Terms and Conditions of Audit Agreement

Terms and Conditions of Audit Agreement

The audit is basically an agreement between the auditor and the organization . Therefore the terms and conditions of audit must be signed by both parties. The documents contains the terms and condition of audit is known as Audit Engagement letter.
The important clauses of this agreement are as under

1. The purpose of the audit
2. Scope of the audit
3. Roles and responsibilities of Auditor
4. Roles and responsibilities of the entity
5. forma and content of audit report
6. Deadlines for completion and audit report issuance
7. Applicable accounting system in the organization

The above mentioned terms are agreed in writing and any subsequent change is also recorded in writing if such change is acceptable to both parties.

Limitations of Sampling

Limitations of Sampling

The following are important disadvantage of using sampling technique

1. Biased Selection of sample size
2. insufficient size of sample
3. Selection of unrepresentative data
4. Selection by unskilled staff
5. Misinterpretation of results
6. Manipulation of data

Methods of Obtaining Audit Evidence

Methods of Obtaining Audit Evidence

The following are important methods of obtaining audit evidence

Inspection of Document :- The inspection of documents is the most common way to obtain audit evidence. Inspection is not only restricted to document but it also includes inspection of fixed assets.
Observation :- Observation is another important way  of obtaining audit evidence. This include the observation of business process. The most common example of observation is observing the physical inventory count at the year end.
External confirmation :- The external confirmation is considered to be one of the most reliable way to confirm the internally generated information. The most common example of external confirmation is receivable and payable confirmation. However ,the auditor may confirm any information from third parties.
Checking Accuracy :- The auditor may calculate the figures by himself to confirm the accuracy of calculation performed by the management . for example the auditor may calculate the depreciation schedule.
Inquires from the Management and others:- The auditor may get the audit evidence from the inquires made from the management and other relevant person like internal auditor , employees etc.

Analytical Procedures ;- The auditor also obtain information by performing different ratio analyses and analyzing different trends.

Characteristic of Good Sampling Technique

   Characteristic of Good Sampling

The sampling is a technique to choose a small number of group from the population and form an opinion about the population on the bases of results derived from the sample. The sampling is used because in many cases technically it is not possible to cover the whole population. for example in the audit it is not possible for auditor to inspect all document so he uses the sampling technique in the audit.

The characteristic of good sampling technique includes

1. It must represent the whole population
2. Every member must have equal chance of selection
3. Size of the sample must be sufficient to cover the all population
4. Sample must be free from bias
5.  

Types of Sampling

Types of Sampling

There are basically two types of sampling techniques

1. Random Sampling
2. Non Random Sampling

The non random sampling is further classified into five types

1. Systemic sampling technique
2. Stratified sampling technique
3. multistage sampling technique
4. Quota sampling technique
5. Cluster Sampling Technique

Systematic sampling :- each item is selected after an equal interval

Stratified Sampling :- The population is divided into subgroup and then sample is selected from that group.


Qouta Sampling :- The population is divided into different categories. The categories may be gender base or age base.

Types of Inherent Limitations of Audit

Types of Inherent Limitations of Audit

The audit cannot give you an hundred percent assurance that financial statements are correct and there is no mistake in financial statement. The reason is that audit has many inherent limitation.
The important types of inherent limitation of audit are


Sample Based Audit:- The audit is conducted on the bases of sample . Though systematic procedures are adopted to minimize the sample risk, however, the sampling cannot replace the population in any case. There is fair chance that result based on sample are not representing the population behavior.

Time Bound Job :- The audit is a time bound job .The auditor has to complete the work withing regulatory deadline. The delay in audit report is not an option for the auditor in many situation. The auditor cannot delay the audit report on bases of amount of work to be performed by the auditor. Therefore auditor has to plan the audit in such a way that more critical areas are covered. Therefore some area are less focused .

Auditor is not master :- The auditor have the basic knowledge of auditing and accounting and normal business operation. however, some business area are very complex in nature and therefore difficult to understand. The auditor may not be able to fully understand those process and therefore there may be some shortcoming in designing the appropriate audit procedures


Frauds are planned :- The frauds are more difficult to detect because the frauds are normally well planned . The fraudulent person make sure that fraud are not detected by the ordinary audit procedures . The fraudulent person have detailed knowledge of the operations or process and award of loop whole in the process . The depth study and knowledge of loop hole enables the fraudulent person to hide the fraud from the eyes of auditor.


Limited power of auditor :- The auditor have limited power and moreover the auditor has to maintain a professional decorum while conducting the audit. The auditor in no way considered to be an investigation agency has unlimited power to inquire the matter.

Complex Accounting Framework:-

Types of Audit Risks

Types of Audit Risks

There are basically three types of Audit Risks

1. Detection Risks
2. Control Risks
3. Inherent Risks

Detection Risks :- There is a risk that audit work done by the auditor for the detection of fraud and error would fail and would not be able to detect the misstatement in the reported financial statements.

Inherent Risk :- This means that despite all kind of control due to inherent limitation of audit. it is not possible to detect all misstatement in the financial statement.


Control Risks :- every organization put in place some control to detect and prevent the misstatement due to fraud and error. The risk that those control would not be able to detect the misstatement resulted from fraud or error.

Types of Audit Documentation

Types of Audit Documentation

The following are important type of documentation

1. Nature of the Audit procedure
2. Timing of Auditor Procedure
3. The Nature of item on which audit procedure applied
4. The audit evidence obtained from the audit procedure
5. The result of audit procedure performed
6. identity of the person who performed the audit procedure
7. Identity of the person who review the audit procedure performed
8. Important matter discussed with Management

Advantages of Audit Documentation

Advantages of Audit Documentation
The following are important advantages of audit documentation

• Audit documentation provides the evidence for the work performed by the auditor. This is important cover of suit against the auditor on the bases of negligence on part of auditor.
• Auditor documentation is basically an evidence for forming the opinion
• Audit documentation is really helpful in planning of audit
• Audit documentation define the roles and responsibilities of individual in audit.
• Audit documentation is helpful for subsequent reviews
• Audit documentation is tool of directing and supervising the audit.