1.7. ROUTINE CHECKING 1.7.1. | Meaning of Routine Checking Routine checking is a part of vouching. Routine checking is the regular monitoring of business accounts, books and ledgers to determine how the business is functioning and to detect any error that may have occurred, either accidentally or fraudulently. Audit of a bank is generally conducted through routine checking. Routine checking is carried on by the auditor and includes checking of: 1) Castings, sub-castings, carry forwards and other calculations in the books of original entry. 2) Postings into the ledger accounts. 3) Castings and balances of various ledger accounts. 4) Transfer of balances from the ledger to the trial balance. 1.7.2. Features of Routine Checking Following are the salient features of routine checking: 1) Detailed Checking: Routine checking is a detailed checking of each and every transaction as recorded in the books of original entry and the subsidiary books, and all ledger postings. 2) Traditional System: It is a traditional system of audit 3) Checking of All Items: In a routine checking all efforts are directed to check transactions without exception. 2) 3) 4) 1.7.2 Frat yy a: mae nti, eal 2) 3)gaa wo (Coe) Method of Extensive Checking: By routine {hecking the traditional method of extensive checking {nd vouching of all entries is done. 4 45) Expensive: The process of routine checking. is expensive in terms of time as well as cost. It takes ‘nore time and consumes higher costo 6 Detects Clerical Errors and Frauds of a Very Ordinary Nature: Routine checking can reveal the clerical errors and ordinary frauds, 1.7.3. Objectives of Routine Checking Following are the common objectives of routine checking: 1) Arithmetical Accuracy: The purpose of routine checking is to check the arithmetical accuracy of books of accounts. 2) Correct Posting: The purpose of routine checking is to examine the accuracy of posting. 3) NoAlteration: The purpose of routine checking is to see that there is no alteration of figures by the client staff. 1.7.4. Auditor’s Duty Regarding Routine Checking Routine checking is a significant component of audit; every auditor has the following duties related to the routine checking: 1) The auditor can first evaluate the internal control and internal check system existing in the organisation. Based upon his evaluation, auditor can determine the extent of routine checking to be adopted. 2). It is advisable that auditor should undertake thorough routine checking in such cases where size of firm is small. 3) In case of audit of large organisations, it is not possible for auditor to undertake thorough routine checking. So, in such cases, auditor can apply his judgement, experience and knowledge in determining the extent of routine checking. 4) The auditor should frequently supervise the work of routine checking being done by his subordinates and ensure the adherence to his instructions in this regard. 5) The auditor can determine his duty after examining the degree of computerisation. 1.7.5. Advantages of Routine Checking Following are the advantages of routine checking: 1) Accuracy: The benefit of routine checking is that there is accuracy of accounting books and records, Frauds: Routine checkin; in the books of accounts. is useful to checking fraud58 43) Ledger Verification: Routing | ratty the accuracy of recorded transactions in ledger. 4) No Change in Figures: climinate the alternation of figures: Final Checking: The benefit of routine that final checking work is reduced. 1.7.6. Disadvantages of Routine Checking Routine checking has the following disadvantage |). Mechanical Process: Practically routine checking is J mechanical process and often leads to monitoring Acrounting, procedures on past of those who are entrusted with this task. 2) Complex Errors and Frauds Remain Unearthed: It feimbompetent to uncover complex errors such is incon rinciple or compensating erors of other cleverly committed frauds. 3) Expensive: Routine checking takes more time and consumes higher 4) Redundant in Certain Cases: Routine checking is A asidered redundant in certain cases, -g~ a business where self-balancing accounting system exists, routine checking is almost of no use. 5) Monotony: The work of routine checking is boring ‘and time consuming. It does not improve the performance of employee rather it brings ‘monotony. fig. TEST CHECKING | 181. Meaning and Definition of "Test Checking ‘Test checking is a process of selecting and checking of few transactions from a large volume of transactions. 