Audit Procedures

Our main objective is to offer our clients a clear view of the actual and optimal status of the enterprise through a wide range of audit services. We are going now to discuss the procedures of the audit services as follows:

Audit evidence
Procedures of Obtaining Audit Evidence
External Confirmations
Analytical Procedures
Objectives of Financial Statements’ Audit
Responsibility of the Firm’s Management
Responsibility of the Auditor
Notes regarding Internal Control

1. Audit evidence

Introduction

This standard aims to establish standards and guidelines related to what can constitute an audit evidence upon auditing of financial statements, the quantity and type of audit evidence that should be obtained, in addition to the procedures taken by the managing partner to obtain this audit evidence.
The managing partner should obtain sufficient and appropriate evidence so as to enable him to draw reasonable conclusions upon which his opinion shall be based.

Notion of audit evidence

Audit evidence is defined as all information utilized by the managing partner in order to enable him to draw reasonable conclusions upon which his opinion shall be based. It includes information that exists in the accounting records and supports the financial statements as well as other information.

First: Audit evidence policies

By its very nature, audit evidence is cumulative evidence that has been obtained from previous audits, during the course of the audit or through quality control procedures of the enterprise.
Generally, accounting records include books of original entry and supporting documents; for example, cheques, records of electronic funds transfer, invoices, general ledgers, sub-ledgers, journals as well as other adjustments on financial statements that are not reflected on official journal entries and records such as adjustment and analytic statements that support cost apportionment, arithmetic operations, adjustments and disclosures.
The management is liable for preparing financial reports according to the accounting records of the entity. The managing partner obtains some audit evidence through examining the accounting records, for example, through analyzing and reviewing the procedures adopted upon preparing financial reports and matching them with applications that include the same information. Through the latter, the managing partner can assure that the accounting records are consistent internally with the financial statements. However, accounting records do not provide sufficient audit evidence. Thus, the managing partner should obtain other evidence that enables him to constitute a point of view about the financial statements.
The other information that can be utilized by the managing partner as audit evidence includes: minutes of meetings, conformations from third parties, comparable data about competitors (benchmarking data), control evidence, information obtained by the managing partner through audit procedures such as inquiries notes and inspection as well as other information accessible to the managing partner enabling him to draw reasonable conclusions upon which his opinion shall be based.
Sufficiency is the measure of quantity of the obtained audit evidence. Appropriateness is the measure of the evidence quality. This means its relevance and reliability in providing support or detection of material misstatements in the relevant classes of transactions, account balances, disclosures and confirmations. The quantity of audit evidence needed by the managing partner is affected by the risks of material misstatement (The higher the assessed risks, the more audit evidence is likely to be required). It is also influenced by the quality of the evidence (The higher the quality, the less audit evidence may be required).
In addition, obtaining more audit evidence may not compensate for its poor quality.
A given set of audit procedures may provide audit evidence that is relevant to certain confirmations. However, other procedures, For instance, inspection of records and documents related to collection of receivables after the end of period may provide audit evidence regarding existence and valuation, but not necessarily cut-off.
The managing director usually obtains the audit evidence from different sources with a different nature in order to support the same assertion. For example, the managing partner analyzes debts write-off and the subsequent collection of debts in order to obtain the audit evidence relevant to determination of bad debt examination.
Obtaining audit evidence regarding a particular assertion is not a substitute for obtaining audit evidence regarding another assertion. For instance, the material existence of inventory does not provide an evidence of its correct valuation.
Reliability of the audit evidence is influenced by its source, nature and the circumstances under which it is obtained:

The reliability of audit evidence is increased when it is obtained from an independent external source.
The reliability of audit evidence that is generated internally increases when the internal controls are effective.
Audit evidence obtained directly by the managing partner (Prior to observation of the application of a control) is more reliable than audit evidence obtained indirectly through inquiry about the application of a control.
Audit evidence in documentary form, whether paper, electronic, or other medium is more reliable.
Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles.

When using the information produced by the entity, the managing partner should evaluate whether the information is sufficiently precise and detailed. The information on which audit procedures are based should be sufficiently precise in order to enable the managing partner to obtain reliable audit evidence.
The managing partner obtains more assurance upon matching the audit evidence obtained from different sources, or of a different nature with audit evidence obtained individually. However, in case of non- match, it gives an indication that the audit evidence obtained individually is not reliable.
The managing partner shall study the balance between the cost of obtaining audit evidence and the benefit of the obtained information. However, difficulty or cost of a particular audit procedure is not deemed a reason for its deletion in case of lack of alternative.
Upon forming the audit opinion, the managing partner does not review all of the available information. He uses the sampling technique, or any other technique to draw a conclusion upon which his opinion is based. The managing partner prefers persuasive evidence than decisive evidence.
The management is responsible for the fair presentation of financial statements that describe the nature and activities of the entity. Upon representation that the financial statements give a true and fair view with respect to all of the significant aspects, the management shall – according to the applicable financial reporting framework – make implicit or explicit assertions relevant to recognition, measurement, presentation and disclosure of all elements of financial statements and the relevant disclosures.
The managing partner should use assertions for classes of transactions, account balances, presentation and disclosures in sufficient detail to form a basis for the assessment of material misstatement risks, as well as the design and performance of additional audit procedures.
The assertions used by the managing partner are classified into the following classes:

a) Assertions about classes of transactions and events for the period under audit

