An auditor while performing audit forms opinion regarding financial statements through the proper collection of evidences, the methods of collecting evidences is called Audit Techniques.
They are the tools by the help of which auditor supports his opinion to be submitted to the client regarding his organization.
Below mentioned are some important audit techniques:
- Vouching– An auditor completes audit only after successful examination of the physical vouchers of the company, they are the supporting documents of the company through which the expenses are recorded in the system. It confirms the authenticity of the transactions recorded in the books of accounts. Also, it ensures the classification of transaction that is the head in which the transaction is recorded is proper or not.
- Confirmation– To confirm the balances of a debtors/creditor ledger maintained by the company, confirmations are taken by the third-party, where in they confirm the balance to be paid or received by them. These confirmations are utmost important as if not received them, company might show some unreal transactions. This validates correctness of transactions.
- Reconciliation– Reconciliation is basically done in bank statements or statements with major purchase or sale parties. Any difference in balances of two or more ledgers are obtained by reconciliation. As for Example, difference in bank balance as shown in bank statement and that of the bank ledger in the system is obtained through reconciliation.
- Testing– Testing is only done as a part of sampling test or selected representative items that may help in forming opinion about the whole data. But for testing, items must be sufficiently representative.
- Physical Verification– It is only done in the case of verification of tangible assets like furniture and fixture, land and building, cash in hand. An auditor can physically verify the tangible assets and check the balance as shown in the books of accounts. It is also possible in the case of stock taking. In case of intangible assets like goodwill, physical verification is not possible.
- Analysis– Horizontal and vertical comparisons are only possible through analysis of financial statements of the company. It ensures consistency of accounting methods like ratio analysis and variance analysis.
- Scrutiny of accounts– The most important part of auditing is scrutinizing books of accounts, scanning the accounts on overall basis, also used for future reference. It helps to find out whether entries are regular, consistent, logical or not.
- Inquiry – As and when required an auditor is allowed to inquire any transaction or nature of transaction from the employee of the company. It helps to identify if any transaction is not mis posted in any other ledger.
- Verification– Verifications can be classified into two types- Posting verification and Extension verification. Posting verification suggests whether the transaction is properly recorded in correct ledger head with correct amount. But extension verification requires multiplication of two or more accounts to establish accuracy of entire accounts.
- Flow chart– Flow charts are required to analyse the stages of transactions through a graphical presentation.
- Observation – An auditor carefully observes the policy adopted by the company while maintaining financial statement of accounts.