Professional Documents
Culture Documents
Classification of Audit
Classification of Audit
Classification of Audit
Fezan Akhtar
MBAP-F13-19
Faisal Saeed
MBAP-F13-07
Hina Shaheen
MBAP-F13-10
Ammara Ch
MBAP-F13-24
Table of
Content
Introduction.
.3
1. Define Auditing............................................................................................. 3
2. Features of Auditing....................................................................................... 3
Classificaition of Audit...
.4
1. Based on Organization Structure......................................................................5
2. Based on Scoep............................................................................................ 10
3. Based on time.............................................................................................. 11
4. Based on Object........................................................................................... 21
5. Other Audits............................................................................................... 22
Audit Tools and Techniques...
26
1. Introduction............................................................................................... 26
2. Audit Procedure.......................................................................................... 26
3. Audit Tools and Techniques........................................................................... 26
4. Other Techniques......................................................................................... 27
References
...29
INDRODUCTION
The word, audit is derived from the Latin term audire which means to hear. In
early days an Auditor used to listen to the accounts read out by the accountant in order to check
them. Businessman wanted assurance that their book- keepers had accurately and properly kept
the books of account. An auditor is an independent expert who examines the account of a
business concern and report whether the final accounts are reliable or not.
The final accounts of a business concern are used by various persons such as the owners,
shareholders, investors, creditors, leaders, government etc. for different purposes. All these
users need to be sure that the final accounts prepared by the management are reliable. An auditor
is an independent expert who examines the accounts of a business concern and reports the final
accounts are reliable or not. Different authorities have defined Auditing as follows:
Definition:
Auditing is the process of gathering and evaluation of the economic information with the
purpose of reporting on it
According to Mautz Auditing is concerned with the verification of accounting data, with
determining the accuracy and reliability of accounting statements and reports.
A.W. Hanson defined auditing as, An Audit is an examination of accounting records to
establish their reliability and the reliability of statement drawn from them.
Statement on Standard Auditing Practices (SAP)
Auditing is the independent examination of financial information of any entity, whether
profit oriented or not, and irrespective of its size or legal form, when such an examination
is conducted with a view to expressing an opinion thereon.
Features
1. It is the systematic and scientific examination of the accounts of a business.
2. It is an intelligent and critical examination of the accounts of a business.
3. It is done by an independent person or body of persons qualified for the job.
4. It is a verification of result shown by profit and Loss Account and the state of affairs
shown by Balance Sheet.
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Non-Statutory
Audit
Sole
Proprietorship
Govt
Audit
Partnership
Firm
Complete Partial
Audit
Audit
Detailed
Audit
Non-Profit
Organization
Independent
Financial Audit
Cost
Audit
Management
Audit
Internal
Audit
Social
Audit
Operational
Audit
Occasional
Property Audit
Secretarial
Audit
Audit
In Depth
Statutory Audit
Government Audit
Non-statutory
(Private) Audit
Sole Proprietorship
Partnership Firm
Individuals and Non-profit
Organization
1. Statutory Audit:
Statutory Audit is compulsory audit prescribed under statute i.e. law. Appointments
of auditors, removal, remuneration, rights, duties, liabilities are governed as per the
Provisions of the respective law applicable to the organization. Scope of the audit work and
all others terms are as laid down by the law. It can be conducted only by a qualified
Chartered Accountant.
Statutory audit is conducted after preparation of final accounts. Statutory auditor has to
report whether the balance sheet and profit and loss A/c are drawn upon conformity with law
and whether they show true and fair view. Statutory auditor has to submit report to the
shareholder. His remuneration is fixed by shareholder.
2. Government Audit:
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Meaning and Scope: Government audit is a control measure for public accounting of
government funds. It covers the audit of all expenditure and receipts done by the executive
and audit of commercial accounts maintained by public enterprises. Public enterprises are
classified under three categories department undertaking, statutory corporations financed by
government and government companies set up under the Companies Act.
