After carrying out the routine audit what are the overall tests which an auditor is required to perform?

Auditing and Assurance Revision Questions and Answers

Answer:
After the routine audit is completed the junior members of the staff, the same is reviewed the principal or the senior assistant with the object of establishing the validity of the accounting data conducting the overall assessment of accounts which is an accepted auditing procedure. The technique of conducting overall tests constitute substantive auditing procedures designed to obtain evidence as to the completeness, accuracy and validity of the data produced the accounting system and include analysis of significant ratios and trends. Such an assessment is necessary in organization having large volume of transactions, and in the organization following mechanized accounting system where it is not possible to trace and check each and every transaction. The various tests which may be used for overall assessment of the accounts are as under:

i) Ratio Analysis: The inter-relationship of data is studied to spot variations in the normal pattern of transaction. Ratios are interpreted and their significance in the light of actual business circumstances is judged. The various ratios which may be worked out are Gross Profit Ratio, Return on Investment, Capital Turnover Ratio, Net Profit Ratio, Current Ratio, Stock Turnover Ratio, ratios of individual expenses to their related income, etc. In ratio analysis, comparison of the ratios with the corresponding ratios of the previous year is important. Comparison of ratios with the ratios of similar organization is also helpful. Overall study of the various ratios should be made to see disharmony of one ratio in relation to another related ratio e.g. net profit to sales and gross profit ratio

ii) Quantitative ratios and reconciliation: The analysis of quantitative ratios in physical norms where practicable is a much better test over analysis of financial ratios because these ratios are not affected the changing price levels and thus reveal more stable pattern. The various quantitative ratios which may be calculated are input-output ratio for a manufacturing concern, occupancy ratio for hotels etc. The overall reconciliation statement, in case of stocks, membership fees of club, payroll with number of employees, etc. is also a useful technique in overall assessment of the accounts.

iii) Trend Analysis: The trend analysis of various ratios and relevant cost and revenues over a number of years for an organization is also a useful test employed the auditor to check the internal consistency and overall reasonableness of data.

iv) Comparison: Comparison of figures under various significant head of accounts with the corresponding figures of the previous year constitute a simple but worthwhile approach to overall assessment.
The overall tests described above help the auditor to confirm his findings on various areas based on other routine auditing steps. Where confirmation is lacking, it provides with clues for areas needing further investigation for arriving at his conclusion.



(Visited 4 times, 1 visits today)
Share this on:

Leave a Reply

Your email address will not be published.