Occurrence: All transactions and events relevant to the entity in the accounting records actually occur.
Completeness: All transactions and events of the entity are indeed recorded.
Accuracy: The amounts and other statements relevant to the transactions and events are entered precisely.
Cut-off: Transactions and events are recorded in the correct accounting period.
Classification: Transactions and events are recorded in the appropriate accounts.

b) Assertions about account balances at the end of period:

Existence: Existence of assets, liabilities and equity interests.
Rights and Obligations: The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
Completeness : All assets, liabilities and equity interests of the entity are recorded.
Valuation and Allocation: Assets, liabilities and equity interests are included in the financial statements at appropriate amounts. Any resulting valuation or allocation adjustments are appropriately recorded.

C) Assertions about presentation and disclosure:

Occurrence and Rights and Obligations: Disclosed events and transactions relating to the entity occur.
Completeness: All disclosures that should have been included in the financial statements are included.
Classification and Understandability: Financial information is appropriately presented and described and disclosures are clearly expressed.
Accuracy and Valuation: Financial and other information is disclosed fairly at appropriate amounts.

Audit procedures for obtaining audit evidence

The managing partner should perform the following:
- A) Understand the entity and its environment including the entity’s internal control in order to identify and assess the risks of material misstatement at the financial statements level and the assertions level.
- B) Test the effectiveness and efficiency of internal controls in order to prevent, or detect and correct the material misstatement.
- C) Detect significant misstatements at the assertions level.
Testing Controls is essential in the following two cases:
- First :In case the managing partner relies in his risk assessment on anticipating the effectiveness of the controls, and thus tests the extent of commitment so as to support the procedures of risk assessment.
- Second : In case the verification procedures do not provide sufficient evidence.
  - The managing partner plans and performs verification procedures to enable him to deal with the assessed risks of material misstatement, taking into account that assessment of risks of material misstatement is based on personal judgment of the controller. Therefore, it is not sufficiently precise owing to the risks inherent in the internal control, such as the risk of management overriding internal controls, or occurrence of errors. Accordingly, verification procedures regarding the classes of transactions, account balances and disclosures are ordinarily required so as to obtain sufficient and appropriate audit evidence.
  - The managing partner uses one or more audit procedures provided in paragraph (26-38) in the standard. Those procedures or a combination of them may be used as procedures for assessment of risks of material misstatement, testing controls, or according to the context which the auditor intends. Furthermore, it can rely on the audit evidence obtained from previous years as audit evidence after verification – through the audit procedures – that it is still appropriate.
  - The nature and timing of the audit procedures to be used may be affected by the fact that some of the accounting data and other information may be available only in electronic form, or only at certain points, or periods in time.
  - For example, source documents, such as purchase orders, bills of lading, invoices and cheques, may exist only in electronic form, may be scanned and sent to clients and suppliers, may be kept for a specific period of time, or there may be no back-up files. Accordingly, the managing partner may find it necessary to request the entity to retain some information in order to review them or perform audit procedures at a time when the information is available.
  - When the information is in electronic form, the managing partner may perform some of the audit procedures provided below through CAATs.

2- Audit Procedures for obtaining audit evidence

A. Inspection of records or documents

Involves examining records or documents, whether internal or external, in paper form, electronic form, or other media. Inspection of records and documents provides audit evidence of varying degrees of reliability, depending on their nature and source and, in the case of internal records and documents, on the effectiveness of the controls over their production. An example of inspection used as a test of controls is inspection of records for evidence of authorization.
Some documents represent direct audit evidence of the existence of an asset, for example, a document constituting a financial instrument such as a stock or bond. Inspection of such documents may not necessarily provide audit evidence about ownership or value. In addition, inspecting an executed contract may provide audit evidence relevant to the entity’s application of accounting policies, such as revenue recognition.

B. Inspection of tangible assets

Inspection of tangible assets consists of physical examination of assets. Inspection of tangible assets may provide reliable audit evidence with respect to their existence, but not necessarily about the entity’s rights and obligations or the valuation of the assets. Inspection of individual inventory items ordinarily accompanies the observation of inventory counting.