3. Non-Statutory Audit
Non-Statutory Audit is voluntary audit. They are not compulsory under any law. It is
carried at the discretion of the proprietor terms and conditions of the audit are determined
as per the agreement made between the auditor and proprietor. Example: Financial audit
of the sole trader and partnership firm. Voluntary audit also covers non-financial audit.
Internal audit, management audit, social audit, operational audit etc.
Private Audit
Private audit is carried out at the behest of the interested parties and not to fulfill
statutory requirements. The terms and conditions between the client and the auditor defines
the scope of latters work. Sole proprietors, partnership firms, certain individuals such as
rent collectors, estate managers, etc. and non-profit organizations such as schools,
hospitals, clubs, etc., get the accounts audited for various reasons. Some of these are to meet
the requirements laid down by internal rules and regulations, to ensure reliability of financial
statements and derive related advantages.
These are listed below:
1.
Features of Audit
a. Audit Procedures: The nature and extent of audit procedures and working
papers are influenced by special features of SE described as above.
b. Fraud and Errors: Auditor should check the following circumstances which
indicate the possibility of fraud and Errors:
Whether owner needs to manipulate the accounts (as the SE is his only
source of income).
Whether personal and business transactions are mixed up.
Whether advisor (lawyer, etc.) are changed frequently.
Whether advisor starts too late or has to be finished in a hurry.
Whether there are unusual material transactions around year-end.
Whether there are unusual transactions with group concern.
Whether excessive fees/ commission is paid.
Whether there disputes about taxes.
Whether accounting records are partly missing.
Whether cash transactions are too many.
Whether documents for many transactions are inadequate.
Whether many confirmations for debtors/stock have not been received back.
Whether owner/senior manager have not been leave for long period.
Whether working capital is insufficient.
Whether remarks in earlier audit report are ignored.
Whether stock records are not kept.
C. Audit Evidence:
a) Adequate audit evidence may not be available. The owner may want that some
transactions are not recorded at all. The internal controls, which should generate the
documents, may be weak.
b) Auditor should focus on cross-checking of data, quantity reconciliations, analytical
review, external confirmations and review of transactions after year-end.
c) Audit Planning: Audit of a Se may be done by a sole C.A. Hence, audit planning will be
simple.
d) Management Certificate: Auditor should obtain a written certificate from the owner that
the accounting records/ financial statements are complete and accurate.
e) Analytical Review: Evaluating the Gross Profit Ratio over years/trade is often very
helpful in case of a SE.
f) Audit Sampling: In view of the small size, it may be possible to check 100% entries or
at least select a; large sample size for checking.
3.
B. BASED ON SCOPE
Based on Scope
Complete Audit
Partial Audit
Detailed Audit
Complete Audit:
In this type of audit, the auditor is required to check each and every transaction recorded
in the books of accounts. He has to examine each and every voucher, document or
correspondence relating to the transaction. This type of audit is not possible for large
sized organizations.
Partial Audit:
In Partial audit, the auditor is not required to examine all the books of accounts. Only a
part of the accounts or some transactions as desired by the clients may be scrutinized.
Auditor has to state the area covered by the audit. This type of audit cannot be followed
in the case of statutory audit. It may be followed in the case of statutory audit. This audit
is not convenient when the audit is legally required.
Detailed Audit:
Under detailed audit, few business transactions are examined in detail by the auditor.
Spicer and Pegler have defined it as, An audit which starts with books of prime entry
and ends with the balance sheet. The checking sequence is arranged in order of recording
the transactions in the primary book.
Thus, for the purpose of detailed audit certain transactions are traced through various
stages from beginning to their end with the help of available evidence. This technique of
examination is also called audit-in-depth. To take an example, detailed audit of purchase
of goods for inventory would consist of tracing the transaction though all the points of
transaction cycle viz., requisitioning the goods, ordering the goods requisitioned,
receiving the goods ordered and preparing the payment voucher.
