Audit Procedure: 9 Types of Testing Methods You Need to Know

Fraud.   Preventing fraud is a big business. It’s also very difficult to detect and find without the right knowledge of audit procedure.   The idea of an audit as a preventative measure has been around for centuries, but it was not until the 17th century that auditing became systematic with formalized procedures.  

Audit Procedure: What Is It?

  An audit procedure (or audit) is a formal inspection conducted by independent parties like accountants, auditors, management consultants, etc., where they perform various tests as part of their assessment process!   The idea behind this type of testing relies partly on prevention- it’s believed these types of procedures help organizations identify risks before they happen through observing how processes are currently carried out within the organization.   A scheduled audit procedure in this context is usually performed by an external party like a consultant for example but can also be carried out internally as part of the company’s ongoing audit process.   In either case, it should not only involve examining how systems work currently to spot any potential risks before they happen but identifying what controls need to be put in place so that no errors occur going forward!  

What is the Purpose of Audits?

  The audit process is not always an easy one and it can be difficult to find time for, but the result of this type of testing will provide organizations with a ‘snapshot’ view of what is going on within the organization.   Audits are carried out during different stages in a company’s life cycle so that they might identify potential risks as well as opportunities associated with any given stage or phase!   In this blog post, we’ll cover what various types of audit methods are available and which ones you should know about if your company does regular internal or external audits!   

1. Inquiry:

  The most basic type of audit, which is asking questions.   When an audit engagement begins, the company and staff being audited agree to provide auditors with the right to obtain information that is relevant to the preparation of the financial statements or the purpose of the audit. Auditors are granted entry to individuals within the business who they feel will provide them with evidence.    This audit method mainly involves a series of interviews with staff who can be asked about their job responsibilities and what they do on a day-to-day basis to see if procedures are being followed correctly or not.  

2. Observation:

  Requires you to observe a process or activity.   If internal auditors walk around with their eyes open, they’ll be able to note any irregularities that may point towards some form of fraud.   The observer has no direct contact with the subject matter and must rely on his/her observations for evidence, so this type of audit cannot typically produce conclusive results which means it should not usually be used alone but instead combined with other types, like examination for example.  

3. Examination:

  Looks at whether work was performed following company policies and regulations set out by an organization’s audit policy.    It is a very broad audit method and can include any number of audit techniques depending on the situation, such as interviewing staff or visiting different departments to see if their procedures are being followed correctly or not.  

4. Computer-Assisted Audit Technique:

  Computer-assisted audit technique (or CAAT) combines manual review with computer-generated analyses for improved efficiency in an audit procedure.    The process begins by generating test data which then goes through various types of testing before it’s compared to what was expected when running the tests manually.    A great tool for auditing agencies that helps increase accuracy while also reducing human error at the same time!  

5. Audit Analytical Procedure:

  Looks at financial reports that have been produced using auditing standards, like GAAPs, for example.    When combined with analytical audit procedures, this audit method can be used to look for fraud by reviewing the company’s financial statements and comparing them with what is expected when audit standards are applied.  

6. Inspection of Assets:

  Examines whether work was performed following policies (in this case ones related to physical property) or not but it relies on a thorough inspection of various types of assets which includes looking at things like buildings/grounds, IT equipment, vehicles, etc.    Inspecting these items allows auditors to spot anything that doesn’t match up – such as missing data files on an employee computer- resulting in the suspicious activity being found much earlier than if you were using inquiry audit alone!  

7. Recalculation:

  Recalculating numbers is one audit technique that is used to audit financial statements.   This audit method can be used for both internal and external audits – the purpose of which is to confirm numbers being reported on an audit statement are in line with what was done or not, particularly when large amounts of money have been either gained or lost by a company.  

8. Confirmations:

  Used to confirm that the financial statements have been prepared following audit standards, which includes examining whether they’re correct and accurate.    The confirmation audit can be either formal or informal; it’s usually a series of questions asked by the auditor to ensure he/she has all the information needed for this type of audit.  

9. Audit Procedures for Inventory:

  Inspecting records and documents audit relies on a comprehensive inspection of the company’s documentation, such as audit trails for example.    This type of audit allows you to look at things like computer logs to spot any inconsistencies with what was reported or not which would signal fraud – it can be used alone but is usually combined with other types such as examination when examining whether work was performed correctly or not.  

How Can Audit Types Be Combined?

