As an audit technique repeatedly used through out the whole auditing process, audit testing appears to be a combination of a series of isolated and different audit techniques. However, in practice these seemingly isolated techniques are closely linked with each other and become temporally consecutive and spatial concomitant with the character of dynamical temporal sequence. From this point of view, the audit testing can be described as a synthesis of testing methods under temporal-spatial reference frame during the audit process. As the audit testing techniques evolve with the development of the society, and are tied up with the application level of science and technology, as well as the audit experiences, the applicable model for audit testing, mainly based on the audit testing techniques, is to some extent historically successive. This paper will primarily discuss the practical and applicable model for audit testing in common sense.
The applicable model for audit testing is constituted with a series of closely connected elements under the basic structure of audit process, and includes the methods of analysis, reviewing and checking, etc. With the development of the society, the public are now paying much more attention to the fairness and truthfulness of financial reports, which changes the objective of auditing. Facing the numerous and jumbled business operations, we gradually realized the importance of the internal control over the audit work. Carrying out audits after testing internal control will not only help improve the efficiency of audits, but also ensure the quality of audit. Therefore, based on the hypothesis and testing theory that “a better accounting system and internal control will minimize the scope of financial statements for audit testing”, the audit of basic accounting system comes into being. Under this condition, the applicable model for audit testing will concentrate on the circumstances and the internal control system, under which the business transactions were processed, instead of the results of the business transactions, such as accounting vouchers, accounts and financial statements. After assessing of the internal control system and its implementation, the scope of audit testing could be decided. Then, the weak points found within the internal control system become the focus of audit review where substantial test will be conducted before an audit conclusion is made.
In order to specify the audit work and give prominence to key aspects for audit review, the applicable model for audit testing can be divided into 5 stages:
The above analyses show the variations of difference applicable models for audit testing under various circumstances. However, in practice, auditors need to adjust and re-modify the applicable model for audit testing for different auditees. This paper will analyze the applicable model for audit testing from the perspective of internal and external economic environment.
1) The impact from the scale of business to the applicable model for audit testing
Limited audit testing is performed after audit sampling and internal control evaluation to reduces the audit costs while ensuring reasonable audit quality. However, if the scale of an auditee’s business is small enough, limitations on internal control may become obvious, such as simple organizational structure and economic business, non-standard control system and authorization procedures, and incomplete division of duty. The audits on those small-scale entities can be simplified accordingly. The discrimination of the business scale mostly attributes to the professional judgment of auditors. The main criteria are the scale of transactions and number of staff. Both factors are equally important, for example, if both the business scale and the number of staff are small, the auditee is to be identified as small in scale, while in other instances, if the auditee’s business scale is small but employs a large number of staff, like the case of a labor-intensive industry, it should only be treated as normal auditee. If the auditee’s business scale is large, but employs a reasonable number of staff and its transactions are generally simple, like the case of a trade or wholesale company, yet its internal control system is considered weak and is more likely to have errors or frauds in financial statements, it then should still be identified as mall-scale auditee. For these small scale business, as their inherent risk and control risk are comparatively high, and sometimes it is more efficient to check the balance of accounts directly, in these case, auditors may carry out substantial test directly without lying on the internal control test, in order to minimize the audit risk to an acceptable level. These audit tests include only the direct test on all business transactions and the test procedures are simplified adapting to actual situation. For example, if the auditee keeps a small current account, auditors can adopt the analytical test method instead of letter inquiry, calculate a ratio between Sales Receivable and Total Sales and compare it with the rate of the previous year. It is also not necessary for auditors to check the inventory, if the small-scale auditee does not have a large inventory. After taking into consideration the costs and profits, auditors could carry out analytical test on the items under the Income Statements and normal testing on the balance of important accounts. Then, auditors could proceed with the test on other important transactions or matters. Moreover, in practice, the following fraudulent activities are frequently found in small-scale auditees: overstate costs, disguise profits, illegal tax evasion and camouflage of actual financial status. As the conventional financial audit does not include specific fraud-detecting audit approach, and the audit testing does not include professional skills in this regard, auditors should carry out special test to make up the draw back of audit testing in fraud detecting besides expressing auditors’ opinion on the fairness of financial statements.