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C. BASED ON TIME
Based On Time
Continuous Audit
Final Audit
Interim Audit
Balance sheet Audit
1. Continuons Audit :
Meaning:
Continuous audit is defined by R.C. Williams as one where the auditor is
constantly or at (regular or irregular) intervals engaged in checking the accounts during
the period. Continuous Audit means an audit at regular intervals throughout the
accounting year. Generally, the audit work begins after the accounting year is over. But
in case of Continuous Audit, the work begins the accounting year itself.
Necessity
Continuous Audit is necessary in the following casesa.
b.
c.
d.
e.
Errors and Frauds in Books Already Checked: If an employee changes some figures in the
books already checked by the auditor during his earlier visits, it would be difficult to detect
such errors and frauds subsequently.
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d.
Monotonous- tiresome-tedious: Continuous visits to the clients place may make the work
tedious and the audit staff loses interest from work consequently. The quality of audit suffers.
e.
Absence of link: In the absence of well-planned audit work, an auditor may miss the thread
of audit work. Further, some important queries may be overlooked if no proper audit notes
and queries are recorded by the audit staff during the course of the audit.
f.
Conflict between audit and accounts staff: The members of audit and accounts staff come
in close contact and sometimes it may result in spoiling the healthy relations between them
and thereby the quality of audit may suffer.
g.
Dependence of the accounts staff on the auditor: The accounts staff may depend on the
audit staff. They may require the help of auditor for even small errors which they can
discover or avoid by taking proper care.
Precautions
a. Strict instructions: Strict instructions should be given to clients staff not to alter
the audited figures. Mistakes, if any, should be rectified by passing rectification
journal entries and not by alteration of figures.
b. Audit programme: Proper audit programme should be prepared by the auditor,
so that the time of accounts and audit staff is not wasted.
c. Special ticks: Special ticks should be used for unaudited altered figures. Auditor
should write in the margin the actual figures audited with his audit pencil.
d. Audit notes: the auditor should keep exhaustive audit notes. The queries and their
explanation by the client should be properly recorded.
e. Checking the ledger: Checking the impersonal ledger should be done only after
the close of the accounting year.
f.
Surprise visits: Surprise visits should be made in addition to the regular visits.
g.
Rotation: There should be reasonable rotation of audit staff and their duties so
that they may not lose interest in their work.
h.
Better control and supervision: There should be better control and supervision
over the audit staff. All the important figures in the balance sheet should be noted
in the audit diary and they should be rechecked at the time of subsequent visits.
i.
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2. Final Audit
It is also known as periodical audit. It is generally start after the completion aspect
more than the depth aspect of audit. The danger of alteration of figures or manipulation of
accounts is totally absent. Generally, it starts after the close of the financial period. There is
very little impact on prevention of errors and frauds by way of moral checks. It is best suited
for small and medium sized business. It saves in terms of time, energy and money.
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e. No Familiarity with Clients Business: Since the audit spends little time at the clients
place, he cannot become familiar with all the aspects of clients business. They may
affect the quality of audit.
f. Sample Check: Since the auditor has to complete the audit in a short time, he has to
resort to sample checking. The increases the risk of missing material items.
g. Uneven Work-load for Audit Staff: Audit staff is overworked immediately after year
end and comparatively less busy at other times.
3. Interim Audit:
Meaning:
Interim Audit is an audit conducted in between the annual audits. It is conducted to find out
the interim profit and know the financial position at the end of a part of the accounting year.
For example, an audit of accounts prepared for the period of six months from 1 st April to 30th
September, would be Interim Audit.