C. Observation

Observation consists of reviewing a process or procedure being performed by others. Examples include observation of the counting of inventories by the entity’s personnel and observation of the performance of control activities. Observation provides audit evidence about the performance of a process or procedure, but is limited to the point in time at which observation takes place and to the fact that the act being observed may affect how the process or procedure is performed.

D. Inquiry

Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, across the entity or outside the entity. Inquiry is an audit procedure that is used extensively and is often complementary to performing other audit procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process.
Inquiry alone does not ordinarily provide sufficient audit evidence to detect a material misstatement at the assertion level. Moreover, inquiry alone is not sufficient to test the operating effectiveness of controls.

3- Conformations

Confirmation, which is a specific type of inquiry, is the process of obtaining a representation of information, or of an existing condition directly from a third party. For example, the managing partner may seek direct confirmation from creditors and debtors affirming the correctness of their respective account balances. Confirmations are frequently used in relation to account balances and their components, but they need not be restricted to these items. For example, the managing partner may request confirmation of the terms of agreements or transactions an entity has with third parties. The confirmation request is designed to inquire if any modifications have been made to the agreement. Confirmations are also used to obtain audit evidence about the absence of certain conditions, for example, the absence of a “side agreement” that may influence revenue recognition.

Recalculation

Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation can be performed through the use of information technology, for example, by obtaining an electronic file from the entity and using CAATs to check the accuracy of the summarization of the file.

Re-performance

Re-performance is the auditor’s independent execution of procedures or controls that are originally performed as part of the entity’s internal control, either manually or through the use of CAATs, for example, re-performing the aging of accounts receivable.

4- Analytical procedures

Analytical procedures consist of evaluations of financial information and the study of plausible relationships among both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or that deviate significantly from predicted amounts.

5- Objectives of financial statements audit

Expression of an independent opinion about the fairness of the financial statements which should fairly present the company’s financial position and the results of its operations.
Assuring that the data listed in the accounting records at the financial statements is fairly presented.

6- Responsibility of the company’s management

Maintaining appropriate financial and managerial regulations that can be relied on when conducting the process of periodic audit and examining the elements of the annual financial statements. These regulations encompass the following:

Organizational chart: is a diagram that illustrates levels of top management, supervisory management and executive management, and places the employees of the organizational units in the referred chart.
Job specification: is a statement for employees in the different managerial levels (top – senior – supervisory) that determines scientific qualifications and practical experiences for each individual. Furthermore, it clearly defines tasks, responsibilities, and specialties of the different jobs in the company; particularly those regarding works of recording in the records and books, as well as the approbation authority, and retention of the company’s documents.
Document cycles: indicate the activities of the various organizational units of the company, particularly those related to the financial aspects (Spotting exchange transactions, issuance of cheques, etc.), as well as the determination of the procedures that must be followed for recording in books and records. This is for the purpose of achieving efficient internal control in the company, subject to determination of the number of the document copies and the procedural flow that warrant the efficiency of the internal control elements over them.
Accounts manual: describes all items and elements of the financial statements, in addition to the accounts on which transactions are likely to be conducted in the future, taking into account the necessity of not using accounts in the books, or the automated accounting system unless this chart is added to them. This is in order to keep a continuous control over the transactions that are recorded in the books or the automated accounting system.
Book set: is an integrated (manual or automated) set that aids in extraction of analysis, data and financial information in an immediate and proper manner, and thus enables timely preparation of financial statements while sub ledgers control the operations of recording in the ledgers.
Written regulations: (Financial – Purchase – Warehouses – Employees , etc…) that organize work in the different departments to ensure that the elements of internal control are not breached, and to achieve an easy flow of documents, data and information, provided that those regulations express the actual procedures taken by the company.
Providing appropriate human efficiencies to retain proper accounting records (manual or automated) that enable preparation of financial statements that give a true and fair view of the financial position at the date of preparing the final accounts. The company is also responsible for providing us, upon request, with access to all manual and automated accounting documents, papers, books and records.
Maintaining efficient internal control system that achieves the purposes of detecting misstatements in accounts and financial statements arising from fraud. We shall plan our audit so that we can have reasonable prospects regarding such misstatements (If any). We shall take into account non-reliance on our tests for disclosure of fraud that may exist in the records and books despite our audit, owing to our performance of the periodic audit work and examination of the elements of financial statements through sampling.
The company shall provide written assertions of opinions, views and oral assertions that we obtain in the course of our performance of the periodic audit work and examination of the elements of financial statements. In addition, we may request to obtain other written assertions which we ordinarily include in the letter of the management’s representations that will be mentioned later.
The management is responsible for providing us with copies of all documents, papers, sheets, financial and non financial statements of the company for the period under audit, in order to help us examine the elements of financial statements. We are also entitled to attend all important meetings held in the company, and we shall be informed about those meetings within due time.
The company’s management is responsible for notifying us of the occurrence of any violation of rules, regulations or decisions issued by the company’s top management during the fiscal year in a manner that affects the company’s activity or financial position. It should also explain whether such violations existed at the time of preparing the financial statements of the company or not.