  The types of testing methods used during audit procedures can be combined to offer a more detailed audit which is often the case during an audit.    Some of these methods might be used in combination with other types like examination for example:  

Substantive Audit Procedures:

  Audit procedures that examine a company’s economic and financial statements and supporting documentation to see its state or position.   They are used to detect inaccuracies that could occur in financial statements.   Substantive audit testing can be completed using analytical procedures, inspection, confirmation, and recalculation.  

Audit Procedures for Cash: 

  Audit procedures that audit the cash balances of a company.   This audit is conducted by comparing the cash balances with what’s expected to be available.   It can also rely on an audit of bank statements or demand drafts, as well as examining whether work was performed correctly and following procedures (i.e do employees know how to handle money?).   These can be completed using audit or inquiry methods, which are used to examine information recorded in journals and ledgers.  

Test of controls:

  Audit procedures that audit and examine the controls of a company’s internal control system.   A test of control audit is used to ensure controls are in place and working effectively – if they’re not, then this could represent fraud or errors which would need to be reported on an audit statement.   These can rely on audit techniques like computer-assisted audit technique (CAT) for example, as well as examination, inquiry, observation, inspection, and re-performance which you’d use when examining whether work was performed correctly or not.  

Test of control examples:

  – audit the work of a person   – audit whether a computer is functioning correctly or not   – audit whether people are following procedures in line with the company’s internal control system   Once the testing methods yield results, the audit evidence is then recorded in audit reports and audit findings.  

What is audit evidence?

  Audit evidence is what audit findings are based on.   The audit evidence can be the result of audit testing methods like computer-assisted audit techniques, and it could also include inspection or observation – these won’t always yield results as some things might not have been tested for yet (i.e a company’s assets).  

What are some types of audit evidence?

  -financial statements   -accounting information   -bank accounts   -management accounts   Which type of company is the best fit for an in-house audit?   The most common use of an in-house auditor would be when a company has subsidiaries to ensure the subsidiaries are following their policies correctly – this might not always apply to smaller companies though so make sure you know what you need before deciding whether in-house or outsourcing should work better for your business.    Internal Vs External Auditors: Which is Best?   No one answer fits all cases but there are typically two reasons why people choose either: supposed cost savings versus increased expertise from an audit firm.   An audit can be done by audit staff inside the company, or it may require hiring an external audit firm – either way will depend on what you need and how much money you have available to spend as well as your requirements for expertise versus cost savings.    Usually, you would expect to save money by hiring in-house auditing staff, but this could end up being more costly than partnering with a reliable auditing firm because audit staff needs to be recruited, trained, and monitored.   Internal auditors might not always be experts in all areas of audit so they would rely heavily on these outside firms who provide that extra level of expertise as well as objective standards of conduct.   If internal auditors don’t utilize the utmost expertise on a subject, they could fall prey to ever-changing regulations and end up costing your bottom-line more in the long run.   The benefits of outsourcing audit services are that there will be better expertise and experience, as well as a more flexible approach for different audit requirements – this could include specific accounting knowledge or particular audit methods like computer-assisted audit technique (CAT).   Outsourcing also gives you access to experts in other areas such as business process improvement which can help with your company’s efficiency/effectiveness over time.   When an audit is conducted, the testing methods and audit evidence are recorded in audit reports which are then presented to management or shareholders.   For these tests to be effective during audits, they must rely on accurate recording of historical transactions (i.e the financial statements) as well as records and documents, etc., but this isn’t always happening so make sure your company takes all necessary steps to protect its operations by using audit techniques like computer-assisted audit technique (CAT).   You might ask why a test would even need to take place – there can be many reasons behind an audit procedure, one being fraud or illegal activities.    Conclusion   In audit testing, there’s one main goal: to ensure that the company is following all of its policies correctly and meeting expectations for it to be able to maintain stability as well as continue doing business with a good reputation.   There are many types of tests that companies can use to ensure compliance.   These nine different test methods used during audit procedures cover everything from examining records and documents to re-performing work to confirm whether the figures reported were correct or not.   Each type has its purpose and specific goals when used together with other types of testing methods.   In most cases, working with an outsourced, professional audit team is beneficial and will provide the expertise needed to audit your company.   If your institution wants to ensure its compliance and reduce its risk contact us and see what our experienced auditing team can do to help your institution stay compliant!