AARK INDIA AUDIT METHODOLOGY
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Audit Procedure Audit Planning Audit Exectuion Audit Completion
Audit Procedure
Index
Engagement Acceptance
Audit Planning
Phase I
Understanding the Entity
• Opening Meeting with client
Time and Cost Budgeting
Team Planning and Briefing
• Audit Planning Meeting
Phase II
Assessment of PM, TE and Trivial
• Planning Materiality
Identification and analysis of Significant Risk
Control Risk Assessment
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Audit Procedure
Audit Execution
Analysis on Key matters.
• Going Concern, fraud Risk, A/c Policies evaluation, RPT and IAR etc.
Analysis of Significant risk accounts.
Process Narratives of Business Cycles
Audit Sampling
Testing of Key Transactions and areas
Direct balance confirmations
Analytical Review
• Comparison and variation analysis etc.
Verification of Financial Statements and Notes to Accounts
• Verification, Compliances and Disclosures etc.
Conclusions / Discussions on pending issues
• Summary of significant matters / Observation Log
Finalization of Standard Checklist of Audit
• Audit Program, CARO , AS/ Ind AS Compliance and Disclosure checklist etc.
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Audit Procedure
Audit Completion
Post Balance Sheet Event Review
Manager’s Review
Close the review points and perform additional procedure, if required
Partner’s Review
Clearance Meeting with Client
Meeting with Audit Committee/Board
Finalization of Closure Checklist
Documentation
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Audit Procedure
Engagement Acceptance
Audit clients accept the engagement by virtue of engagement letter agreeing to the
terms and conditions.
Audit Planning – Phase I
Understanding the Entity
In case of new appointment, Partner and Senior Manager have initial meetings with
the client to understand the client business.
In case of existing clients, planning meeting is held to understand key changes that
have taken place during the year.
Time and Cost Budget
Considering the nature and size of business, time required to be spent on the
assignment is budgeted.
Cost is budgeted on the basis of budgeted time and standard charge out rates of the
firm for positions envisaged for the audit.
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Audit Procedure
Audit Planning – Phase I Contd..
Team Planning and Briefing
After assessing the client requirements, suitable team is assigned to the client. Based
on the initial discussions with the client, team briefing meeting is held (i.e.
Discussion on Audit Planning Memo). Key focus areas are instigated to the team
along with the time lines.
Following key areas which is generally covered in Audit Planning Meeting
Client Information
Audit Scope
Team Structure
Discussion of risk indicator, matters and risk.
Summary of significant events
Key technical updates relevant for client for current year audit.
Fraud Risk Consideration
Timelines and Budgets.
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Audit Procedure
Audit Planning – Phase II
Assessment of PM, TE and TRIVIAL
On the basis of draft financial statements received from the client, Planning Materiality, Tolerable
Error and Trivial is assessed as per the audit methodology of the firm and / or as per audit
instructions received.
On the basis of Tolerable Error assessed, significant accounts are assessed. Apart from TE, other
criterions are also considered examples; past experience, statutory liabilities, etc. and mentioned
below is benchmark table to fix the materiality: -
Benchmark Measurement Percentage
Earnings before taxes:
Public entity 5%
Non-public entity 5% to 10%
Normalized earnings before
taxes:
Public entity 5%
Non-public entity 5% to 10%
Total revenues ½% to 1%
Total assets ½% to 1%
Equity 1% to 2%
Net assets ½% to 1%
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Audit Procedure
Audit Planning – Phase II Contd..
Identification and analysis of Significant Risk.
Step-I
1. Identify the Risk indicator on the company under Risk Indicator Summary.
2. Identify the cycle wise reasonable and significant risk under summary of Matters and
Risk
Step-II
Performed the procedure to mitigate the such identified significant risk
Further significant accounts are assessed on the basis of TE assessed at the planning stage.
Apart from TE, past experience with the client, statutory compliances, etc are also
considered for identifying the significant accounts.
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Audit Procedure
Audit Planning – Phase II Contd..
Control Risk Assessment
Control risk is assessed on the basis of inherent risk and detection risk.
Significant Risk assessment summary sheet is compiled in consideration to the
inherent risk and detection risk.
The conclusions are discussed with the engagement partner and senior manager and
accordingly the extent of verification is determined.
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Audit Procedure
Execution
Analysis on Key matters
Engagement team performed Fraud Risk discussion with client.
Analysis of Going Concern Risk Assessment.
Accounting Policies Evaluation
Identification and Analysis of Related Parties.
Physical verification of Inventory, Cash in hand and Fixed assets
Analysis on Internal Audit Report
Analysis of Significant risk accounts
Analysis work is performed on significant accounts to ensure that costs
incurred / variances / audit assertions are justified / complied.
Analytical work is performed on the data provided by the client or extracted
from the available documents.
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Execution – Contd..
Instances of analytical review include, sale analysis, cost analysis, production
analysis, power analysis, payroll analysis, verification etc.
Performed the substantive procedure to mitigate the significant risk identified.
Process Narratives of Business Cycles
Significant processes are documented at the initial stages to understand the theoretical
controls existing like Internal Financial Control etc.
