Although auditors might develop complicated techniques to test high-risk account balances, they use common techniques to test the accounts found at most companies. By understanding the methods used by your company's auditors, you will be able to determine how to best deploy resources to have your audit completed quickly. And as audits are billed to the company by the hour, saving time will also save money.

These are some of the activities you can expect during an audit:

Confirmation of Accounts

Even the smallest businesses use at least one bank account. To gain assurance about cash balances, auditors often send confirmations to the client's bankers. These forms request that the banker confirm the amount of the bank balance or investment and that the client has a right to use the funds that are being held by the third party.

Confirmations are considered strong audit evidence because they require a third party to vouch for the reported balance. However, it is important that confirmations are both sent and received under the auditor's control. This maintains the integrity of the procedure, as the client is unable to tamper with the confirmation before it is sent or after it is received.

Observation of Assets

For inventory and fixed-asset balances, auditors commonly observe the existence of an asset. By physically verifying an asset, auditors do not have to rely on the client's records or third-party evidence.

For companies where inventory is a large part of the business, generally accepted auditing standards specifically mention that the company's annual inventory count should be observed by the auditor.

Property, plant and equipment balances are usually tested by obtaining a listing of the company's fixed assets and sub-selecting assets for testing. Once selected, the auditor travels to the location where the asset has been placed into service and ensures that the asset is in place and is functioning properly.

For many smaller businesses, the bulk of fixed assets are furniture, fixtures and computer equipment. As these items are easy to verify visually, observation is the most efficient method to audit these accounts.

Recalculation of Ledger Entries

Auditors frequently examine client-created schedules and ledgers to ensure that the calculations are performed accurately. To do this, they recalculate the document. Although recalculation is not sufficient to determine the existence of an asset or a liability, it is necessary to make sure that the balance reflects the appropriate value.

With the move toward computerized accounting systems and spreadsheets, recalculation tasks are much less cumbersome than in the past. However, it is important for business owners to understand that the auditor also has to audit the inputs to the spreadsheet.

An owner can help the auditor complete this task by providing support for the inputs to the spreadsheet at the same time the spreadsheet is provided.

Reciprocal Population Analysis

Many times, auditors must look for transactions that are unrecorded in the company's financial statements. To do so, a reciprocal population analysis is employed. For example, auditors are required to search for unrecorded liabilities and loans in the company's financial statements.

Looking at the company's records for unrecorded transactions does not make sense in this instance, as the auditor would be looking for something that, by definition, wasn't there. To audit in this situation, the auditor will examine cash payments after year-end, using these cash payments as a reciprocal population.

If the auditors discover payments made for obligations that are not recorded as of year-end, there is reason to suspect that the company might have unrecorded liabilities.