Audit Note Book and Internal Audit: Importance and Functions

Posted on Aug 4, 2024 in Mathematics

Audit Note Book

An audit note book is a document prepared by audit staff to record uncleared queries, errors, and points for discussion with auditors or clients. It contains information about daily audit work and points to be included in the audit report.

Contents of Audit Note Book

  1. Copy of audit program
  2. Nature of business and important documents
  3. Client name and audit year
  4. List of books of accounts
  5. Principal officers’ names, duties, and responsibilities
  6. Accounting and financial policies

Special Matters to Be Recorded in the Audit Note Book

  1. Unresolved queries (e.g., missing receipts)
  2. Mistakes and errors discovered
  3. Points raised during the audit requiring the auditor’s attention (e.g., non-compliance with legal requirements)
  4. Extracts from minutes books, contracts, and correspondence
  5. Points to be included in the audit report
  6. Points requiring further explanation (e.g., changes in valuation methods)
  7. Dates of audit commencement and completion

Importance of Internal Audit

Internal audit is essential for:

1. Planning

Internal auditors plan audit checks based on risk and extent of audit, including accounting functions like purchase, sales, income, expenses, and shares.

2. Controlling

Internal auditors examine accounting system operations and control audit work through audit programs, distributing work among staff.

3. Recording

Internal auditors record facts and figures in audit notebooks and working papers to express their views on business activities.

4. Independence

Internal auditors must be independent from management influence in developing audit programs, conducting investigations, and reporting.

5. Staffing

Internal audit requires trained staff to conduct examinations effectively.

6. Training

Internal audit staff should receive training to improve audit work results.

7. Relationship

Internal audit staff should maintain friendly relations with management, external auditors, and consultants.

Distinguishing Internal and External Evidence

Internal and external audits differ in several ways:

  • Internal auditors are company employees, while external auditors work for outside firms.
  • Internal auditors are hired by the company, while external auditors are appointed by shareholders.
  • Internal auditors need not be CPAs, while external auditors must be directed by a CPA.
  • Internal auditors report to management, while external auditors report to shareholders.
  • Internal auditors can use any report format, while external auditors must use specific formats.
  • Internal audit reports are used by management, while external audit reports are used by stakeholders.
  • Internal auditors can provide consulting assistance, while external auditors are limited in their support.
  • Internal auditors examine business practices and risks, while external auditors examine financial records and issue opinions.
  • Internal audits are conducted throughout the year, while external audits are annual (with additional reviews for publicly-held companies).