Process narratives are updated at the beginning of first year.
Audit Sampling
Select the sample and perform the procedure in such way as defined in Audit
Sampling Process.
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Execution – Contd..
Testing of Key Transactions and areas
Key transactions above materiality level in significant accounts identified at the
planning stage are identified and further verified.
Any observations at this stage are discussed with the client and audit adjustments
if required are suggested.
Direct Balance Confirmations
Direct balance confirmations are taken from bankers, lenders / financers, debtors
and creditors and inter company balances.
In case of balance confirmations from debtors and creditors and log is
maintained to record balance confirmations received from the customers /
vendors.
In majority cases direct balance confirmations are not received from customers /
vendors, therefore to ensure the completeness and accuracy of balance
outstanding, subsequent recovery / payments are verified and ensured that
purchase / sales recorded during the year under audit have been paid / recovered.
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Audit Procedure
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Execution – Contd..
Analytical Review
Subsequent to key testing and adjustment of audit differences identified, analytical
review is performed at individual account level in comparison with the previous
year figures.
Reasonability tests are performed and conclusions derived to ensure that variance
in the figures are justified.
Relevant documents are taken and placed in the working files to ensure the audit
assertions.
Conclusions drawn by the audit team are reviewed by the engagement partner and
manager and further verification / re-working if required, is discussed and intimated
to the audit team
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Execution – Contd..
Verification of Financial Statements and Notes to Accounts
Financial statements are linked with the trial balance and account schedules (soft
copies) to ensure the accuracy of the same.
Compliance with the relevant provisions of Companies Act, 2013, Income Tax
Act, 1961, Accounting Standards /Indian Accounting Standard, Standards on
Auditing & Guidance note issued by ICAI is ensured at each stage of review.
Disclosure requirements as per the applicable GAAP are also ensured to be
covered in the financial statements.
Comments raised on the financial statements reviewed by the engagement partner
and manager are considered by the audit team and such observations are
resolved / concluded,
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Execution – Contd..
Conclusions / Discussions on Pending Issues
Unresolved issues (i.e. Summary of significant matters / Observation Log) are
considered for discussions in the clearance meeting and are discussed with the client.
Documents are taken from the client to confirm / justify the explanations given by the
client in support of the observations of the audit team.
Unresolved issues are taken care in the Auditor’s Report or adequate disclosure is
given in the Notes to Accounts, so as at ensure transparency of the financial
statements to the reader.
Finalisation of Standard Checklist of Audit
Audit team fill and finalise the following Standard Checklist:
Audit Program Checklist,
CARO Checklist,
AS Compliance and Ind AS Compliance Checklist
AS and Ind AS Disclosure Checklist.
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Audit Procedure
Audit Completion
Post Balance Sheet Events Review (PBSE)
PBSE is performed on significant areas.
Any material variances in these accounts from the previous year audited are discussed
with the client, to ensure that the same would not have any impact on the audit
opinion drawn on the financial statements of the previous year.
Manager’s Review
Manager reviews the engagement at the stage of planning, risk assessment,
execution and finalisation and completion.
Review notes are generally prepared in soft copies, which are then handed over to
the audit team. The audit team provides clarifications / explanations to those
review notes in the same soft copy. The soft copy of review note is part and
parcel of the audit documentation.
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Audit Procedure
Audit Completion Contd..
Close the review points and perform additional procedure, if required
Close the review notes of Manager and perform the additional procedure, if
required along with all documents and relevant supporting, either in soft or hard
copies.
Partner’s Review
Subsequent to manager review the file is lined up for partner review along with
all documents, either in soft or hard copies.
Partner regularly keeps on discussing the status of assignment with the manager
as well as the client.
Partner reviews the key audit files and makes review notes in soft for the audit
team after discussing the same with the manager.
The review notes from partner are then cleared by the team in the same soft copy.
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Audit Procedure
Audit Completion Contd..
Clearance Meeting with Client
Subsequent to manager and partner review, pending issues / open items are
considered as part of the agenda for clearance meeting with the client.
All open issues are discussed and justification taken from the client for having a
different opinion on the issue.
Relevant documents and comfort letters are taken.
Meeting With Audit Committee/Board
All open and important issue are discussed with members of Audit
Committee /Board.
Finalization of Closure Checklist
Fill the financial closure points in audit program checklist and the same is review
by Manager and Partner.
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Audit Procedure
Documentation
Planning documents such as, assessment of significant accounts, process narratives are
all maintained in soft files/Hard files. PM, TE and TRIVIAL are assessed in excel
worksheets and are part of soft files.
Execution schedules and their analysis are performed in excel spreadsheet and Word
file etc, which are also part of the soft file.
All applicable checklists are filled in soft copies and are retained in the soft file of the
engagement. The same are reviewed both by the manager and partner before signing
off the file completion checklist.
Complete the assembly of final audit file with in 60 days from the date of audit report.
Back up of the final version is also retained on the server of the company and the
access of edit and modify the workpaper and document only to authorized person like
Partner or Managers.
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Audit Procedure
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