CHAP

pTER CLASSIFICATION OF
2 AUDIT

CHAPTER LEARNING OBJECTIVES (CL0

On completion of this chapter, students will be able to know
Types of audit on the basis of organization structure
Types ofaudit on the basis of degree of independence of the auditor
.Types ofaudit on the basis Time
.Types of audit on the basis on Scope
Types of audit on the basis specific Objectives

2.1 INTRODUCTION

In the previous chapter, the meaning, definition, characteristic, benefits and limitations of audit is

discussed. Here, we will see the different types of audit. The requirement of getting the books of accounts
audited became mandatory due to legislation. The nature and scope of audit vary due to various factors such
as the size of organisation, the strength of internal control system, legal requirement etc. In internal Audit,
the books of accounts may be audited by internal department of the organisation, wbile in other types of
audit; such as statutory audit, secretarial audit, cost audit, tax audit, bank audit, insurance audit, co-operative
society audit, trust audit, sole proprietorship audit etc. the audit is done by independent person. In internal
audit the area of work is determined by the management, whereas in other types of audit the area of work
is determined by the legislation. In this context, this chapter is dedicated for discussion of different types of

audit as detailed in the figure below:

 Auditing and Corporate Goverm
ernance Classification of Audit 35
34
No. Organization Act
TYPES OF AUDIT Companies Companies Act, 2013
of
Onthe Basis Financial audit Sec.227
Special audit Sec.233A
Cost audit Sec.233B
Scope Objectives Banks Banking Companies Regulation Act, 1949|
Degree of Time
Organization Insurance Companies
Independence Insurance Act.1938
Structure
Special Co-operative Societies Respective State Co-operative Act
Continuous
Complete Cost
Final Partial Public Charitable Trusts Indian Trust Act etc.
Statutor Internal Detailed
Management
Interim Statutory Corporations Special Act of Parliament e.g. Life
Govemment
Extemal Social
Pmvate
Balance Sheet Insurance Corporations.
Glance
of Audit af
a
Classification
Figure: Electricity Companies Electricity Supply Act, 1948
ORGANIZATION STRUCTURE
2.2
CLASSIFICATION ON THE BAsIC
OF 8
Registered Societies Societies Registration Act
audit may be
classified into three types. They are:
strucure. 2.2.2 Goverment Audit
On the basis of organization c. Private Audit
a Statutory audit
b. Government audit
Government audit refers to the audit of accounts of Government departments and offices, Government
companies and statutory or public corporations.
2.2.1 Statutory Audit The features of Government Audit are
audit prescribed under statute i.e. law. Appointments of auditor (a) Government audit is prescribed for by law
Statutory Audit is compulsory of the respective la
per the Provisions
removal, remuneration. nghts. duties.
liabilities are governed as
others terms are as laid down by the law.

