Commencement of a new audit, audit programme, audit note book and working papers

1. Steps before commencing a new audit

Before he starts work on a new engagement the auditor should:

1. Confirm the appointment is valid. For a company, check that he was appointed under section 139 by the proper authority (Board for the first auditor, members at the AGM, CAG for a government company), that a retiring auditor was removed or not reappointed in accordance with section 140 (special notice, representation), and obtain a copy of the resolution.
2. Communicate with the previous auditor in writing before accepting. Clause 8 of Part I of the First Schedule to the Chartered Accountants Act 1949 makes it professional misconduct to accept a position as auditor previously held by another chartered accountant without first communicating with him in writing. The purpose is to learn whether there are professional reasons why the appointment should not be accepted.
3. Check his own eligibility under section 141 and give his written consent and certificate of eligibility (s.139(1)).
4. Agree the terms of the engagement in an engagement letter (SA 210): the objective and scope, the responsibilities of the auditor and of management, the form of the report, and fees.
5. Study the constitution of the client: the memorandum and articles of a company, the partnership deed, the trust deed or the bye-laws of a society, noting provisions on accounts, borrowing powers, managerial remuneration and dividends.
6. Obtain a list of books kept and of the principal officers, with specimen signatures and the extent of their authority.
7. Understand the business: its nature, products, locations, technical terms, important contracts and the previous year’s accounts and audit report.
8. Study the accounting system and internal control (SA 315), usually through a questionnaire, so as to decide the extent of test checking.
9. Plan the audit (SA 300) and draw up the audit programme, allocating work to staff.
10. For a first audit, consider opening balances (SA 510): whether the closing balances of last year were correctly brought forward.

2. Audit programme

An audit programme is a detailed plan of the audit work: a written list of the procedures to be performed, the extent of checking, the staff who will do each part and the time allotted. SA 300 requires the auditor to develop an overall audit strategy and an audit plan describing the nature, timing and extent of the procedures.

Points in drafting it: it should be in writing; it should be framed after studying the internal control system, so that weak areas get more checking; it should fix the scope of the work clearly; and it should be flexible enough to change as the audit proceeds.

Advantages

• The audit work is clearly laid out; nothing important is omitted.
• Work can be divided among the staff, and each assistant knows his task.
• The progress of the work can be checked at any time.
• It fixes responsibility on the assistant who did each part.
• It is evidence, in a negligence claim, that the audit was carried out with due care.
• It gives uniformity from year to year and is a guide for the next audit.

Disadvantages

• The work becomes mechanical; the assistant may not look beyond the programme.
• No programme fits every business; a rigid one ignores the special features of a client.
• It may kill the initiative of an efficient assistant.
• Dishonest staff of the client may come to know what will be checked.

These drawbacks are met by revising the programme every year and encouraging staff to report anything unusual.

3. Audit note book

An audit note book is a register maintained by the audit staff in which they record the points noted during the audit: the queries raised and the answers given, errors found, matters for the principal’s attention and information needed for the next year. It is kept for each client and each year.

Contents: (a) general (permanent) information: list of books, names of officers and their duties, the nature of the business, important provisions of the articles or deed, accounting methods; (b) day-to-day matters: queries raised and whether answered, mistakes discovered, items that need further vouching, missing vouchers, the points where work was stopped each day (important in a continuous audit), information for the final report.

Importance: it helps in drafting the report; it shows the work done and so fixes responsibility on assistants; it avoids repetition of questions; it is a reference for the following year; and it is evidence of due care if the auditor is sued for negligence.

4. Audit working papers

Working papers (audit documentation) are the record of the audit procedures performed, the evidence obtained and the conclusions reached. SA 230 requires the auditor to prepare documentation on a timely basis sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of the procedures, the results and the significant matters and conclusions.

Kinds

• Permanent audit file: information of continuing importance: the memorandum and articles or deed, organisation chart, internal control notes, copies of long-term contracts, loan agreements, previous reports.
• Current audit file: papers for the current year: the audit programme, schedules of assets and liabilities, bank reconciliations, confirmations, copies of minutes, correspondence, management representations, and the trial balance and final accounts.

Ownership and custody. Working papers are the property of the auditor, not the client. He may at his discretion make extracts available to the client, but he must keep them confidential and preserve them for the period required by the ICAI’s standards on quality management (generally not less than seven years from the date of the report).

How this is examined

“What do you mean by audit programme? Explain the procedure required before commencement of a new audit” (April 2023, January 2026, 16 marks) combines sections 1 and 2: define the programme in one paragraph, then list the ten steps. “Steps to be followed by an auditor before the commencement of a new audit” (June 2025) is section 1 alone. Short notes: audit note book (2021, 2023, June 2025, January 2026 Q.8(b)); audit note book and working papers (April 2023); working papers (August 2024); audit programme (2019, 2022, 2023).