Auditing in depth entails checking a few selected transactions in their entirety from beginning to end. The selected transactions are examined across various stages of the recording process that they pass through. In other words, the entire flow of a transaction is verified. At every stage, appropriate records and authorities are examined to determine if the transaction has been authorized by designated personnel or not. Moreover, all accounting and operational aspects of the transaction are reviewed from beginning to end. This enables an auditor to have an overall view and evaluate the selected transactions in complete detail.
As compared to other types of audit procedures, auditing in-depth reveals more about the functioning of the client’s system and its deficiencies. It traces transactions from their origin to conclusion, thereby examining each stage of entry in the client’s records and its authorization.
Auditing in depth does not mean 100% checking. It is a concept that is closely associated and is normally used as part of test checking. Therefore, only a certain percentage of transactions (a sample) is examined in detail. Say, for example, only 25% of purchase transactions are selected for test checking and the auditor applies in-depth checks on them. This shall include verifying the Purchase Requisition, Purchase Orders, Quotations, Bin Card, Bills and Invoices, Stock register, Goods Received Note, etc. This will enable the auditor to evaluate the accounting mechanism and internal controls present in the client’s system.
Example of “Auditing in depth”
To take an example, auditing in-depth for transactions of purchase of goods would involve verification of the following things:
- Purchase Requisition and if it is printed, numbered, and authorized
- The invitations for quotations and analyzing the same
- Purchase Orders and whether they are serially numbered, authorized, and made with the approved list of suppliers only
- Receipt of goods along with the review of Delivery Challan, Advice Note, etc.
- Entrance of goods to stores after they have been verified for quality, quantity, etc.
- Recording of entry in stores books/records
- Supplier’s Invoice and its receipt
- Purchase Invoice and its approval with regard to the compliance of specifications, quantity, and quality
- Review of entries in Purchases Day Book
- Posting of entries to Purchase Ledger, Creditor’s Account, and Purchase Ledger Control Account
- Payment made for settlement of invoice and discounts availed if any
- Review of payment entries in Cash Book/ Bank Account.
- Posting of entries from Cash Book/ Bank Account to the ledger and control accounts.
The below points highlight some of the important characteristics of auditing in-depth:
- It is a detailed examination of transactions right from their very beginning to the endpoint of their recognition in the books of account.
- It involves a logical, systematic, and organized sequence of steps or procedures.
- It helps to evaluate the effectiveness of the client’s internal control system.
- All aspects of the transaction are examined using this technique, including the authenticity of the transaction, its validity, adherence to established procedures, arithmetic accuracy of the transaction, accounting treatment, and so on.
- For all material items, an auditor should seek to obtain satisfactory evidence and should apply auditing in-depth, wherever possible.
- It assists in locating frauds and manipulation in the client’s books.
- When planning an audit in-depth, the auditor should carefully examine the enterprise’s object, nature, and activities, as well as the account books kept, internal control system, and other controls used.
The principle of materiality when using “Auditing in depth”
The principle of materiality has always been fundamental to the whole process of auditing. During the course of an audit, an auditor must be cautious and decide which items are material and which are not. The judgment depends on the knowledge, experience, and competence on his part. When he finds that an item is quite material in nature, he would have to give more consideration to its verification and would look for more evidence in support thereof. In fact, he would have to conduct an examination-in-depth for the said items.
Further, even though auditing in depth is closely associated with test checking, they may not go hand-in-hand in every situation. There may be a certain group of transactions for which test checking may not be appropriate (for example, cash/bank records). This is so because, under test checking, the auditor does not generally review all of the records put into the books of accounts, but instead selects a few items and, if these are found to be correct, he assumes that the remaining entries will be correct as well.
An auditor has to select an audit approach based on the materiality of the transaction as well as the degree of likely risk of having a material misstatement. If the risk is high and the transactions are material, then selective verification may not be appropriate. Rather a comprehensive checking of each and every transaction, that too in extensive detail, is necessary. Thus, complicated or material transactions that need more attention may not be apt for test checking. For them, the approach of auditing-in-depth is appropriate to carry out an extensive examination.
Auditing in depth is a comprehensive examination of certain transactions wherein they are evaluated in a step-by-step manner across all stages of the recording process. This exercise can help an auditor to obtain sufficient and conclusive evidence, especially in areas that require more attention.
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