
received match what was ordered and received.
• It also helps prevent fraud or other irregularities by
detecting any inconsistencies or discrepancies in the
purchasing process. The results of the 3-way match are
documented and reported as part of the audit findings, and
any discrepancies are investigated and resolved as
necessary.
Basics of Audit Program 37
 The purpose of the 3-way match is to ensure that the information on these three documents
matches and is consistent with each other. This helps to verify that the goods or services were
received as per the purchase order, and that the invoice is accurate and valid.
The steps involved in a typical 3-way match audit program may include:
• Obtain and review the purchase orders, goods receiving notes, and vendor invoices
for a selected sample of transactions.
• Verify that the purchase orders, receiving reports, and vendor invoices have the
same information, including item descriptions, quantities, prices, and other terms
and conditions.
• Compare the quantities and descriptions of goods or services received on the

3-way Match
receiving reports with the purchase orders.
• Verify that the vendor invoices match the corresponding purchase orders and
receiving reports in terms of quantities, prices, and other relevant details.
• Investigate and resolve any discrepancies or errors identified during the 3-way
match process, which may involve further communication with the vendor or other
relevant parties.
• Document the findings, conclusions, and any issues identified during the 3-way
match process in the audit workpapers and report them to the appropriate parties.
Overall, the 3-way match is a crucial procedure in the audit program to ensure the
accuracy and integrity of procurement transactions, and to detect and prevent potential
fraud, errors, or discrepancies in the purchasing process.

Basics of Audit Program 38

Cut off test
• The cutoff test is a commonly used procedure in an
audit program to ensure that transactions are
recorded in the correct accounting period, and
to verify the accuracy of the financial statements.
• It typically involves testing the cutoff of
transactions at the end of an accounting period, to
determine if they are recorded in the proper period
or if they have been improperly recorded in a
different period.
• The cutoff test is designed to detect any potential
timing issues, such as revenue or expense
recognition in the wrong period, which could
result in misstated financial statements.

Basics of Audit Program 39

 Cut off test
The steps involved in a typical cutoff test in an audit program may include:
• Identify the relevant cutoff period: Determine the specific accounting period or cutoff date that
is relevant for the audit. This is typically the end of the financial reporting period, such as the
end of the month, quarter, or year.
• Select the appropriate transactions: Identify the types of transactions that are relevant for cutoff
testing, such as sales, purchases, or other significant transactions that may impact the financial
statements.
• Review internal controls: Evaluate the design and effectiveness of the client's internal
controls related to transaction cutoff, including policies and procedures for recording
transactions in the correct period.
• Test the cutoff transactions: Select a sample of transactions that occurred near the
cutoff date and perform detailed testing to determine if they are recorded in the
proper period.
For example, for sales cutoff testing, the auditor may select a sample of sales
invoices or shipping documents that occurred close to the end of the accounting period
and verify if they are recorded in the correct period in the sales journal or other relevant
accounting records.

Basics of Audit Program 40

 Cut off test (cont’d…)
The steps involved in a typical cutoff test in an audit program may include:

• Perform substantive procedures: Test the accuracy and completeness of cutoff transactions by
comparing the recorded dates with the actual occurrence dates of the
transactions. This may involve verifying the shipment or delivery dates, examining supporting
documentation, and confirming with third parties, as appropriate.
• Analyze results and report findings: Evaluate the results of the cutoff testing and determine
if any misstatements or discrepancies are identified. Document any findings in the audit
workpapers and communicate them to management, if necessary.
• Follow-up procedures: If any discrepancies or issues are identified during the
cutoff testing, perform additional procedures as needed to further investigate and
resolve the issues, and ensure that the financial statements are properly
presented.

Basics of Audit Program 41

Cut off test- example
• Assume ABC Corporation's fiscal year-end is June 30, and the auditor is
conducting an audit of ABC Corporation's financial statements for the year
ended June 30, 2022. The auditor wants to perform a cutoff test on
sales transactions to ensure that all sales for the year ending June 30,
2022, are accurately recorded in the appropriate accounting period.
• Here's how the cutoff test might be conducted:
• Define the cutoff period: The auditor defines the cutoff period for
sales transactions, which is typically a few days before and after the fiscal
year-end. For example, the cutoff period may be set as June 29th to July
2nd, to capture sales transactions that occurred close to the year-end.
• Identify the cutoff transactions: The auditor identifies the sales
transactions that occurred during the cutoff period by reviewing
relevant documentation, such as sales invoices, shipping documents,
and other sales-related records.
For example, the auditor may review sales invoices, packing slips, and
shipping records for shipments made between June 29th and July 2nd.

Basics of Audit Program 42

Cut off test- example
Document the findings: The auditor documents the results of the
cutoff test, including any discrepancies or errors identified, in the
audit workpapers. This documentation provides evidence of the audit
procedures performed and the conclusions reached.
Report the findings: If any material misstatements or
discrepancies are identified during the cutoff test, the auditor
reports these findings to management and other relevant
parties as required by auditing standards.
Overall, the cutoff test in this example would help ensure that all
sales transactions for the year ending June 30, 2022, are
accurately recorded in the appropriate accounting period,
providing assurance on the timing and recognition of sales
revenue in ABC Corporation's financial statements.

Basics of Audit Program 43

Thank
you
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