When Conducted:
Interim Audit is conducted in the following cases
a. Quarterly Results: Public Limited Companies listed on the stock exchange has to
declare their quarterly results. It is preferable, though not compulsory, to declare such
results on the basis of interim audit.
b. Interim Dividends: Interim audit is also advisable when a company intends to pay
interim dividends. Interim audit would ensure that there are enough profits to justify
payment of interim dividends.
c. Sale of Business: In case of a sole partnership firm, interim audit becomes necessary on
admission, retirement or death of a partner, dissolution of partnership, sale of a firm to a
company, valuation of goodwill etc.
d. Changes in Firm: In case of a proprietor, interim audit may be conducted when the
business is proposed to be sold, to fix the purchase consideration.
e. Changes in Firm: In case of a partnership firm, interim audit becomes necessary on
admission, retirement or death of a partner, dissolution of partnership, sale of firm to a
company, valuation of goodwill etc.
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How Conducted:
An interim audit should be done as if it is the final audit for the concerned period.
Thus, it would involve not only vouching but also verification of assets and liabilities,
valuation of closing stock, computation of depreciation, confirmation from parties and so on.
Once an interim audit is done, at the time of the final audit, the auditor has to concentrate
only on the remaining period. Thus, interim audit helps in timely completion of final audit.
The auditor at the time of final audit, however, should ensure that there are no alterations in
the books previously checked by him. He should carefully compare the final accounts with
the interim accounts to find out if they are consistent.
Advantages
Interim audit is similar to Continuous Audit and enjoys similar advantages:
a. Quarterly Results: A public limited company listed on the stock exchange can
comply with the statutory provision of declaring quarterly results.
b. Interim Dividends to Shareholders: The shareholders would be happy as the
Company can pay interim dividends to the shareholders.
c. Quick Preparation of Final Accounts: Since the interim audit is already done, the
Final Accounts can be prepared immediately after the year end.
d. Up-to-date Accounts for Banks/Investors: The up-to-date interim accounts are
useful to banks and investors for taking decisions regarding loans and investment.
e. Check on employees: Interim audit acts as check on the employees to keep the
accounts ready and up-to-date.
f. Prevents errors and frauds: Checking by the auditors for the purpose of interim
audit helps to detect and even prevent errors and frauds.
g. Thorough Final audit: The auditor has more time at his disposal at the time of
final audit, which reduces the risk of missing any material items.
h. Utilization of Audit staff: audit staff can be utilized in a better manner. Interim
audit is done when the audit staff is relatively free.
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Applicability:
Balance sheet Audits are not conducted in all cases. Such Audits are conducted in case of
very large organization banks, etc. in the following circumstances:
a. The Internal Control System is very strong. The controls have been developed
and tested over the years. The controls are capable of detecting and preventing
errors and frauds.
b. The volume of transaction is so large that an in-depth checking is impossible. A
detailed vouch-and-post audit is not possible if the final accounts arte to be ready
in time.
c. The concern has its own internal audit department. The statutory auditor,
therefore, need no duplicate this work.
d. The accounts staff is highly qualified, the management is professional and
accounts are computerized.
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Method:
Balance Sheet Audit is conducted in the following manner
Review of Internal Controls: The auditor must evaluate the system of internal
controls in the following respects:
a. Whether the internal controls are effective: If the internal controls are effective,
auditor can concentrate on material items instead of checking arithmetical
accuracy of vouchers and books. He should study the internal control system with
the help of questionnaires, manuals, organization charts and flow charts.
b. Whether the internal controls are in operation: He should carry out tests to
ascertain that the controls are actually in operation. Based on his evaluation of the
internal controls, the auditor should plan his audit programme.
Verification of Items in the Final Accounts : He should verify the major items of
assets and liabilities and income and expenditure appearing in the Final Accounts
(Balance Sheet and Profit and Loss) in the following manner:
a. Verification: He should carry out physical verification of major items of
assets and liabilities on sample basis.
b. Inspection: He should inspect documents of title etc. in respect of major items
on sample basis to verify whether such transactions actually occurred, and
whether such transactions are recorded in the books for the right amount.
c.Vouching: He should vouch only the major transactions on sample basis to
ascertain whether such transactions are actually occurred by the concern; and
whether such transactions are recorded in the books for the right amount.
d. Valuation: He should satisfy himself that the assets and liabilities are properly
valued.
e.Presentations and Disclosure: He should check whether the assets, liabilities,
income and expenses are presented and disclosed in the Final Accounts
properly, according to the recognized accounting policies and the
requirements of law.