7- Responsibility of the Auditor – Audit scope and approach

The audit process is completed during the fiscal year under review through several stages as follows:

First: Planning of the audit process

Assessment of risks of all types
Initial assessment of the elements of the internal control and determination of an audit approach
Initial procedures of the analytical review

Second: Preparing the audit program

Third: Performing the audit procedures

Detailed study of the applicable internal control system
Conducting detailed tests
Issuing an auditor report
Our responsibility as the auditor of the company depends on the amount of information and documents we obtain from the company’s management. It shall be within the provisions of laws regulating its conditions and the by-laws interpreting such laws, as well as the international standards on auditing and the company’s guidelines in that regard.
Our audit is conducted through selecting appropriate samples from the company’s transactions using approaches we believe to be necessary for gathering the appropriate evidence on which we can rely to help us reach acceptable conclusions. Nature, extent and volume of our tests will vary according to our assessment of the applicable internal control system, particularly the elements of the financial and accounting system. Such tests can cover any aspect of the company’s operations, and we shall prepare reports to illustrate the main weaknesses that appear before us while conducting the necessary tests (If any).
Preparing a plan of the audit works for the fiscal year under review, and following up its execution throughout the year according to the international standards on auditing, taking into account any changes that may occur in the accounting methods used by the company.
Studying and assessing the internal control system in the company through conducting the necessary tests on it. This includes identification of the authorities, duties and liabilities, verification of the segregation of duties, as well as the flow of documents and correctness of recording in books and records and that they match what was stated in the supporting documents. The purpose of this is to determine its reliability upon performing the periodic audit and examining the elements of the financial statements.
Executing the procedures of periodic audit of the company’s transactions that are recorded in its financial accounts, as well as examining the elements of the financial statements through the multiple visits of the audit team during the fiscal year under review. This shall be in addition to communicating with the company’s management directly in order to avoid any deficiency in the internal control system.
Preparing detailed report that includes all observations we reached during the periodic audit and the suggested solutions in our opinion, especially those influencing the preparation of financial statements (adjustments). Any disagreement with the company’s management regarding any of the items contained in our reports shall be deemed “reservations”. Such reservations should be stated in our final report about the financial statements according to their significance for us.
The auditor shall be deemed irresponsible for the prevention and detection of fraud and errors. This responsibility is shouldered by the company’s management through the implementation and continuous execution of a proper internal control system, as this system decreases the likelihood of fraud and error.
Examining the elements of the financial statements and making our final report that states whether the financial statements, in our opinion, give a true and fair view of the company’s financial position and the results of its operations, and whether such financial statements are in compliance with the Egyptian accounting standards. After forming our opinion, we shall take into account the following issues and make a report about any of them.
Have we obtained all data and explanations that we deem necessary for the purposes of auditing according to the requirements of the international standards on accounting?
Have all the items appearing in the financial statements been disclosed in a proper and acceptable manner?
Does the company keep proper accounting books? What is the extent of correctness of the sheets and reports suitable for audit works which are obtained from the branches that we could not visit?
Are the company’s budget and income accounts consistent with the manual and automated accounting records and sheets? Do they comply with the non breach of laws, regulations and instructions related to the company and its activity by such statements?
Is the inventory conducted according to the followed rules (In form and content) stating any changes in the inventory approach that was used in the previous year (If any)?
Are the decisions of the company’s top management consistent with the data stated in the financial statements that have been audited?

8- Notes regarding internal control

First: Organization

Seperation of duties and responsibilities / jobs
Integration of documentary system and books system in the company
Integration of the procedure system adopted in establishment and recording of the company’s operations
Supervision and reporting

Second: Safeguarding of assets and documents

Notes regarding periodic audit:

Authorization audit
Desk audit
Arithmetic check
Audit of the genuineness of recording, accounting treatment and transfer into books and records

Third: Notes regarding examination of the elements of the financial statements

Whether the auditors obtained the necessary data and information for the purpose of audit or not.
Whether the financial statements were prepared according to the Egyptian accounting standards.
Whether the financial statements were influenced by substantive uncertainty conditions “Going concern assumption”
Whether the financial statements give a true and fair view of the financial position and the results of operations

The auditor’s report about the financial statements:

This report is considered to be the final result of the audit process, as the auditor indicates any reservations he finds in the financial statements, the extent of their expression of true and fair view of the financial position and the results of operations; in addition to a brief statement of the management’s responsibilities and the basis on which the auditor forms his opinion.