2) The soundness and efficiency of the internal control require the adjustment on applicable model for audit testing
For auditors, the soundness and effectiveness of internal control are the basis on which audit program are found and audit testing conducted. Since contemporary auditing requires auditors to carry our proper research and evaluation on the existing internal control system and regards it as a reliable basis for auditing testing. In other words, the method, scope and extent of audit testing implementation, as well as whether the auditors could control the audit risk at an acceptable level all hinges on the soundness and effectiveness of internal control the soundness and effectiveness of internal control. Generally speaking, the soundness of the internal control will be tested and evaluated through analytical test, the review on the soundness of the internal control system itself.
Learning the situation of internal control and comparing it with the standard internal control evaluation model designed for the control objective and expressed in flowing charts and questionnaires, auditors can easily find any defections within the control system. Although the analytical tests solve the problem of completeness of control points within the internal control system, they are only based on regulations on the business transactions. In actual business activities, the effectiveness of internal control, whether auditees comply with these regulations or whether these key control points are effectively functioning, have to be examined and evaluated through compliance tests.
According to the characters of auditees, auditors can adjust the applicable model for audit testing. If the internal control system is regarded to be sound after analytical tests, auditors could proceed with compliance audit directly, otherwise, auditors have to carry out a comprehensive substantial review. If the internal control is proved to be effective through compliance tests, auditors could collect all the evaluation results and go on to decide the scope, focus and approaches for limited substantial audit accordingly.
Government auditing in China has undergone new developments under the threefold impacts of China’s accession to the World Trade Organization (WTO). The first and second impacts we would like to underline are more advantages than disadvantages and more opportunities than challenges. The third impact we could defer is both audit priorities placed by the CNAO and the call for 3-B Development (better work force in audit institutions, build audit regulatory framework and boost the modernization of audit measures and methodology) proposed by the CNAO are scheduled in commensurate with the requirements of WTO rules. The top management of the CNAO has proved itself with the farsightedness in promoting the booming of government auditing in China with China’s accession to WTO.
1. WTO gives impetus to the forming of a unified, normative and transparent legal framework in conducting audit
Introduction on the WTO rules
A basic principle of government auditing in China is to conduct audit in accordance with the law. But for a long time, auditors have been puzzled about several bottle-necks like unconsolidated legal framework, legal regulations contradictory with each other and interference with audit law-enforcing of departmental document and notification. With China’s accession to WTO, the above-mentioned puzzles could be solved step by step. China’s accession to WTO might entail a miscellaneous edition but cut the long story short: “the Chinese government should handle affairs on the basis of 56 WTO rules.” The 56 WTO rules could be classified into four types: 20 Uruguay Round Agreements, like the General Agreement on Tariffs and Trade 1994, Agreement on Agriculture, Agreement on Textiles and Clothing, Agreement on implementation of Article VI (Anti-dumping), etc.; 7 understandings about the implementation of related agreements, like Understanding on Rules and Procedures Governing the Settlement of Disputes, etc.; 29 ministerial decisions and declarations (Ministerial Conference is the highest level decision-making body of WTO and entitled to interpret and revise WTO rules); 4 legal documents about China’s accession to WTO, namely, Protocol on the Accession of the People's Republic of China, Report of the Working Party on the Accession of China, Decision: Accession of the People's Republic of China by Standing Committee of National People’s Congress, Instrument of Ratification by President Jiang Zemin, and Foreign Affairs Minister Tang Jiaxuan,. The above-mentioned legal documents mainly cover the following 4 areas: Trade in Counterfeit Goods, Trade in Services, Trade-related Aspects of Intellectual Property Rights and Trade-related Aspects of Investment Measures and affirmed 3 core principles: non-discrimination principle (most-favored-nation status and national treatment), open market principle (tariff concessions, lifting of quantitative import limitations and transparency) and fair competition principle (custom duties could be used as a suitable measure of trade protection while dumping and subsidy is not permitted). In conclusion, WTO rules refer to 56 or 60 legal documents, 4 areas and 3 core principles.
