DEPARTMENT OF ACCOUNTING

UNIVERSITY OF JAFFNA- SRI LANKA

Programme Title : Second in Business Administration -2017/2018
Course Unit : BBAA 2132: Audit & Assurance
Handout : 05- Types of Audit
Prepared by : Mr. A.Ajanthan
Issued on : 24th of September, 2019

Learning Objective:
At the end of this chapter you should be able to:
 describe the different types of audit

Classification / types of audit

Audit can be classified on the basis of:
 The work undertaken
 The basis of degree of independence
 The timing of audit

Classification of audit by nature of the work undertaken

Statutory audit
The statutory audits are carried out by the entities because law requires them to do so. e.g: an
audit of a company is carried out as per Companies act No.7 of 2007. The special feature of a
statutory audit is that, the regulations in respect of audit affairs (appointment of auditors, their
qualifications, removal, rights and duties, etc) are laid down in the relevant statute/ act.

Private audit or voluntary audit

A private audit is conducted into an affair of an entity by the auditors on owners request
auditor to do so, and not because of a legal requirement. e.g: audit of the accounts of
proprietorship and partnerships. The scope of the audit terms and conditions will be decided
on agreement made between client and auditor.

Management audit
Management audit is a form of appraisal of the total performance of the management by
means of an objective and comprehensive examination of the organizational structure, its
components, its plans and policies, methods of process or operations and controls and its use
of physical and human resource.

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According to Churchil and Cyert, “Management audit is performed with the object of
examining the efficacy of the information control system, management and management
procedures towards the achievement of enterprise goals.”
Aims and objectives of management audit:
 Improve the efficiency of the management.
 Ensure optimum utilization of resources.
 Find out weak points in internal control system.
 Help management by providing early signals of sickness.
 Appraise managerial performance.
 Facilitates performance evaluation of human resources at every managerial level.

Classification of audit on the basis of degree of independence

Internal audit
Internal audit, also referred as operational audit, is a voluntary appraisal activity undertaken
by an organization to provide assurance over the effectiveness of internal controls, risk
management and governance to facilitate the achievement of organizational objectives.
Internal audit is performed by employees of the organization who report to the audit
committee of the board of directors as opposed to external audit which is carried out by
professionals independent of the organization and who report to the shareholders via audit
report. In general internal audit activities include one or more of the following:
 Monitoring the effectiveness of internal controls and proposing improvements

 Investigating instances of fraud and theft

 Monitoring compliance with laws and regulations

 Reviewing and verifying where necessary the financial and operating information

 Evaluating risk management policies and procedures of the company

 Examining the effectiveness, efficiency and economy of operations and processes

Note: An internal auditor is appointed by the management of an entity (an employee or

an audit firm may be appointed).An internal auditor reports to the management.

External audit
External audit, also known as financial statement audit and statutory audit, involves the
examination of the truth and fairness of the financial statements of an entity by an external
auditor who is independent of the organization in accordance with a reporting framework

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such as the LKAS/IFRS. Company law in most countries requires external audit on annual
basis for companies. External auditors in Sri Lanka are required to comply with professional
auditing standards such as the Sri Lankan Auditing Standards (SLAuSs) and ethical
guidelines such as those issued by CA Sri Lanka in order to maintain a level of quality and
trust of all stakeholders in the auditing exercise. The following table summarizes the
distinction between external auditors and internal auditors.
External Auditors Internal Auditors
Responsible to management, managing
Independent of the organization
director, board of directors or audit committee
Responsibilities are fixed by statute Responsibilities are specified by management
Report to shareholders Report to the director or audit committee
Perform work to enable them express an
Work may range over many operational and
opinion on the truth and fairness of the
financial areas and activities, as determined
accounts in accordance with the
by management.
requirements.

Note: It must be emphasized that some of the activities performed by internal auditors are
similar to those performed by external auditors and the efficiency of the former largely
affects the workload of the latter.

Classification of audit on the basis of timing of audit

Continuous audit
Continuous audit is one where the auditor’s staff is occupied continuously on the audit
throughout the financial year or where they attend at frequent intervals during the financial
year. It is generally applicable to banking company and insurance company.
Advantages Disadvantages
Figures may be altered after the auditor has
More detail checking may be performed
checked them.
The continuous audit is performed in It may be inconvenient for the client staff
accordance with a systematic audit plan, to make available books and documents as
there by the audit report may be issued on they are using them during the accounting
date. year.
Errors and frauds may be detected more
quickly during the accounting period and
thereby losses may be minimized. The cost of audit is very high
The auditors’ attendance at intervals has the
effect on the staff to prevent from
comminuting errors or frauds.

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Final audit or annual or periodical audit
It is an audit carried out after the preparation of financial statement. It is an audit where the
auditor takes up his work of checking the books of accounts only at the end of the accounting
year. In this case, the audit work is commenced and completed in one session.

