Preparatory Steps Before Commencement of a New Audit

An auditor never simply walks in and starts checking vouchers. Before the actual examination of accounts begins, a new auditor (one taking up an audit engagement for the first time, or for a new client) must complete a set of preparatory steps to understand the business and organise the work ahead:

1. Obtaining the letter of appointment. The auditor should have, in writing, formal confirmation of appointment — stating the scope, the period to be covered, and the terms of engagement — before starting any work.
2. Communicating with the previous auditor (where one existed). Professional ethics require a newly appointed auditor to communicate with the outgoing auditor before accepting the assignment, both as a matter of professional courtesy and to obtain any information the outgoing auditor may have about the client (including whether there are any professional reasons the appointment should not be accepted).
3. Ascertaining the scope of the audit. Whether the audit is statutory (scope fixed by law, e.g. under the Companies Act, 2013, for a company) or non-statutory (scope fixed by agreement with the client) determines how much freedom the auditor has to decide what to check and how.
4. Studying the legal constitution of the business. Examining the Memorandum and Articles of Association (for a company), the Partnership Deed (for a firm), or the trust deed/governing document (for other entities), to understand the powers, objects, and any special provisions affecting the accounts.
5. Understanding the nature of the business. The auditor must learn what the business does, what its major transactions look like, and what accounting policies and practices it follows, since the audit approach for a manufacturing company differs from that for a trading or service business.
6. Studying the accounting system and internal control. A preliminary review of the client's books of account, the accounting software/manual system in use, and the internal control system in place, helps the auditor gauge how much reliance can be placed on the client's own records.
7. Noting the names, designations, and powers of the responsible officials, so the auditor knows who is authorised to approve which kinds of transactions.
8. Obtaining a list of books of account maintained and the previous year's audited financial statements (if available), to understand the scale and pattern of the business's records.
9. Visiting the business premises, where practicable, to get a first-hand sense of operations, stock, and the general control environment. …