Inquiry is one of the most fundamental and widely used audit procedures, playing a critical role in gathering evidence and understanding the entity and its environment. It involves seeking information from knowledgeable individuals within or outside the entity, such as management, employees, or third parties. According to International Standard on Auditing (ISA) 315, inquiries help auditors obtain insights into business processes, internal controls, financial reporting practices, and potential risks of material misstatement. While inquiries alone are rarely sufficient to form an audit conclusion, they provide a foundation for further audit procedures, such as observation, inspection, and analytical procedures.
1. Importance of Inquiry in the Audit Process
Inquiry is a powerful tool for auditors to obtain information, clarify processes, and identify potential risks. It enhances the auditor’s understanding of the entity and guides the design of further audit procedures.
A. Gathering Information on Business Processes and Risks
- Understanding Business Operations: Inquiry provides insights into how the entity operates, including its key processes, products, and services.
- Identifying Risks: Inquiries with management and staff help identify areas where errors, fraud, or other risks of material misstatement may arise.
B. Evaluating Internal Controls
- Assessing Control Design and Implementation: Inquiry helps auditors understand how internal controls are designed and whether they are implemented effectively.
- Identifying Control Weaknesses: Discussions with personnel may reveal weaknesses or gaps in the internal control system that require further investigation.
C. Supporting Professional Judgment
- Clarifying Accounting Policies: Inquiry assists auditors in understanding the rationale behind management’s selection and application of accounting policies.
- Assessing Estimates and Judgments: Inquiry helps auditors evaluate the reasonableness of management’s estimates and assumptions, such as provisions or asset valuations.
2. Types of Inquiry in Auditing
Inquiries can be formal or informal and may involve discussions with internal or external parties. The type of inquiry depends on the information sought and the level of assurance required.
A. Inquiries of Management and Those Charged with Governance
- Senior Management (CEO, CFO): Inquire about strategic objectives, financial reporting processes, and risk management practices.
- Audit Committee and Board of Directors: Discuss governance oversight, compliance with regulations, and the monitoring of internal controls.
- Internal Audit Function: Obtain information on internal audit findings, risk assessments, and the effectiveness of internal controls.
B. Inquiries of Operational Staff
- Department Heads (Sales, Procurement, IT): Gain insights into operational processes, revenue recognition, inventory management, and IT systems.
- Finance and Accounting Staff: Inquire about journal entries, reconciliations, and the preparation of financial statements.
- Compliance and Legal Teams: Obtain information on legal matters, regulatory compliance, and contingent liabilities.
C. Inquiries of External Parties
- Legal Counsel: Seek legal opinions on ongoing litigation, contractual obligations, and regulatory compliance.
- Bankers and Financial Institutions: Confirm loan agreements, credit facilities, and cash balances.
- Customers and Suppliers: Verify transactions, account balances, and contractual terms to ensure accuracy and completeness.
3. Techniques for Conducting Effective Inquiries
Conducting effective inquiries requires careful planning, clear communication, and professional skepticism. Auditors must frame questions appropriately and critically evaluate the responses received.
A. Planning and Preparing for Inquiries
- Define Objectives: Clearly define the purpose of the inquiry, such as understanding a specific process or verifying information.
- Identify Key Personnel: Determine who within the entity or externally is best positioned to provide accurate and relevant information.
- Prepare Questions in Advance: Develop a list of targeted questions, ensuring they are specific, open-ended, and relevant to the audit objectives.
B. Conducting the Inquiry
- Use Open-Ended Questions: Encourage detailed responses by asking open-ended questions that allow the interviewee to provide comprehensive information.
- Maintain Professional Skepticism: Approach all responses with a questioning mind, considering the possibility of bias, misrepresentation, or omission.
- Observe Non-Verbal Cues: Pay attention to body language, tone, and other non-verbal signals that may indicate discomfort or hesitation.
C. Evaluating Responses and Corroborating Information
- Assess Consistency: Compare responses from different individuals to identify inconsistencies or contradictions.
- Seek Corroborating Evidence: Verify responses through observation, inspection, or analytical procedures to ensure their accuracy.
- Follow Up on Inconsistencies: Investigate discrepancies by conducting additional inquiries or performing further audit procedures.
