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1. An audit notebook is usually a BOUND BOOK in which a large variety of matters observed during the course of the audit are recorded. That means it is a record of Audit Observations.
2. It forms part of the permanent Working Paper File as it is used for future reference.
3. It contains detailed information relating to the work performed such as Queries raises, Responses, Clarifications asked, Explanation obtained. Unsatisfactory Responses, Auditors Remarks, etc.
4. It is usual for the present day auditors to use loose sheets but they also serve the purpose. However care should be taken that those loose sheets are bounded into a book at the end of the audit.
5. An audit notebook helps the auditor in picking up the work from where it is left.
6. It can be used by the auditor in proving the Quality and Extent of work done as and when he is charged with a duty of negligence.

Extracts from Audit Note Book: (Some Examples)

1. The clock at the time keeping department is Ahead by 5 minutes.
2. During the peak hours, insufficient staff existed at the factory gate.
3. The following receipts with a value of 10,000 are missing: ———.
4. The last 2 board meetings were held on 31st march and 30th June (around 8 PM). This appears to be risky and may lead to statutory Non-Compliance.
5. Insufficient Registered members not maintained.
6. The same person handling Cash, maintaining Cash Book and handles important register.

G. EXTENT OF CHECKING

1. Under the traditional approach to audit (i.e. in olden days) each and every transaction was checked by the auditor in order to express the true and correct view of financial statement. Such Thorough Verification of Transaction is known as Exhaustive Checking.
2. Such exhaustive checking is not considered or accepted by the present day auditors as it involves a huge amount of Time, Money and Efforts.

Moreover the auditor is NOT required to express his opinion as true and correct.
3. Hence by considering the above aspects the technique of test checking or sampling is favored by the present day auditor.
4. There are various factors which contributed to the auditors adoption of test checking; which are as follows:
i.) Professional Competence of Management.
ii.) Existence of a formal internal control system with in organization.
iii.) Time constant in examining the numerous and repetitive transactions.

5. There is no Law or Statute, which permits the auditor to undertake test checking at the same time the Law also does not specify exhaustive checking or complete checking.
Therefore whether to undertake exhaustive checking or test checking is purely a matter of auditors Professional Judgement.
6. Even though by resorting to exhaustive checking the auditor cannot provide the accuracy or reliability of financial statements.
7. The auditor is undertaking a calculated risk by reducing the extent of checking. Therefore the auditor should carefully consider the following aspects in order to minimize the risk of test checking.
i.) Nature and Size of Business.
ii.) Adequacy and Reliability of Books and Records maintained.
iii.) Strength and weakness of internal control system.
iv.) The number of Transactions.
v.) Materiality of a Transaction. Etc.
8. Test Checking is based on the scientific statistical theory of sampling. Therefore Auditors are more interested in adopting test checking.

H. TEST CHECKING

1. Test checking is technique where by the auditor selects some transaction from the whole population and subjects them to a thorough in-depth examination.
He equates the above results to the whole population in order to arrive at a conclusion.
2. Such Selection of particular items from the given population is also known as sample selection.
3. The auditor selects the samples on any one of the following basis:
i.) On the basis of Professional Judgement of auditor (or)
ii.) On the basis of Random Selection.
4. The auditor must be very careful in selection of a sample and should not allow any element of Bias or Prejudice
5. The auditor should consider the Nature and size of the business, Materiality of Transactions, the possibility of frauds and errors etc, before he resorts to the techniques of test checking.

Precautions to be taken by the auditor in Adopting Test Checking

a. All the transactions must be properly classified according to the appropriate item or Group to which they belong.
b. If there are wide variations between the transactions then the entire transactions must be first stratified, (i.e. Divide into groups).
c. The number of transactions to be selected as samples in each area must be pre determined. This should depend on the type of transactions, Materiality, the level of Confidence and the degree of satisfaction, etc.
d. The internal control system must be thoroughly examined.
e. The auditor must prepare a comprehensive test check plan after careful Review of Internal Controls.
While preparing such plan, the auditor should fix an objective for each test check and provide necessary explanations order to avoid confusion among the audit assistants.
f. The auditor must identify the Areas of Materiality where test checking should not be done. All such areas should be Examined Exhaustively