Page 258 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes 3. Observation: In many cases the management auditor may have to rely upon his won
observation of pertinent activities and conditions in the organisation. A management
auditor may prepare organisational charts and flowcharts as a result of his observation of
pertinent activities and conditions.
4. Evaluating the policies of the organization: Evaluating the policies of the organization is
very important is very important. Any scope of improvement in it should be reported.

Planning: The next step, planning, is the steps the auditor takes, before the audit, to identify key
areas of risk and areas of concern. This step is usually accomplished in a series of meetings with
auditing staff. This leads up to the opening meeting between the auditing staff and senior
management of the auditing target as well as administrative staff. The auditors will describe the
process they will undertake. Management will describe areas of concern to them and the schedule
of the employees that must be consulted.
Fieldwork: The next step, fieldwork, begins after the results of the meeting are used to adjust the
final audit plans. Employees are notified of the audit, schedules are drawn up regarding the
activities of the audit staff, and initial investigation is begun after learning of business procedures,
interviewing key staff, testing current business practices by sampling, reviewing the law and
testing internal rules and practices for reasonableness. Main points that need to be considered are:

1. Inquiry: A management auditor collects most of the evidence required by him by asking
relevant questions and obtaining satisfactory answers to these questions. Proper framing of
questionnaire is one of the first steps in conducting management audit. The main value of
questionnaires lies in the fact that a good question is often a key to uncover a hidden problem.

2. Examination: In many cases, the management auditor may have to conduct an examination
of documents and records. This may be necessary in case of inquiry process yields certain
information which needs collaboration or which suffers from internal contradictions.

3. Confirmation: A management auditor may also obtain written or oral statements.
4. Developing Audit Questionnaire: Select a procedure to audit. Define the scope and intent,
identify the participants and pull together a plan of action. Create an audit questionnaire
to accompany and document each audit. This questionnaire should help to automate and
formalize certain audit procedures. Include audit procedures on the questionnaire, and
provide a place for the name of the procedure at the top of the questionnaire; this will help
to focus the audit.

5. Providing Weights: Procedures should also include an explanation for audit responses. In
general audit responses are as follows: yes, no, and N/A. “No” answers identify a procedural
performance issue and “yes” answers identify areas of procedural effectiveness. “N/A”
signifies that the questions are not applicable to the situation. Audit procedures should also
provide a weighting system. Assign a weight to each question. For instance, each question
can be rated on a scale from 1 to 5 with “1” signifying less risk and “5” signifying more risk.
6. Conclusion Framework: In addition to a questionnaire and explanation for audit responses,
audit procedures should include a format for writing a conclusion. Once answered,
summarize the responses ( i.e., how many were yes, no, or N/A). Procedures must outline
a way to calculate performance scores, generalize conclusions, and provide a framework
for implementing recommendations.

The Audit Itself – Communication, Draft Audit and Management Response

1. Communication is the next step. The audit team should consistently be in contact with the
corporate auditor to clarify processes, gain access to documents and clarify procedures. At
the completion of the audit, the next step, the draft audit, is prepared.

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