AUDITING (PART-11) (UNIT-II) ROUTINE CHECKING AND TEST CHECKING (PART-4)

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1 AUDITING (PART-11) (UNIT-II) ROUTINE CHECKING AND TEST CHECKING (PART-4) 1. INTRODUCTION Hello students I welcome you on the lecture series auditing and under auditing today we shall be taking up unit II and under unit II we are going to discuss a very preliminary topic which is very beneficial to the students who first time go for an audit. So today we are discussing about routine checking and test checking. Routine checking and test checking are part of the audit process while conducting a audit we need to go for routine checking and test checking so that the detail vouching of each and every item can be done. So let us understand it in a separate unit and under separate discussion is been taken up under routine checking and test checking so that we can discuss in length about the following features. The meaning features advantages disadvantages of routine checking and test checking when we will do the difference between routine checks and test checks. 2. ROUTINE CHECKING So first of all let us understand the meaning of routine checking. Routine checking means checking of arithmetical accuracy of books of original entry the ledgers with a view to detect clerical errors and frauds of a very simple nature so first time when a candidate goes for doing the auditing he has to go for checking the routine checking so first step to be followed is to check the arithmetical accuracy of the data being entered so whatever data input has been done we need to ensure whether the totals are being matching up the debit sides and credit side are being tallied there is no difference in the ledger posting which is being done for the books of original entry so this is a very simple exercise but yet with lot of detail analysis and meticulationsuch routine checking is to be done. So what are the features of the routine checking, detailed checking because we need to do the routine checking of each and every

2 transaction which is being recorded under books of original entry and now it is being posted to the ledger then it s a traditional system because a very preliminary check is to be done as to the arithmetical accuracy of the data which is being done as a input so right now under today s scenario where lot of methods and data processing systems are being evolved there is lesser need of routine checking as most of the data s are been computerise yet the mistakes cannot be mitigated to a large extend although we have taken care not to make the mistakes of clerical nature or of arithmetical inaccuracy so this system was being followed when there was not so much of the computerised date yet with the computerised data its importance has not gone down again the routine checking has to be done but now there are inbuilt sheets of control checks while performing the audits under the computerised system. Next one is checking of each and every system. Off course when we do the routine checking the routine checking are to be done for sales for purchases and for assets and liabilities this is a method of extensive checking it s a expensive task because lot of time is being spent on doing the routine checking the clerical staff is being appointed and dedicatedly they have to carry out the routine checking on very regular basis when its main aim is to detect the clerical errors and frauds of very ordinary nature. 3. ADVANTAGE AND DISADVANTAGE What are the advantage of going for the routine checking thorough checking of transactions can be done so that there cannot be a chance of any fraud there cannot be duplicacy of the data if a data is being entered twice whether intentionally or unintentionally it can be detected there can be lesser chances of doing any mis-statement of the information when thorough checking of transaction is being done while following the routine checking. It constitutes important base because it is being known to the organization that routine checking s will be done they will be much particular about the fact that clerical errors or the errors manager of fraud should not be done. It facilitates the verification of arithmetical accuracy of transections and it s very easy to perform. Now what are the disadvantages of doing the routine checking?

3 First one is it is a mechanical process because it is very monotonous and regularly and on a daily basis arithmetical accuracy of the transaction are to be done it is repetitive in nature. Complex errors and fraud remain undiscovered so again when the substantive test are being implemented on a larger scale and in an extensive manner such complex errors and frauds can be determined but in the routine checking only ordinary errors can be traced out. It is expensive because its time consuming the labour is being employed to do routine checking and its tends to be boring because every time we have to find out the same sort of errors we have to do the calculation aspect so that the debit and credit side may not be mismatched there cannot be any omission or duplication of the data so in a way it tends to be repetitive so it amounts to a certain level of boredom for the staff who is doing it on a regular basis. Of course there is a method of reducing the boredom under this work there on a circular basis or on a rotational basis staff can be changed then redundent in certain cases. What s difference between routine checking and test checking let us understand it. Under routine checking we need to verify each and every book of accounts, while test checking is the examination of selected number of items it is not that elaborative as that of routine checking. Under routine checking, check transection verification without exception that means entire transaction which are being recorded in the original books of accounts and subsidiary books are to be checked without any deficiency or without leaving anything out while under test checking it avoids immaterial items only significant items or material items are being examine under test checking. Routine checking is done on a daily basis while test checking can be done on a weekly, monthly or quarterly basis depending upon the size of an organization and quantum of transaction which need to be analysed and examined. 4. VOUCHING Now again one of the feature of the routine checking and test checking is vouching, now let us understand what do we mean by vouching and now it to be carried out, why it is helpful under the routine checking. Vouching is the process of inspecting documents that supports a

