Auditing – Preparation before an Audit

In this chapter, we will focus on the important aspects that have to be taken care of, before commencing a new audit.

Scope of Duties

Auditor should know the scope of duties as per the Companies Act in case of company audit and in any other case, he should discuss with the person who is going to engage him for audit.

Letter of Engagement

To avoid any misunderstanding with the client, an Auditor should procure an engagement letter. It is a contract between an Auditor and a client. This letter is a standard letter accordance with the established accounting practice and special assignment or task, if, any should be added to it.

Knowledge about Business, Accounting System, and Technical Detail

Complete understanding about the business of the client is desirable. An Auditor may gain knowledge through the following −

  • He may visit a factory site to know the process of production and to understand the nature of material, labor and machine.
  • He should read the available document there like Memorandum of Association or the partnership deed as the case may be.
  • He should obtain a list of officers and staff along with their job profiles.
  • He should study the complete accounting system of the client, the scope and effectiveness of internal control system and the list of books maintained by the client.
  • To understand the nature of transaction, knowledge of technical aspects of business is must.

List of documents/schedule require from client

After doing all above preparation, an Auditor should give a list of documents or schedule required for audit purpose along with instructions. Following documents or schedule may be required to get auditing started −

  • Stock statement with value and method of valuation.
  • Schedule of debtors and creditors.
  • Schedule of fixed assets.
  • Schedule of prepaid outstanding expenses, expenditure and income.
  • List of deferred revenue expenses.
  • List of capital expenditure incurred during the relevant financial year.
  • Investment schedule with cost of acquisition.