The Preliminary Examination is of great importance for the success and quality of the Audit, as it means the level of information that is collected in it, guaranteeing that the process is executed taking into account the elements collected at this stage, mainly referring to the characteristics of the entity.
Furthermore, it is affirmed by various authors that this stage or process is one of the most important in the exercise of the Audit because it defines the Scope of it.
The following article shows indications to develop it, objectives of vital importance to fulfill, risks that can be presented in its correct performance or not and other elements.
Introduction
Exploration is the stage in which the study or examination is carried out prior to the start of the audit in order to know in detail the characteristics of the entity to be audited in order to have the necessary elements that allow adequate planning of the work to be carried out and direct it. towards the issues that are of greatest interest according to the intended objectives.
The results of the exploration also allow the selection and adjustments to the methodology and programs to be used; as well as determining the importance of the subjects to be examined.
It also makes it possible to assess the degree of reliability of internal control (accounting and administrative) as well as the fact that in the planning stage a more efficient and rational work plan is developed for each auditor, which ensures that the audit must be carried out with due quality., economy, efficiency and effectiveness; promoting, to a large extent, the success of its execution.
In the preliminary stage, the auditor or whoever is designated may be the Group Chief Auditor, must understand the environment of the entity that must be audited, for this it must know its organizational structure, determine the areas of responsibility, find out how it is assigned and communicates responsibility and authority and determines the methods used by management to supervise operations, including the internal audit function, if one exists.
Also in the preliminary exploration of the environment, the auditor or his designee must understand the flow of operations; the nature of the business, types of operations; authorization procedures; execution, registration and processing of operations and others that are required.
The auditor will obtain evidence and answers to certain questions, which will enable him to direct his investigation, among which the following could be cited as an example:
In the Administration Areas:
- How is the entity structured? Obtain the organization chart How is the entity grouped for administration purposes (for example by services in processes, locations, functions or cost / benefit centers)? Do these administration areas have their own financial statements?
Operations processes
- What are the entity's operations processes? What are the relevant operations processes for the different areas of administration? Are the operations processes centralized or managed separately within the administration areas? What are the systems accounting keys that support business processes?
Persons
- Who is responsible for each area of administration, and what is the scope of their responsibilities? Who is responsible for the administration of each operation process? Who makes decisions regarding operational aspects? To what extent does the Do you, by carrying out normal activities, obtain evidence as to whether the internal control system continues to function? For example, consider whether: Operational Management compares the information, inventory, sales, and other information obtained in the course of its daily activities with the information generated by the system. To what extent do communications from external parties corroborate internally generated information or indicate problems.Are the controls that should have avoided or detected the problems evaluated again? What is the capacity to respond to the recommendations of the internal and external auditor to strengthen internal controls. Are the desired actions followed up to verify their implementation?
When an audit is repeated, much of the auditor's knowledge about the control environment and the flow of operations will come from the experience of the previously performed audit, if it were to be performed by the same auditor, otherwise the roles of the auditor should be studied. Archived work from previous audit.
In addition, the auditor will normally gain knowledge by conversing with the personnel of the entity to be audited, observing the work of the employees and reviewing documents that describe the system.
Upon completion of the examination and based on knowledge of the control environment and flow of operations, the auditor must decide either:
- not relying on the control system to determine the nature, timing, and extent of substantive evidence, or conducting additional research to determine whether the control system can be relied on to determine the nature, timing, and extent of substantive testing.
The decision not to rely on the internal accounting control system may be the result of the Auditor observing that the controls in said environment do not justify any reduction in substantive tests.
Another reason for this decision may be based on the cost-benefit ratio. The cost and time to complete the control system study and test its operation can be greater than the audit effort to carry out substantive tests without relying on the control system.
If the highest direction of Audit, suggests to the auditor to decide not to limit these tests, in the Work Papers the reasons for this decision must be documented, although it is not necessary that the documentation include evidence that the auditor applies a questionnaire on any subject, since this only applies in the execution of the audit, since at this stage only the control environment is evaluated.
The Working Papers will be identified with the initials PT: EP- the digits that correspond to the evidences that support the substantive tests of the exploration carried out, and the final evaluation of the exploration, which would be identified with a work paper based on report notes, abbreviated PT: N-EP
Development
Once the Work Order has been issued, the group leader proceeds to execute this stage, gathering information in the Control and Supervision Directorate and in other Directorates of the Corporation and in the entity to be audited to know in detail the characteristics of the same in Regarding its organizational structure, sales flow, production or services it provides, results of previous audits, etc.