4 recorded transaction in order to verify the authority and authenticity of such a transaction. So when vouching is been done we have underlined document with us with which the transaction which is being recorded in the books of the account can be verified so when vouching is to be done each and every aspect of the transaction is being analysed because we need to verify the authority as well as the authenticity of the transaction so when a transaction is being verified with a voucher the date, the amount, the party concerned all such features are to be taken care of while doing the vouching. Vouching has been defined by various accounting scholar s according to J R Batliboi vouching means testing the truth of item appearing in the books of original entry. So here again he wants to say that where the truth of an item is to be analysed or it is to be tested the underline document that is voucher is to be taken care of. Secondly by Lawrence R. Dixy it has been described as vouching is an act of comparing entries in the books of accounts with the documentary evidence in support thereof. So it s a very vivid and clear definition of vouching where it has been specifically mentioned that documentary evidences are been taken in support to authenticate the entry which is being recorded in the books of original entry. So what are the objectives of carrying out the vouching so that we can do the complete routine checking s. Firstly verification of authority and authenticity of transaction recorded in the books of the account which we have discussed right now that it can be done when a voucher is been analysed and the truth of the entry can be examined or tested with such voucher. To ascertain that the record transection are genuinely connected with the business where there is a underline document and it is not in the name of business entity so we can say that a fake document is being given and the truthness of the transaction which is being recorded in the books of account is questionable. So it is a peculiar feature that the voucher which we are having with us should be in the name of business it should be associated or connected with the business for which the accounting entry is being recorded in the books of account thirdly to ascertain that the recorded transaction are supported by documentary evidence

5 called voucher. We have already discussed so many times out here that voucher is the documentary evidenced which supports the journal entry which recorded in the books of accounts and to ensure that all vouchers pertain to financial year under audit that means if our financial year is from April 1 to 31 March the vouchers should also be for the same financial year there should not be voucher which belongs to previous year or a succeeding year the relevant voucher should be there in support of the journal entry which we have passed in our books of account and cut of procedures can be employed so that such entries or such vouching can be done and the inappropriate data entry can be eliminated so that correct financial position can be traced out. Now there is certain procedure to be followed when we do the vouching first of all call out particulars that means we need to take up relevant vouchers for sales, for purchases and all the underlined documents are been asked to be given then we compare the details, while comparing the details we should give weightage to the date, the particular, the voucher name that means in who s name the voucher is being appearing whether it is relevant for the business, then the transaction is related to the business it should not be of personal nature the amount which is being reflected in the voucher should exactly be same which is recorded in the books of accounts and if there is any text it should be properly accounted for with the help of proper accounting entry. Then put initials, put initials means that we are authenticating by transection, authority will do the signature for authorised signatory that particular transection is genuine and cancel the documents which are being cancelled or where a transaction has not taken up a proper shape these all parameters are to be evaluated while doing the vouching. 5. ROUTINE CHECKING AND VOUCHING Now let us examine the differences between routing checking and vouching because we have discussed in length about both the things vouching as well as routine checks so let us make a difference between the two so that both the concept can be clear to us routine checking comprises of checking of accounts ledger posting etc. that means totalling, sub totalling, casting and posting to the correct account or