9 checking is is not economical as it 5 COSt. If the entries checked are found to be correct then the auditor assumes that the remaining entries are also correct. ‘The technique is based on the theory of sampling which is ‘commonly used as a statistical method. In other words, it is also known as “Selecti Process/Verification” or “Sampling Process”. ae According to Protas Meig, “Testing and test checking ‘means to sel examine a representative a large number of similar items”. ae 1.8.2, Features of Test Checking beg checking has the following characteristics: }) Scientific: Its a mathematical truth that a scient selected sample would reveal the aa characteristics ofthe population. The statistical theory of sampling is based on a scientific law. Hence, it can be relied upon to a greater extent than any arbitrary techniques which lacks basis and acceptability: pever bring complete reliably, it coment accurate results. Its a process of estimation. © 3) Coverage of Material Items: amounts or telating to mate exhaustively and other entries are picked carom ase kl fr plan, Sometimes nes are checked. for afew specified months exhaustive) specie ly and the rest go 4) Full Coverage over a Time Period: i ) pormally planned in such away" wher aee Seg programmes for 3 t0 5 years cover all types of transactions in case of a medium or large’ sized Company. Thus, if in one year the months of January. June and December are checked; April, July and September may be checked inthe second year and so on, 5) Surprise Element: The staff and management of the ‘Auditee Company should not be able to anticipate the pattern of test checking; otherwise they will predict the areas and periods to be covered in any one year and will be careful regarding the same. 6) Flexibility: If test checking becomes routine, predictable and mechanical, it loses its value. Hence, the auditor should keeps on changing the methods of test checking at reasonably frequent intervals, 7) Judgment Based: The extent of test checking would primarily depend on the Auditor's judgment of a particular situation. This judgment in tum depends on the previous experience of the Auditor, current developments and the efficacy of intemal Control System. Entries involving large rial accounts are seen 1.8.3. Methods of Selection of Sample ‘Samples can be selected in the following ways: 1) Block Selection Method This method of sampling involves selecting a block (or blocks) of contiguous items from within a population. 2) Random Selection Method: This method of sampling ensures that all items within a population stand an equal chance of selection by the use of random number tables or random number generators. ‘The sampling units could be physical items, such as sales invoices or monetary units. 3) Systematic Selection Method: This method selects samples using sample interval which are a result of dividing the population of units by the sample size, 4) Haphazard Selection Method: This selection | ‘method may be an alternative to the random selection method provided auditors satisfy that the sample is Tepresentative of the entire population. Haphazard ‘sampling method of sample selection is least suitable for extrapolating results to the population.60 i le, tied Sampling Method: 4 stratified sample, > tie 10 eee Methotical features, of population ‘on a smaller scale Bet 7 Tation is divided into the Pot a ike the ‘division is based on gender, social religion, etc. : pn hod of sampling The : 6) Monetary Unit SamP ion whereby sample si2¢, fon will result in & 1.8.4. Precautions for Test Checking ) Cl ‘and Stratify Transactions: should be classified under may be stratified if transactions of the cof authorisation, documentation, : System 2 Se ad f transaction should be recording and evidencing of examined, 4° Internal Controls: The whole system of intra control Intermaeas of accounts and finance should be studi’ and evaluated for its ‘efficiency, soundness and, ‘capability for producing reliable accounting and financial data. 4) Test Check Plan: | properly thought out test chess plan should be prepared to match with the audit bbjective and avoid mix-up in the objective. 5} No Bias in Selection: The transactions falling under cach tests check plan should be selected in such @ ‘manner that bias cannot enter in the selection. 6) Avoid Unsuitable Areas: Auditor should identify the ‘areas where test check may not be suitable. 7) Decide Number of ‘Transactions: The number of transactions to be selected for each test check plan should be predetermined. It refers to intensive checking of a selected number of transactions. 8) Decide Significance of Errors: Errors that found may be material or immaterial in the particular audit 1.8.5. Applicability of Test Checking Following are the applications of test checking: 1) When there are large volumes of identical or routine transactions. 2) When transactions are large. 3) When the auditor has to certify the accounts quickly after the close of the accounting period. 