1. First, we have to see the legal aspect, i.e., whether the entity is a partnership firm, LLP, trust, or company. Listed or unlisted, and accordingly, we should ensure that we possess the knowledge (relevant acts, for example, the Companies Act, the LLP Act, etc.) that is required for its audit, or at least the basic provisions we should be aware of. Similarly, in the case of a signing partner, he or she should be well versed in the relevant statutes.
2. We should make ourselves aware of the IT environment (Accounts Department), where the cash/bank/JV/capital assets/sales/purchases/stock data are entered, the details of staff doing the data entry, and the powers and rights given to their login ID.
In large organizations, it is a system to give user rights to employees based on their profile. An investment department manager can't access the cash/bank, and bank/cash staff don't have the power to pass entries into the investment module. This is generally done as part of internal control or checking.
3. As is quite evident, in large organizations and even in small organizations, the accounts are computerized. This implies that opening balances flow from the last year's balance sheet to the current year. But, as a test check, the main group of assets—bank loans, capital, etc.—can be checked, and the auditor can satisfy himself that the opening balances are correctly carried forward.
4. Next comes the "cut-off procedure," which means last year's prepaid expenses are to be considered in the current year's profit and loss account, and outstanding liabilities from last year are to be paid in the current year and nullified. Similarly, current-year outstanding expenses are to be shown as liabilities, and prepaid expenses are to be shown as assets. This exercise is done by the management or accountant of the company. The auditor is expected to check and correct or rectify the errors if any.
5. The major work that is to be done by the auditor is vouching, in which the auditor and his staff check the bills, vouchers, and supporting evidence to arrive at the conclusion that the bank payments, receipts, cash payments, cash receipts, and fixed assets Capex Vouchers, Journal Vouchers, Sales, and Purchases: All vouchers have proper bills attached; there is all proper documentary evidence; the correct head of account is debited or credited pertaining to the transaction; and all transactions are duly authorized as per the management policy or hierarchy.
6. Simultaneously, the auditor notes down the discrepancies, queries, and mistakes for which explanations are taken from the management. In the process, the auditor notes down the non-compliance with the laws and regulations if found and asks for explanations from management before reporting the non-compliance in the audit report. If the auditee is an insurance company, bank, NBFC, etc., then these are governed by specific laws such as the Insurance Act, Banking Regulation Act, RBI Act, etc. The auditor should be equipped with the latest circulars, etc. applicable to the entity so that he can discharge his professional work in an accurate and timely manner.
7. While the audit approach remains the same whether it is a small or large organization, the concept of materiality should be followed, which is of paramount importance and saves a lot of effort and time. Example: A Company which has Turnover of 5 crore, for such company, amount of 10 lacs is very much material, while a big Insurance Company, having 10,000 crore yearly revenue, Rs. 10 lacs is immaterial.
8. The auditor should get a management representation letter from the client so that he has proof of the amounts given by management and on which he relies during the course of the audit. This protects the auditor from future legal disputes.
9. Statutory compliance is to be given equal weight, such as the Income Tax Act, Companies Act, Labour Laws, PF, etc., because whatever non-compliance the auditor comes with while auditing is a value addition for the company, and a lot of time and money is saved and notices, etc. from the government can be avoided.
10. Internal control is also one of the areas in which the auditor can give advice and add value, which helps the client make a proper accounting system and makes its staff aware of the new set of procedures, which helps the company in the long run.
11. In the Notes to Accounts, the significant observations of the auditor should be mentioned, for example, legal cases by and against the company, particularly where the amount is huge, and other points that are worth mentioning to make the stakeholders aware of the company matters for informed decision-making.
12. Although auditing as a profession is a very important and responsible job, irrespective of whether it is a proprietorship or a PSU bank, in the case of big organizations like listed companies and banks, it is more important because there is public money involved, many shareholders have substantial stakes, and there is huge responsibility on auditors. In such cases, the auditor should be more alert and vigilant to discharge the duty as per the latest legal requirements.
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