1.1 Change of legal framework
WTO rules are characteristic of their function in regulating and restricting government’s behavior (some experts would like to take it for an international administrative law) as well as a legal binding force and compulsive and authoritative power prevailing over domestic law. Any domestic law of member states conflicting with WTO rules shall be repealed or revised. Currently, China is going through the stage of making, revising or repealing WTO-related laws, representing a major change of legal framework for audit law-enforcing. The last two years have seen revisions to 9 laws, like law of the People’s Republic of China on Joint Ventures with Chinese and Foreign Investment, law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures, Trademark Law of the People’s Republic of China, Copyright Law of the People’s Republic of China and Patent Law of the People’s Republic of China. The State Council has also reviewed 756 administrative laws and regulations, and 221 of them were subject to change, among which 71 statues were repealed, 80 were declared invalid and 70 were replaced. Recently, Supreme People’s Procuratorate has repealed 140 laws while the figure of abolished law by Ministry of Foreign Trade and Economic Cooperation reaches 364 in three rounds. Ministry of Finance and State Development Planning Commission have abolished 7 and 26 statues respectively and their work is yet to be finished. State Administration of Taxation is still reviewing the related laws and those subject to abolishment are soon to be disclosed. In order to apply the suitable statue in conducting auditing, auditors need to be acquainted with all these changes to legal framework in a timely manner.
1.2 Transparency of laws and regulations on foreign trade
According to the WTO rules, all regulations and policies concerning foreign trade should be made public. Departmental documents, internal notifications with stipulations resulting in unauthorized issuance of certificates, exaction of random levies or fines on enterprises and personnel, or even trade monopolies and regional blockades shall be suspended in all trades including auditing. Catering to the requirement of making all regulations public by WTO rules, Legislative Affairs Office of the State Council has published The compilation of Regulations, Rules and Other measures pertaining to or affecting China’s Accession to WTO (three volumes), publicizing 244 regulations, rules and other measures about China’s commitments as a WTO member state.
1.3 Sole promulgator of laws on foreign trade
In line with WTO rules, all regulations and policies pertaining to or affecting foreign trade should be solely promulgated by national government. Local governments at Sub-national level must conform to the laws and regulations made by national government and they are not entitled to make any law on foreign trade. If audit institutions consider that the regulations, rules and other measures of local governments at the sub-national level or departments of national government contravene WTO rules, they shall suggest that the competent departments concerned make corrections. If the departments concerned fail to make corrections, the audit institutions shall refer the matter to the competent organs for disposition according to law.
1.4 A unified tariffs zone
WTO rules require that state should implement its tariff policy uniformly throughout its customs territory, including its special economic zones. According to Article 222 of Report of the Working Party on the Accession of China, China would implement its tariff policy uniformly throughout its customs territory. In line with the former rule provided by the State Council and General Administration of Customs, customs duties and other charges applied to imports of self-use materials by special economic zones and Pudong New Area of Shanghai Municipality could be refunded after collection on a 100% or 80% basis or enjoy a 20% annual reduction. According to another former practice, the imported goods of foreign-invested enterprise with the value of which is equal to or lower than total investment volume by the same enterprise are subject to Specific tariff reduction or exemption. In line with WTO rules, the above-mentioned preferential tariff regulations or notifications should be eliminated. Auditors should pay special attention to this kind of tax reduction and exemption in performing customs audit.
2. WTO gives impetus to the adjustment of audit contents and scopes
2.1 Change of audit contents
With China’s accession to WTO, we are sure to witness a more regulated government and business behavior, improved truthfulness and compliance of revenues and expenditures of public finance as well as the decrease of irregularities and misbehaviors, paving the way for a better audit context. Audit institutions can reset work priorities with less burden for the audit of truthfulness like error-checking and fraud prevention, but more devotion to performance audit in order to urge the audited bodies to perform their duties, improve management and promote quality and effectiveness of economic management.
2.2 Change of audit scopes
With China’s accession to WTO, traditionally-monopoly markets such as monetary, insurance and telecommunications sectors shall be open for foreign competition in a gradual manner. A large number of foreign enterprises as well as large sum of foreign capital shall enter local market and the percentage of state sectors as well as absolute quantity in certain fields is sure to fall. As a result, audit of public finance will become the main assignment of audit institutions. Statistics show that, among 47 service and trade sectors, only 12 sectors (telecommunications, cinema, import of movies, negotiable securities, life insurance, international cargo freight, maintenance of air craft and computer-booking service) are open for foreign capital with quantity or proportion (less than 49%) limits, while all the other sectors including other insurance and banking will be fully open in 5 years’ time. It is estimated that China will have less state-owned enterprises subject to audit.