Specific Items: The auditor should pay special attention to the following specific items
in the Final Accounts:
a. Verify fixed assets, investment physically.
b. Check the addition to and deduction from fixed assets and investments.
c. Check the amount of depreciation charged.
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d. Check the accounts of major debtors and creditors and obtain confirmations
and statement of accounts.
e. Verify cash and stocks physically.
f. Check valuation of stocks.
g. Ascertain amount of bad or doubtful debts.
h. Check estimates of contingent liabilities.
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D. BASED ON OBJECT
Based on Object
Independent Financial Audit
Cost Audit
Management Audit
Internal Audit
Social Audit
3. Management Audit:
4. Social Audit: A social audit is a way of measuring, understanding, reporting and ultimately
improving an organization's social and ethical performance. A social audit helps to narrow
gaps between vision/goal and reality, between efficiency and effectiveness.
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5. Internal Audit:
Internal audit is an independent, objective assurance and consulting activity designed to add
value and improve an organization's operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve
the effectiveness of risk management, control, and governance processes. Internal auditing is
a catalyst for improving an organization's governance, risk management and management
controls by providing insight and recommendations based on analyses and assessments of
data and business processes. With commitment to integrity and accountability internal
auditing provides value to governing bodies and senior management as an objective source of
independent advice. Professionals called internal auditors are employed by organizations to
perform the internal auditing activity.
E. OTHER TYPES
Other Types
Special Audit
Occasional Audit
Secretarial Audit
Audit in Depth
Cash Audit
Operational Audit
Tax Audit
Environmental Audit
Propriety Audit
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1. Special Audit:
Central Government has power to order a special audit of the accounts of a company for a
specific period. When affairs of any company are not managed as per the sound business
principles.
a. When company is being managed in a manner which is likely to cause serious
injury or damage to the interest of trade or industry.
b. When financial position of a company is such as to endanger its solvency.
Special audit can be entrusted by the central government to the companys auditor
himself or to any other chartered accountant. Auditors remuneration will be fixed by the
Central Government and paid by the company Auditor submits his report to the central
government. On the basis of his report the Central Government may take adequate actions.
Such auditor has the same rights, duties, powers and liabilities as the statutory auditor of the
company.
2. Occasional Audit:
This audit is carried out according to the occasional need of the business of the client.
It is done at the specific desire of the owners of the business where the audit is legally not
compulsory. The auditor will conduct the audit according to the terms and reference. His
report will mention the terms of reference as per the letter he has received.
3. Secretarial Audit:
Secretarial Audit is compliance audit it is a part of total compliance management in an
organization. The Secretarial Audit is an effective tool for corporate compliance
management. It helps ensure timely corrective measures when non-compliance is detected.
4. Audit in Depth:
Taylor and Perry define auditing in depth as it implies the examination of the system
applied within a business entailing the tracing of certain transactions from their origin to their
conclusion investigating at each stage the records created and their appropriate authorization.
It is a method according to which a few selected transactions are subject to a thorough
scrutiny in forming an opinion as regards the accuracy of the data so scrutinized.
Under this type of audit, the auditor examines thoroughly selected transactions right
from their origin to the conclusions. All records and documents pertaining to the transactions
are checked in detail. The basic purpose of this type of audit is to see whether the system of
internal check or control system is effective.
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This type of audit enables the auditor to suggest to the management a better procedure for
recording the transactions to avoid any loop holes for committing frauds.
For example, the item sales will be examining as follows:
1
Gate Pass.
Stock Register.
Copy of Invoice.
Cash Book.