4) When the auditor has past experience about the nature of transactions of the clients organisation. 5) When a satisfactory system of intemal control and check system exist 1.8.6. Transactions not Suitable for Test Checking Following transactions ae not appropriate forthe 1)_ Opening and closing entries, ——— 2) Items which are material,goer 1 RD (Cor) 3) Bank reconciliation Statement, 4 Depreciation, 5). Royalty, 6) Presentation and disclosure of information in “ and Loss Account” and ‘Balance Sheet! ON 7) Non-tecurring or exceptional transaction’ test checked, actions need not be 8) The auditor should not resort annual basis in case of seasonal i 9) Managerial remuneration, and 10) Transaction related to cash book. to test checking on industry, 1.8.7. Factors to be Considered before Starting to Test Checking 1) Nature of Transactions: The nature of transactions should be carefully considered for determinin, extent of test checking. [ vce 2) Effectiveness of Internal Control: The internal control system existing in the organisation should be evaluated, ‘The auditor may adopt test checking for determining the suitable sample size. Test checking is done when there is an effective system of internal check. 3) Materiality of Items: The extent of test checking to be adopted should be depend upon the materiality of the items. 4) Previous Experience: Based on previous experience, the auditor may undertake exhaustive checking of details valuation of work-in-progress while restricting his checking to few transactions in the cashbook. 188. Auditor’s Duty Regarding Test Checking 1) Test checking is a short-cut method of audit. 2) It curtails costs and time of audit, but it involves risk on the part of the auditor. 3) If some errors or frauds are escaped from the notice of the auditor because of sample checking, the auditor may held liable for this negligence. So, enough care and caution should be taken by the auditor: while resorting to test checking. 4) Auditor must evaluate the intemal control system existing in the organisation beforehand. 5) Auditor must carefully consider the circumstances for determining the sample size. Materiality of item must not escape from his notice while he selects the sample, 6) The items selected should be verified in depth from its origin to the conclusion. Test checking will then be an effective activity. There will be minimum. possibility of errors and frauds remaining undetected if the auditor exercises Teasonable care according 10 circumstances in conducting test checking.a 1.8.9. Advantages of Test Checking Test checking has the following benefits: 1) Reduces Volume of Work: The work of an auditor is reduced considerably as he checks few transactions, extra time available can be utilised for concentrating ‘on areas of considerable importance. 2) Reduces Time and Cost: Test checking reduces time, cost and energy of both the auditor and the client. 3) Quick Completion of Audit Work: Test checking enables the auditor to complete the work quickly as the auditor checks few or limited transactions. 4) Effective Means of Checking: Test checking can be effective, if the auditor selects the transaction to be checked carefully 5). Scientific Assessment of Risk: The risk of material ‘misstatement in the financial statement is assessed by the auditor in a scientific manner by drawing samples and studying them in detail 6) Serves as a Guide: It serves as a guide for the auditor to arrive at conclusion regarding the true and fair view of the state of business affairs. 7) Measure Mathematically Risk: The main advantage of using statistical sampling techniques is that such techniques measure mathematical risk. 1.8.10. Disadvantages of Test Checking ‘Test checking has the following negative points: 1) No Scientific Approach: No scientific approach is used in selecting the samples, hence the results drawn on itis not reliable. 2) Risk Cannot be Measured: It is not possible to ‘measure the amount of risk involved. 3) Complicated Transactions are not Checked: The | audit assistants select only simple transactions for checking and complicated transactions are left omitted. 4) Carelessness of the Client’s Staff: The client's staff is aware that the auditor will not check all their work hence they become careless. 5) Possibility of Errors and Frauds Remain Undetected: When test checking is adopted by the auditor, there are possibility of errors and frauds left undetected. 6) Unsuitable for Small Business Concerns: Test checking is not suitable for small business concerns as the number of transactions involved are not large. 1.9.1. Short Answer Type Questions 1) Write the nature of auditing 2) Mention the scope of auditing, 3) Explain the primary objectives of auditing. 4) What do you mean by misappropriati nee y mis tion of cash and