6 not all this will be done under routine checking whether there is under casting, overcasting we all will look after it under routine checking while watching is the checking of the transaction, here the authenticity and authority of the transaction is been examined rather than the arithmetical accuracy the objective of routine checking is to verify the accounts have been correctly balanced that means debit side and credit side are matching up they are properly been posted there should not be any error as to the recording of the transaction as well as posting of the transaction as well as the classification of the transaction while the object of vouching is to vouch the transaction on documentary evidence. Routine checking is included in vouching; vouching is broader term as it includes routine checking so while doing the watching routine checking will be carried out because when a transaction is being examined both the amount as well as the authenticity of the transaction is been taken care of but under routine checking only arithmetical accuracy is being done however vouching is been included so that the amount can be matched up and it is proper or not, both are complementary to each other but vouching is again a larger or bigger accounting or auditing procedure where the techniques of doing the routine checking can be applied. Voucher we have already discussed that it s a documentary evidence in support of an transaction so there can be various sort of vouchers like purchase vouchers, sales vouchers, sales return notes, purchase return notes and they should be compiled in the separate folder so that we can have the bunch of all the vouchers at a place where the routine checking is being carried out. Now there are two types of vouches primary voucher and collateral voucher, primary voucher are those vouches where written evidences available in original it is known as primary voucher, while collateral voucher means when a written evidence is not available in original but it is available in copies it is known as collateral voucher. 6. TEST CHECKING Now let us understand another important feature of our discussion that is test checking, test checking is an accepted audit procedure wherein an audit is conducted on the basis of part checking. We are not going

7 for a complete checking but part checking is being done for example there are a bulk of sales transaction so we will take up certain transaction of certain suitable basis and partly we will do the checking of such items in detail. In adopting this technique the auditor must take care to see the proportion of the transaction tested to the total number of transaction is reasonable so here we want to say that where there are number of transactions we can go for test checking but the test checking should not be so small that we cannot derive any information of it. If out of hundred transactions we are going to vouch only 50% of the transaction then we should setup a limit that each of these bundles last 25 or first 25 transaction would be verified randomly and they would be verified in the detail. So under test checking what we are doing is that we are not totally secluded the entire range of the accounting data s but we are doing it in a partial manner. Only on the basis of a reasonable base we are doing the test checks. Test checks cannot be carried out in the case of size of the entity is very small and or there is no effective internal control system so we have two important things are there if the size of the organization is so small that there are only limited number of transaction there is no use of going for the test checking entire routine checking is to be done as well as vouching is to done and one more feature is there that if organization might be medium term organization or a large one but if the internal control systems are week and there are lot many errors in the transactions which we have noticed under that case it is advisable not to go for the part checking or to go for a detailed procedure of auditing here we are going to extend the audit checking we will avoid the test checks where internal control systems are week. 7. METHODS OF STATISTICAL SAMPLING Now students we will understand methods of statistical sampling because when we go for the test checks sampling is the method which we are going to use so under partial check as per SA 530 the revised one audit sampling. The auditor should select sample item in such a way the sample can be expected to represent the population. So wherever the part checking is being done and we are taking the help of audit sampling under that case we are required to that sample which

8 will give us the scenario of the entire population so first of all we will go for a judgemental sampling. Under this method the sample size and the composition are determined by the personal experience and knowledge of the auditor. The expected degree of objective cannot be assured as the risk of personal bias cannot be eliminated so in the way it is neither objective nor scientific to go for the judgemental sampling because if the auditor is not that much experienced he may not select the appropriate sample and as such the population as whole cannot be evaluated on the basis of such sampling. One of the important concepts is the statistical sampling it involves mathematical laws of probability in determining the appropriate sample size. So here the exercise being done in order to evaluate the proper sample size where testing can be done properly so that we can ensure the population for which the sampling is being done is giving us the correct picture of the total amount of the transaction which we are checking so such method is more scientific and judgemetal sampling is not that useful. It is widely use where a population is to be tested consist of large number of such transaction which need to be evaluated on the basis of sampling. 8. SUMMARY Now students we are summing up our lecture of today under today s lecture we have learnt in detail about the routine checking and test checking. We have also learnt that how routing checking varies with test checking as well as vouching. As we know that routine checking is the arithmetical calculation or the checking of the arithmetical accuracy of the transaction which are being recorded for the books of original entries to the ledgers and we take the help of supporting documents known as voucher to do the vouching where the authenticity and authority of the transaction is being recorded with the help of documentary evidence and they are being known as the vouching. So vouching is different from routine checking as vouching involves the routine checking. Then we have discussed about test checking where rather than checking entire population we have taken up the sample which will represent all the characteristics of the population and the test checks can be carried out. So where the part checking is necessary depending upon the large size of the transactions

9 we can go for judgemental sampling or the statistical sampling. With this we are ending up our lecture of today based on routing checking and test checking. Thank you.

evidence explained Chapter 6 The search for

evidence explained Chapter 6 The search for Chapter 6 The search for evidence explained Learning objectives Explain why the audit evidence search is a central concept of auditing. Identify the stages of the audit process and show that evidence has