10
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5. Cash Audit:
It is a partial audit and not a complete audit. In this type of audit, the auditor examines
only the cash transactions. He examines cash receipts and cash payments. The receipts and
payments may be capital or revenue in nature. Cash transactions are checked with the help of
receipts and vouchers and other evidences.
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6. Operational Audit:
Operational audit is conducted to see that the business operations are improved in future.
Operational audit goes beyond financial audit. It is conducted for the following purposes:
7. Tax Audit:
Statutory audits as well as the cost audit are taken up as result of specific provisions
contained in the companies Act. However, a new concept of tax audit has been evolved lately
under the Income Tax Act, 2001. Income tax act provides for compulsory audit of accounts of
certain assesses whose turnover or receipts exceed the specified limit. The Income Tax Act
has provided for rules and regulations regarding tax audit. The tax audit can be undertaken by
the practicing member of the institute of Cost and Works Accountants of Pakistan.
8. Environmental Audit:
In recent times, new type of audit has emerged which is known as Environmental
Audit. The objective of such an audit is to examine the effect of the activities of an
organization on environment. Environment audit is a management tool comprising a
systematic, periodic and objective evaluation of how well organization, management and
equipment are performing to safeguard the environment. It is concerned with assessing
whether the company policies meet regulatory requirements as perceived by the
management.
9. Propriety Audit:
In the words of Kohler, Propriety means that which meets the tests of public interest,
commonly accepted customs and standards of conduct. Applied to audit, propriety audit can
be defined as an examination of actions and decisions to find out whether they are in public
interest and meet the standards of proper conduct. Thus under propriety audit, the auditor
not only examine the transactions from the books of accounts with the help of vouchers and
documents, but he verifies also as to how far transactions effected from the decisions or
actions are proper or reasonable. The propriety audit is concerned with examining that there
is no leakage of revenue or wastage of funds by mistake or fraud. It is concerned with
ascertaining appropriateness from legal, financial or economic point of view.
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Generally, the attainment of the audit objectives required the collection of the evidence to
support a decision.
Posting Verification
Extension Verification
Vouching
Confirmation
To ascertain the correctness of the figures and validity of the clients record
Selection of representative items from the records and examining them for
reaching on conclusion about the trend
Testing
Physical Examination
Reconciliation
Reconcile two or more related items if they are not agreeing or match with each
other
Selection of representative items from the records and examining them for
reaching a conclusion about trend of activity.
TESTING
Financial ratios
Documentary Examination
Make a wide search to find out which of the entries are regular, consistent and
logical
Scanning
Observation
Observe the various policies and procedures or plans followed by the client
Flow Charting
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1. Examination Of Record:
This technique is commonly used by the auditors, The inspection of books and documents is
made to verity the validity of data.
2. Inquiry:
The auditor can also use the technique of inquiry. He can get the information from resource
persons inside or outside the enterprise.
3. Sampling:
Auditor can select few items from whole accounting information. This technique enables the
auditor to obtain and evaluate the evidence of some characteristics of the whole class. It is
helpful in forming the conclusion.
4. Confirmation:
To ensure the accuracy of the data auditor can collect the information from the debtor.
Confirmation is response to an inquiry to prove certain data recorded in the books.
5. Compliance:
To check the arithmetical accuracy of accounting record, the balancing accounts can be
compared with the vouchers to test the reliability of data.
6. Compliance Test:
These tests are designed to check the effectiveness and compliance of internal control. In
obtaining the audit evidence, auditor is concerned with the existence of effective internal control.
7. Use Of Computer Techniques:
There are large number of audit techniques like audit software, test packs and mapping which
can be used by the auditor to test the accuracy of the data.
8. Substantive Test:
There are designed to obtain evidence that data produced by accounting system is accurate or
not. It has two kinds :
a) Test of detail transaction.
b) Test of significant ratios and trends.
It consists of studying significant ratios, trends and investigating different changes. This review
procedure is based on the expectations of relationship among the past and present data.
References:
www.scribd.com
www.investopida.com
www.slideshare.com
www.wikipida.com
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