May-2015

AUDITING
actions, which are selected for detailed analysis. Various
principles of auditing including application of Act, Rules
or Procedures as well as consistency of the monetary value
with the other comparable entries within as well outside
the entity’s transactions, or any novel type of checking,
if any available have to be applied in the selected
sample. Utmost sincere efforts have to be made in this
phase as the entire efficiency of audit model depends on
this. This detailed exercise leads to the identification of
the transactions which are having inconsistence with the
Rules, Regulations, other transactions etc. If there are no
deviations in the sample, the cost auditor has to go for
another sample.
Step 4 –Tabulation of the results derived
In this step, information derived in step 3 are to be tabulated
in a particular format which facilitates to make
further analysis. While exercising the substantial testing
of the transactions the cost auditor may accept the entire
monetary value mentioned in the transactions or he may
be reject the entire transactions. There are many circumstances
where the cost auditor may admit partial amount
of the financial transactions and disallow the remaining.
After completion of the audit of all samples selected the
results derived are to be incorporated into the transaction
data set and form a new transaction data set.
Step 5- Frequency of Errors
After collecting the above information, error distribution
has to be evaluated and the results derived are to be tabulated
in a table containing error interval, actual frequency
and cumulative frequency.
Step 6- Fitting in Normal distribution
The new transaction data set after incorporating the audited
value has to be formed. The actual frequency and
estimated frequency and the difference of the two are
evaluated and the evaluated results are tabulated. If the
new transaction data set satisfy χ2 test, then the cost auditor
may conclude his results. On the other hand, if the
new transaction data set did not satisfy χ2 test, the following
steps may be adopted.
Step 7- Identifying Error Interval, which are likely to
have more misstatements
The cost auditor may identify the error interval, where
the χ2 variate is more. The cost auditor has to select the
samples from the data transaction set in the same interval
where the χ2 variate is more. Cost auditor may use any
type of sampling method to identify the additional samples.
By omitting the transactions already audited, he can
select new transactions from the remaining transactions.
A detailed audit could be conducted in the samples
selected and the form the new transaction data set after
incorporating the audited value. The χ2 test will applied
in the new transaction data set to confirm the normality.
The exercise has to continue till transaction data set
satisfies χ2 test after incorporating the audited admissible
value.
PHASE II - EVALUATION OF MAXIMUM OB-
JECTIONABLE AMOUNT
The following common notations are used in this phase.
Ur = Reliability factor
A = Precision
SE= Standard error of mean
N= Population size
n = sample size
x = Mean
σ = Standard Deviation
SD = Standard Deviation
BV = Book Value of Accounting Balance under scrutiny
EV = Estimated Value Accounting Balance under scrutiny
f= frequency, a positive number.
The next step is to evaluate the monetary value of the
objectionable transactions within the accounting balance
or in a particular class of transactions. The following steps
are required to make the evaluation of the total monetary
value of objectionable transactions.
Step I
Let Xi be audited (correct) value and Yi be the book value
(recorded) of the ith transaction. The book balance
and audited balance of the account under consideration
will be
N
Y = ∑ Yi
i=1
and
N
X= ∑ Xi
i=1
The error amount of i th item is defined as
D i
= Yi - Xi
When D i
> 0 it is overstatement and Di