3. WTO gives impetus to the publicity and transparency of audit findings
According to Art.36 of Audit Law of the People’s Republic of China, audit institutions are entitled to publicize audit findings. But due to the low-transparency of government behaviors, publicity of audit findings, a general-accepted practice by audit institutions abroad, has not been followed out ever since 8 years ago when Audit Law of the People’s Republic of China was put into effect. But with the accession of WTO, China has promised to increase transparency of government behaviors by publishing the following official publications: Gazette of the Standing Committee of National People’s Congress of the People’s Republic of China, Gazette of the State Council of the People’s Republic of China, Gazette of the Ministry of Foreign Trade and Economical Cooperation of the People’s Republic of China, Gazette of the People’s Bank of China and Gazette of the Ministry of Finance of the People’s Republic of China, providing a public and transparent audit context for audit institutions. Moreover, audit institutions of China, as branches of the governments at corresponding levels, shall also improve the transparency of audit work. During the annual conference on audit work nationwide of 2002, Mr. Li Jinhua, Auditor General of China, has proposed to establish the system of publicizing audit findings. The top management of the National Audit Office of China has finished the feasibility research and submitted to the State Council, Opinion on establishing the system of publicizing audit findings by CNAO, suggesting that the CNAO publicize certain reports of audit findings on central budget implementation and other revenues and expenditures of public finance, comprehensive report of audit findings of certain sector, special report of audit findings of certain department and report of economic fiduciary audit on an annual basis. As an initiative of utter importance in CNAO, the system of Publicizing audit findings, once established, will greatly improve public awareness of audit work, with stronger repercussions in the public achieved and authority of audit supervision intensified.
4. WTO gives impetus to the standardization of auditing and improvement of audit quality
As the WTO rules require, member states shall standardize government behaviors and improve the quality and efficiency of government behaviors and it has been made clear that administrative system be evolved into a new model. In order to standardize government behaviors and improve quality of work, government should stick to the three principles: first, no ultra vires, that is to say government should not exceed its mandate for anything out of its competence; second, no absence, that is to say government should be accountable for anything inside its competence; third, no misuse, that is to say government should abstain from any kinds of misbehaviors and misuse of powers.
In light of the requirement of the WTO rules on government behaviors, audit institutions shall perform the duties of auditing in accordance with the law and improve quality of audit work. The National Audit Office should work to strengthen the building of audit regulatory framework, conduct auditing under the guidance of the Audit Law of the People’s Republic of China and various Government Auditing Standards, and implement Government Auditing Standards in an all-round manner. Auditors in China have been confronted with the imperative tasks like abolishing the backward notion that the Audit Law and Government Auditing Standards are chains to auditors and diminishing the phenomenon that “only consciousness and resolution can help auditor in detecting irregularities” in order to replace the random audit by the regular audit in compliance with laws and regulations.
5. WTO gives impetus to the strengthening of audit associations
In China, there are two audit associations: the established China Institute of Certified Public Accountant and to-be China Institute of Internal Auditor. With China’s accession to WTO, both audit associations should be burdened with the duty of self-disciplining and managing the whole sector. By bringing self-disciplinary service and management into full play, audit associations should bring all auditors managed by audit associations to account for the quality of audit work and compliance with codes of ethics and promote the building of an independent, fair and objective profile of auditor in performing duties.
In order to intensify the role of audit associations, we need to harmonize the relations between supervision by government and management by audit associations. In light of the principle of “combining the self-discipline of audit associations with supervision by government and regulation by law”, audit guilds should be reshaped with a self-discipline management system and deprived of any kinds of bureaucratism which are now still seen in today’s associations. With more professional staff, audit associations should no longer be a shelter for laid-off public servants. Audit associations should cultivate a sense of service and improve the work style. With the staff of high professional competence and better service sense, audit associations shall play a more important role in safeguarding the legal interests of individual members and serving the need for training and qualification assessment.