4. Documentation of Inquiries
Proper documentation of inquiries is essential to provide evidence of the audit procedures performed and the conclusions reached. Documentation ensures transparency and supports the auditor’s professional judgment.
A. Key Elements to Document
- Who Was Interviewed: Record the name, position, and department of the individual providing the information.
- Date and Method of Inquiry: Note the date of the inquiry and whether it was conducted in person, by phone, or in writing.
- Topics Discussed: Summarize the key topics covered and the specific questions asked during the inquiry.
- Responses Provided: Document the responses received, noting any significant statements, explanations, or opinions.
- Follow-Up Actions: Record any additional procedures performed or planned as a result of the inquiry, such as corroborating evidence or further inquiries.
B. Use of Inquiry Documentation in the Audit File
- Inclusion in Working Papers: Include detailed records of inquiries in the audit working papers to support the audit opinion and facilitate internal reviews.
- Cross-Referencing: Link inquiry documentation to related audit procedures, such as inspection or analytical procedures, to provide a comprehensive audit trail.
5. Examples of Inquiries in Practice
Examples of inquiries illustrate how auditors apply this procedure in different contexts to gather information, identify risks, and support audit conclusions.
A. Example 1: Inquiry About Revenue Recognition Policies
- Objective: Understand how the entity recognizes revenue from multiple-element arrangements (e.g., software sales with maintenance services).
- Key Personnel: CFO and revenue accounting manager.
- Questions Asked:
- “Can you explain the criteria used to recognize revenue for bundled services?”
- “How do you allocate revenue between different components of the arrangement?”
- Follow-Up: Review contracts and compare responses to the accounting policies disclosed in the financial statements.
B. Example 2: Inquiry About Internal Control Over Cash Handling
- Objective: Assess the effectiveness of internal controls over cash receipts and disbursements.
- Key Personnel: Treasurer and accounts payable clerk.
- Questions Asked:
- “What procedures are in place to ensure cash receipts are accurately recorded?”
- “How do you segregate duties between cash handling and recording transactions?”
- Follow-Up: Observe cash handling procedures and inspect bank reconciliations to verify the accuracy of responses.
C. Example 3: Inquiry About Legal Contingencies
- Objective: Identify potential legal liabilities or contingent liabilities that may require disclosure or accrual.
- Key Personnel: General counsel and compliance officer.
- Questions Asked:
- “Are there any ongoing legal proceedings that could materially impact the financial statements?”
- “What is the likelihood of an unfavorable outcome, and have any provisions been recorded?”
- Follow-Up: Review legal correspondence and obtain written confirmations from external legal counsel to corroborate the responses.
6. Limitations of Inquiry and the Need for Corroboration
While inquiry is a valuable audit procedure, it has limitations and should be supplemented with other procedures to obtain sufficient and appropriate audit evidence.
A. Limitations of Inquiry
- Subjectivity of Responses: Inquiries rely on the knowledge, memory, and honesty of the respondent, which may be influenced by bias or incomplete information.
- Potential for Misrepresentation: Management or employees may intentionally or unintentionally provide misleading information.
- Lack of Sufficient Evidence: Inquiries alone rarely provide sufficient audit evidence to form a conclusion, especially in high-risk areas.
B. The Need for Corroboration
- Combining Procedures: Use inquiry in conjunction with observation, inspection, and analytical procedures to corroborate information and obtain reliable evidence.
- Evaluating Consistency: Cross-check responses with other sources of information to ensure consistency and accuracy.
- Applying Professional Skepticism: Maintain a questioning mindset and critically evaluate the reliability of responses, particularly in areas of significant judgment or risk.
The Role of Inquiry in Effective Auditing
Inquiry is a fundamental audit procedure that provides valuable insights into the entity’s operations, internal controls, and risk environment. By engaging with management, operational staff, and external parties, auditors can gather information that informs risk assessments and guides the design of further audit procedures. However, inquiry alone is rarely sufficient to form audit conclusions and must be supplemented with corroborating evidence through observation, inspection, and analytical procedures. Proper documentation of inquiries ensures transparency, supports professional judgment, and enhances the overall quality and effectiveness of the audit.