Advantages Disadvantages
Operational cost of an audit can be reduced
Errors and frauds remains in the accounts
due to the usage of time is less than other types
for long period of time.
of audits.
No possibility of alteration of figures. Little time for checking
The planning and the assigning of audit works
Rely upon test checking.
among members of the audit staff makes easy.
Less chance for collusion between client staff Not suitable for imposing moral check on
and audit staff. the client staff.
Postmortem examination of accounts.
Audit work is completed in one continuous
Not helpful for preparing interim
sitting. So avoids necessity of keeping records
accounts and Not suitable for large size
for work completion of audit.
organizations.

Interim audit
The interim audit is conducted on periodic basis, during the financial year. The auditor
attends to his examinations on monthly or quarterly basis as the work may require. It is
carried out for some specific purpose for declaring interim dividend, ascertaining interim
profit. Advantages of this audit are as follows:
 Helpful for speedup the final audit.
 The auditor can issue his report on due date
 The attendance of audit staff at different intervals imposes sound internal controls and
improves the quality of the audit work.
 Errors and frauds may be detected more quickly, early corrective measures are
desirable.
 Provide reliable information for payment of interim dividend
 Imposes moral check on client staff.

Other types of audit

Value for money auditing (VFM Audit)
Value for money auditing is often referred to as performance auditing, operational auditing,
efficiency auditing or program results auditing. It is more often associated with auditing in

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the public sector. It involves the assessment of the efficiency, effectiveness and economy of an
organization's use of resources.
Economy: acquisition of the appropriate quality and quantity of resources at the lowest cost.
Efficiency: It is the use of resources such that output is maximized for any given set of inputs
or the use of minimum input resources for a given quantity and quality of output.
Effectiveness: It is defined as ensuring that the desired objectives are achieved.

Public sector / government audit

State owned companies and institutions are required by law in several countries to have their
affairs examined by a public sector auditor.
 In many countries, public sector audits are conducted under the supervision of the
auditor general (CGIR) which is an institute responsible for strengthening public sector
accountability and governance and promoting transparency.
 Public sector audit involves the scrutiny of the financial affairs of the state owned
enterprises to assess whether they have been operated in way which is in the best
interest of the public and whether standard procedures have been followed to comply
with the requirements in place to promote transparency and good governance (e.g.
public sector procurement rules).
 Public sector audit therefore goes a step further than the financial statement audit of
private organizations which primarily focuses on the reliability of financial statements.
Audits of public sector companies are becoming increasingly concerned with the
efficiency, effectiveness and economy of resources used in state organizations which has
given way for the development of value for money audits.

Forensic audit
Forensic audit involves the use of auditing and investigative skills to situations that may
involve legal implications. Forensic auditors are employed by companies, government,
agencies, accounting firms, and consulting and investigative service firms. Forensic audits
may be required in the following instances:
 Fraud investigations involving misappropriation of funds, money laundering, tax evasion
and insider trading.
 Quantification of loss in case of insurance claims.
 Determination of the profit share of business partners in case of a dispute.
 Determination of claims of professional negligence relating to the accountancy
profession.

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Information system audit
Information system audit involves the assessment of the controls relevant to the IT
infrastructure within an organization. Information system audits may be performed as part of
the internal control assessment during internal or external audit. Information system audit
generally comprises of the evaluation of the following aspects of information system:
 Design and internal controls of the system
 Information security and privacy
 Operational effectiveness and efficiency
 Information processing and data integrity
 System development standards

Environmental & social audit

Environmental & social audits involve the assessment of environmental and social footprints
that an organization leaves as a consequence of its economic activities. The need for
environmental auditing is increasing due to higher number of companies providing
environment and sustainability reports in their annual report describing the impact of their
business activities on the environment and society and the initiatives taken by them to reduce
any adverse consequences. Environmental auditing has provided a means for providing
assurance on the accuracy of the statements and claims made in such reports. If for example a
company discloses the level of CO2 emissions during a period in its sustainability report, an
environment auditor would verify the assertion by gathering relevant audit evidence.

Compliance audit
It is an examination of financial information for the purpose of reporting on the legality and
control of operations. In many countries, companies are required to conduct specific audit
engagements other than the statutory audit to comply with the requirements of particular laws
and regulations. Examples of such audits include:
 Verification of reserves available for distribution to shareholders before the declaration
of interim dividend.
 Audit of the statement of assets and liabilities submitted by a company at the time of
liquidation.
 Performance of cost audit of manufacturing companies to verify the cost of production
in order for a regulator to determine the maximum price to be allowed after allowing a
reasonable profit margin to companies operating in a sensitive sector (e.g.
pharmaceuticals industry).

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