1. Chapter 7 Preparation for the Audit ACCT620 Internal Auditing Otto Chang Professor of Accounting

2. Steps to Prepare the Audit Establishing audit objectives and scope of work Study of background information Selecting the audit team and other audit resources Preparing a preliminary audit program Informing the auditee and others Determining how, when, and to whom the audit results will be communicated Obtaining approval to do the audit

3. Establishing Audit Objectives Examination and evaluation of the adequacy and effectiveness of internal control and the quality of performance Primary objectives of internal controls: –Ensure the reliability and integrity of information –Promote compliance with policies, laws, regulations –Ensure the safeguarding of assets –Promote the economical and efficient use of resources –Ensure the accomplishments of goals and objectives

4. Study of Background Materials Four sources of information available: –Permanent files: organization chart, description of operation, government regulation, budgets –Files from previous audits: work paper, response to audit findings and recommendation –Correspondence files: letters to and from external parties –Interviews with management

5. Selecting Audit Team Include a team leader, auditor-in charge, and the audit staff Need to consider the knowledge and skills required for the audit. “Consultant” from other department may be needed Other factors to be considered: required audit hours, computer support, travel funds

6. Prepare a Preliminary Audit Program Audit preparation The initial survey Audit the auditee information system and performance analysis Audit of operation (detailed testing) Instructions concerning the audit report wrap-up procedures

7. Sources of Audit Evidence Auditee’s personnel personnel outside the auditee’s unit Outside parties: customers, suppliers Operating documents: –prepared by the auditee or non-audited units –External: invoice, bill of lading Policies, standards and procedures manuels Legal documents Auditee’s activities and transactions

8. Audit Procedures Describe (the internal controls) Compare (documented vs. actual operation) Calculate (factory overhead rate) Examine (supply contract) Observe (customer check-out at stores) Walk-through (data input procedures) Tour (warehouse facilities)

9. Audit Procedures Foot (monthly sales totals) Confirm (A/R balances) Reconcile (bank statements) Scan (minutes of board meeting) Trace (shipping document to Sales ledger) Vouching (cash payment to vendors) Inquiry of management

10. Format of Audit Program Title Signature and Date of Approval Necessary columns: –Audit steps and procedures –Assigned auditor –Date Completed –Working paper Reference –Comments

11. Informing the Auditee An audit is to take place and when it begins The objectives and scope of the audit A list of documents and schedules needed Employees to be interviewed Others to be informed: management and audit committee Is a matter of courtesy and good practice

12. Communicating Audit Results Usually require both a presentation and a written report. Questions to be considered: –Where and to whom the presentation be made? –To whom should the report be addressed? –Who should receive copies? –Will interim reports be helpful? –Will graphic illustration be helpful?

13. Obtaining Approval to do the Audit Three types of approval: –All audits within a budget period is approved as a package by management or the board –Individual audit is approved as special project –Each audit is approved by the Chief of IA Approval is more for review than for permission. Blocking of an audit by management can be caused by difference in priorities or an attempt to hide information.