It is convenient that this stage concludes before the rest of the staff is incorporated, which enables each auditor to have his or her individual work plan from the start of the audit.
The Control and Supervision Directorate proceeds to collect the information referring to previous audits, the history of alleged criminal acts, the results of audits carried out by internal or external auditors, as well as other elements of interest in the files, such as: structure of the entity, main lines of sales, imports, productions or services, etc.
In the entity, interviews must be carried out with the main leaders in order to explain the objective of the audit, and to know or update in detail the data in terms of structure, amount of dependency, development of the activity it carries out, sales flow, production or the services it provides and other essential antecedents for proper planning of the work to be carried out.
It is impossible to foresee all the questions that could be of interest to know in the exploration, for which reason the most important or general points to capture, review or update in the entity are indicated below; those that are not necessarily absolute, the group leader being able, as indicated, to eliminate or add some, according to circumstances or objective of the audit:
- Updated entity data, including, among others: name, address, telephone, fax, E-Mail, work hours and organizational structure. Organizational units that comprise it. Main activities that it develops, and organization conceived. Licenses to operate. Banks with which it operates, (domestic and abroad), names, bank account numbers and firms authorized to operate the same. Names of the General Manager, Economic Manager, or equivalent positions, as well as the respective dates on which they took possession. Personnel working in the Accounting area; summarizing the functions it performs. Situation of the Single Audit File and its content; reviewing the latest audits, both internal and external, inspections, checks and fiscal verifications carried out in the entity.Provisions issued in relation to the conclusions, recommendations established in the previous reports and notifications of administrative responsibility.Degree of accounting decentralization, number of accounting centers it owns, bank accounts that operate them and information they issue. of warehouses and their importance according to the number of lines, value of their stocks and characteristics of the products. Specific rules and procedures that they use. The computer systems that are applied in the different subsystems and their evaluation within the context of internal control. (Here it could be explored how is Computer Security) Status of the accounting records in use and date of the last entry in each one of them.Date of preparation of the last financial statements. If possible and necessary, specify financial results. Customer satisfaction: Judgment of customers and product quality. Budget and its modifications, as well as its execution.
In addition, when making the tour of the areas that make up the entity in order to observe the operation as a whole, it should be reflected in Note Sheets, the memories of observations made in it.
As a result of this exploration the group leader may suggest to the supervisor to vary the objective of the audit or its scope.
It is possible that for certain reasons it is not necessary to carry out this stage in a specific audit, an issue that must be recorded in a document signed by the group leader, approved by the acting supervisor and filed in the Audit File.
Responsible: Group Leader or acting auditor according to Audit Order.
Goals:
- Enable the auditor knowledge on the need for prior exploration before the execution of an audit, How to obtain evidence to have the necessary elements that allow an adequate planning of the work to be carried out more efficiently and rationally for each auditor, ensuring that the audit is carried out perform with due quality, economy, efficiency and effectiveness; propitiating, to a large extent, the success of its execution. Directing the planning towards the questions of greatest interest according to the foreseen objectives. Knowing in detail the characteristics of the entity to be audited and determining the importance of the subjects to be examined.. Make the selection and adjustments to the methodology and programs to be used; It makes it possible to assess the internal control environment (accounting and administrative)
Risks:
Failure to perform a quality scan results in:
- Conceive planning for unnecessary examinations. Extending future evidence due to ignorance of the control environment. Unknown background of deficiencies or suspected criminal acts as a result of previous audits. The auditor is unable to identify the operational nature of the business, its organization, location. of its facilities, sales, productions, services provided, its financial structure, purchase and sale operations and many other matters that could be significant in what is to be audited Not conceiving an adequate planning of the work to be carried out and / or not directing it towards the issues that are of greatest interest according to the intended objectives
This will result in a higher cost and time to carry out the Audit.
Standards:
The Exploration should be carried out using Note Sheets to record the criteria on answers to your questions and as proof of the result of investigations carried out in your exploration, especially in the control environment, and you can also use a Proforma Model, which can be conceived as a Model Exploration Guide, This Model provides information on some data necessary during the audit execution process, especially in the Planning stage.
It must be adjusted to the needs and of course to the conditions and characteristics of the activity or entity audited.
Controls:
The Supervisor must carry out reviews, and monitoring, in the execution to advise the work, in order to detect failures, insufficiencies and deficiencies in time, and before its completion. You must also carry out supervision, recording this in the Supervision Act, which appears in the Article "Supervision Report" on this site.
