What Are Audit Procedures? Purpose, Types, and Techniques

Audit procedures are the methods auditors employ to gather and evaluate evidence concerning an organization’s financial information. They form the foundation of an audit, allowing auditors to assess the accuracy and fairness of financial statements. These procedures obtain reliable audit evidence, necessary for the auditor to form an informed judgment. The specific procedures used vary depending on the business and audit objectives.

Purpose of Audit Procedures

The primary purpose of audit procedures is to accumulate sufficient audit evidence to support an opinion on whether financial statements are presented fairly. Auditors use these procedures to identify and assess risks of material misstatement, whether due to error or fraud.

These procedures help auditors evaluate the effectiveness of an entity’s internal controls, which are systems designed to prevent or detect misstatements. Testing these controls provides insights into the reliability of the financial reporting system. The evidence gathered enhances the credibility of financial information for stakeholders, including investors, creditors, and regulators.

Categories of Audit Procedures

Audit procedures are generally categorized based on their timing and specific objectives within the audit process.

Risk assessment procedures are performed early in the audit to gain an understanding of the entity and its environment, including its internal controls. These procedures help identify and assess the risks of material misstatement that could affect the financial statements.

Tests of controls are performed to evaluate the operating effectiveness of an entity’s internal controls in preventing or detecting material misstatements. These tests determine whether controls are functioning as intended throughout the audit period. If controls are found to be effective, auditors may reduce the extent of substantive procedures.

Substantive procedures are designed to detect material misstatements at the assertion level, directly verifying the accuracy of financial statement balances and transactions. This category includes two main types: tests of details and substantive analytical procedures. Tests of details involve examining individual transactions, account balances, or disclosures by inspecting supporting documents or obtaining external confirmations.

Substantive analytical procedures involve evaluating financial information through an analysis of plausible relationships among financial and non-financial data. This can include comparing current year balances to prior periods, industry data, or expected results. While analytical procedures can identify potential misstatements, tests of details provide more direct evidence.

Common Audit Techniques

Auditors employ various techniques to execute audit procedures and gather evidence. These techniques represent the practical actions auditors take during an engagement.

Inspection

Inspection involves examining records, documents, or tangible assets. For instance, an auditor might inspect invoices to verify expenses or physically examine inventory to confirm its existence.

Observation

Observation means looking at a process or procedure being performed by others. An auditor might observe an inventory count or a cash handling process to assess adherence to established procedures.

Inquiry

Inquiry consists of seeking information from knowledgeable individuals within or outside the entity. This can involve formal interviews or informal discussions to understand processes, policies, or specific transactions. Inquiry alone often requires corroboration with other evidence.

Confirmation

Confirmation involves obtaining a direct response from a third party regarding account balances or transactions. For example, auditors might send confirmation requests to banks to verify cash balances or to customers to confirm outstanding receivables. This provides external and often highly reliable evidence.

Recalculation

Recalculation is independently checking the mathematical accuracy of documents or records. This involves re-performing computations performed by the entity, such as re-adding a ledger or recomputing depreciation expense. It helps verify the numerical precision of financial data.

Reperformance

Reperformance involves the independent execution of procedures or controls originally performed by the entity. For instance, an auditor might re-perform a bank reconciliation or a control activity to ascertain if expected results are achieved. This technique assesses the effectiveness of internal controls.