Chapter 3 : Chapter 3 : Types of AuditTypes of Audit

T.Y. B com (Honours)

Academic Year : 2009-10

Trimester : V

Classification of AuditsClassification of AuditsStatutory and Non Statutory Audits

• Statutory audits cover :a) Companiesb) Banking companiesc) Electricity Supply companiesd) Co operative societiese) Public and Charitable Trustsf) Corporationsg) Societies

Classification of AuditsClassification of AuditsNon statutory Audits Cover :1)Proprietory concerns2)Partnership firms3)Unregistered clubs and societies, etc.

Internal audit & external audits :1)Internal audit – by own staff2)External Audit – performed by duly

qualified professional accountants

Classification of AuditsClassification of Audits• Primary distinction between internal and

external auditor• Responsibility – Internal auditor to

management and external auditor to owners of the concern

• Scope of Work – Internal auditor will define on basis of business activity, external auditor will define on the basis of the information required to express opinion

• Approach – Internal auditor has to ensure that the accounting system is efficient as well as internal controls to ensure reliability of financial records. External auditor does not have any limitation, there is no fear or favour

Classification of AuditsClassification of AuditsInterim, Final and Continuous audits :1) Interim audit–during the year for a

particular period of the year to avoid too much in the end

2) Final Audit – after the end of the financial year to audit complete accounts

3) Continuous Audit – Continuous and several visits ( similar to internal audit)

Kinds of AuditKinds of AuditThese audits have specific purpose and may or may not be statutory

1. Cost Audit – examine cost records, weaknesses in system, obligatory for some

2. Tax Audit – u/s 44AB of I.T. Act

3. Management Audit – comprehensive and constructive examination of company’s organisational structure

4. Social Audit – special responsibility audit towards public, staff, government, etc

5. Balance Sheet Audit – commences from balance sheet and goes back to the books of accounts

6. Systems based Audit – evaluation of accounting system to ascertain reliability – proper system then minor checking, if not then detailed checking

7. Energy Audit – whether right amount of energy is used by the enterprise, done by technically qualified persons

8. Secretarial Audit – for Compliance with provisions of various Corporate Laws in terms of legality as well as in terms of timeliness. (replaced by compliance certificate by Company Secretary)

Audit of small entitiesAudit of small entitiesSpecial considerations :

a)Audit procedures – as felt required for framing proper opinion

b)Fraud and Errors – personal exps, cash exp, unusual trans, full records, adequate docs, etc.

c) Audit Evidence – sufficient audit evidence, internal control, cross verification of data, etc.

d)Audit Planning – One CA, simple.e)Management Certificate – for accuracy of

books of accountsf) Analytical Review – Relevant for comparisong)Audit Sampling – small entity, hence 100%

verification

Audit of partnership firmAudit of partnership firm Special considerations :

a) Appointment – clear and concise letter of appointment

b) Partnership deed – registered, signed by all partners, ratios, capital distribution, etc.

c) Minute Book – if any, policy decisions and business decisions

d) Authorised Business – authorised business as per deed/modified deed

e) Books of accounts – whether reasonable and adequate

f) Unauthorised Acts – interest of all partners has been given justice

g) Taxes – provision for tax made in books of accountsh) Division of Profits – in the pre decided sharing ratio

Continuous AuditContinuous AuditAdvantages :

1)Quick preparation of final accounts2)Early dividends to shareholders3)Up to date accounts for

banks/investors4)Check on employees5)Prevents Errors and Frauds6)Familiarity with clients business7)Thorough audit8)Utilisation of Audit Staff

Continuous AuditContinuous AuditDisadvantages :1)Expensive2)Audit in instalments3)Errors and frauds in books

already checked4)Disrupts accounts work5)Undue Reliance on Auditors

Final/Periodic/Annual auditFinal/Periodic/Annual audit

Advantages :1)Inexpensive2)Audit at a stretch3)Less errors and Frauds4)Does not Disrupt Accounts Work

Final/Periodic/Annual auditFinal/Periodic/Annual auditDisadvantages :1)Delay in Final accounts2)Late dividends3)Stale accounts for

bankers/investors4)No moral check on employees5)No familiarity with Clients business6)Sample Check7)Uneven Work load for Audit Staff

Interim AuditInterim AuditAdvantages :

1)Quarterly results2)Interim Dividends3)Quick preparation of final Accounts4)Up to date accounts for

banks/investors5)Check on employees6)Prevents errors and frauds7)Thorough final audit8)Utilisation of Audit Staff

Interim AuditInterim AuditDisadvantages :1)Expensive2)Audit in Instalments3)Errors and Frauds in books

aleady checked4)Disrupts Accounts Work

Balance Sheet AuditBalance Sheet AuditApplicability :1)Strong internal control system2)Large volume of transactions3)Internal Audit Department exists4)Accounts staff is highly qualified,

professional management, computerised accounts

Balance Sheet AuditBalance Sheet AuditMethod on B/S audit :

1)Review of Internal controls – whether effective, internal control in operation

2)Verification of Items in the final Accounts – verification, inspection, vouching, valuation, presentation and disclosure

3)Specific Items – all aspects of fixed assets, drs, crs, cash, stock, bad debts, contingent liabilities

4)Overall checking of final Accounts (Analytical Review) – important ratios, non recurring transactions, funds flow, minutes

Inherent Limitations of Inherent Limitations of AuditingAuditing

1) An auditor cannot check each and every transaction

2) Audit evidence is not conclusive in nature3) An auditor cannot be expected to

discover deeply laid frauds4) Audit cannot assure future profitability

and future prospects5) Auditor has to rely upon experts6) Auditor is supposed to be but may not be

independent7) Financial statements though audited have

their inherent limitations