(b)
Itis conducted either by the comptroller and Auditor General of
India
and his
staff
chartered accountant approved by the Comptroller and Auditor General of India.
or profesional
the audit work and all
applicable to the organization. Scope of (c) It is internal audit.
can be conducted a qualified Chartered Accountant.
only by (d) A government audit is a continuous audit.
Features of Statutory Audit are Who conducts it: In India the Accounts and Audit Department of the Government of India, headed
(a) Statutory audit is compulsory under law. b the Auditor GeneralofIndia(CAG). carries the audit work. The CAG's duties have been specified by the
Comptroller and Auditor General's Act, 1971
b) Statutory audit is required to be conducted by a qualified auditor. Objectives of Government audit
(a) To ensure that all payment has been sanctioned by the competent authority.
(c) in the case of statutory audit, the rights. duties and liabilities of the auditor are governed by the stat (6) To ensure that every payments is made as per the rules and regulations.
or
law applicable to the undertakinge (c) To see that the payments have been made to the right persons.
(d) Statutory audit is an independent audit. (d) To ensure that the expenditure is not excessive.
(e) Statutory audit is an external audit. (e) To see that payments are properly classified as capital and revenue.
(t) To verity the existence of stocks and stores.
( Statutory audit must be a
complete or full audit. It cannot be
partial. T o ensure that a proper system of stock taking has been adopted.
Statutory audit is conducted after preparation of final accounts. Statutory auditor has o Classification of Government Audit
repu
whether the Balance Sheet and Profit Govemment audit may be classified into three types. They are:
And Loss Alc drawn upon are
true and fair view. Statutory auditor has to submit report to conformity
show with law and wneu
Audit of Govemment Departments and Offices.
by shareholder remunerato fi
the shareholder. His Audit of Govermment Companies.
Statutory audit is carried out in Audit of Statutory Corporations registered as statutory corporations.
a number of
Organizations, such as
 Auditing and Corporate GOvernanca
36 Audit
Classification of Audit 37
Voluntary undertaken by the owner
Audit o r but is tntari
Private
any
statute, audit refers 2.3 CLASSIFICATION OF AUDIT ON THE BASIS OF DEGREE OF
words, private
under
2.2.3
audit
and other ind:
dividuals itandof
compulsory other
not audit. In
audit is firms
INDEPENDENCE
Where an is called private partnership
the audit concerms,
get the
benefit of audit,
enterprises
such as a sole
trading
Audit is a process of independent checking of financial records of an organization, so as to
accounts
of private givean opinion on the financial statement. It can be grouped into two categories, namely
instiutions.
of private
audit
of the
business are maintained and there
propérly maintained
ar
Advantages accounts ate a. Internal Audit and b. External Audit.
that the
to the
owners
a. Audit assures
2.3.1 Internal Audit
no iregularities.
the employees. of affairs oftheir Internal audit is a review of operations and records undertaken within a business by specially assigned
a moral check on and the state
b. It provides the real profitability
business to know staff. It is a post-transaction review to evaluate the correctness of records and the effectiveness of operations
c. It helps the owners of the
on a contiuous basis in an organization by the paying staffs. The term 'internal audit' has been defined as
business. assessment of tax liability.
basis for the independent appraisal of activity within an organization for the review of accounting, financial and other
d. Audited
accounts serve as
a
loans trom banks and other financial institti
accounts facilitate
the process of raising business practices as a protective and constructive arm of management. It is a type of control which
e. Audited
and claims between the partners of a firm
in the settlement of dispute functions by measuring and evaluating the effectiveness of other types of controls. Internal audit deals
f. Audited accounts help Commercial Audit
Government Audit and primarily with accounting and financial matters, but it may also properly deal with matters of an operating
2.2.4 Difference between
commercial audit are given below. nature.
between government audit and
The points of difference The work of internal auditor is more or less the same as that of external or professional auditor. Being
Government Audit Commercial Audit
Basis External auditor appointed by the
employee of the organization, s/he has to see that there is no waste and ineficiency in the organization.
Audit and Accounts Department
charge for the Conduct has
. In
of Audit
conducts the audit of government employer shall conduct the audit here. An auditor to ensure that the organization incurs liabilities in respect of its valid and legitimate activities.
S/he has to make efforts to find out the weakness of the internal control and internal check systems
department. followed in the organization and suggest necessary improvements.
2. Type of Audit Governments audit always a In commercial concerns, mostly
Many large organizations have a system of internal audit within the organization as a integral part of
continuous audit because of periodical audit is conducted. internal control. Internal auditing is a staff function rather than a line function and the internal auditor does
the involvement of huge not exercise direct authority over other persons in the
organization.
expendinue and large number Objectives of Internal Audit
of transactions. 1. Proper Control: The
3. Nature of
Appointment Auditors are goverument They are not the employees of the
purpose of internal Audit is to keep proper control over business activities.
When there is proper control there is maximum
of Auditors
employees efficiency. The internal control can determine the
concerns whose accounts they audit. degree of control over work.
4. Sanction of Audit In most
of the government It is not necessary here. 2.
Accounting System: The
Department concerns before payment for purpose of internal audit is to evaluate the accounting system. It is concerned
with checking proper authority for transactions like
expenditure is released the purchase, retirement and disposal of fixed assets.
The voucher can be compared with entries in order to determine that
sanction of audit figures and facts.
department 3. Help Management: The
purpose of internal audit is to help the management. Internal auditor can
| iS a must.
5. Need for
Preliminary point out the weaknesses. The internal audit can be used as a tool to correct the situation. The
Treasury officer always makes Cashier has management functions can be performed properly.
Examination of Bills
a preliminary examination of nothing to do with audit of
preliminary examination while making 4. Working Review: The purpose of internal audit is to review the
bills before making a payiment working of business. The working
payment of expenditure. of current year can be reviewed in detail. There is a need to locate the weak
6. Rules & on government account. points. The corrective
measures can be taken for proper
Regulations working.
Government audit is subjected lt is not so in the of commercial 5. Asset Protection : The
purpose of internal audit is to protect the assets. The proper record of assets
to the rules and regulations of case
must be there. Internal
audits. auditor can examine the valuation, verification and possession. The purchase
the concerned department. and sale of assets must be made under proper
authority.
 Auditing and Corporate Govema
the internal check
nance Classification ofAudit 39
38 audit is
valuate
lo eva ystem. here is
are working properly it mo
internal
ot member
staff m ember
Benefits of Internal Audit
wees. When all stafl
purpose
The When
can anni
Imternal Check: ed. He
He can apply test audit is that proper accounting system is introduced
6.
of duties
among
the employees.
The work of an
auaitOr is r e d u c e d .
checks to 1. Proper Accounting System: The benefit ofinternal are processed for
an entity by which transactions
dvision
check system Accounting system is a chain of activities in
internal
need of orderly devices to achicve desirable results.
is
effective
detect tthe
he erTor in in the accounting
accomt
record maintaining financial record. There is a
complete audit duty.
of internal
audit is
audht is
to
to
detect
accounting
record is in order. The Better Management: The benefit of internal audit
is that there is better anagement of bustness
The purpose to s e e
nal 2.
canbe
weak areas of management. Tbe goals of business
Statements:
management
7. Fair the concern. The auditor can point out the
audit can help the errors in the ccounting records.
accountino
If the
work ofinternal and internal audit. It should be noted that
detect
to
achieved if there is proper internal control, internal check
audit is
minimum chances o f
Error: The purpose
of internal side therelore
there are errors. The audit for best results.
8. Check by side in order to L. management could rely on internal
of internal
auditor goes accounts at the end of year help the bencficial to review progress busincss concem. The
of a
Progressive Review: The internal audit is
work mistake to prepare 3.
staff can rectify of simlar
accounting with thus year. Moreover the performmance result
figures of previous years are compared
external auditor. detect frauds in the books of accounting.WA
When the determine the progress made by the entity. The manage
e n t can
audit is to
hen companies can be compared to
Fraud: The purpose of internal started. ACcounting
staff remains alert
ecause
9. Detect internal audit is review progress through internal audit.
staff is over the
I hus delection of
fraud is possible with t i to have eflective control over business activities.
work of accounting
between recording
and checking. 4. Effective Control: The internal audit is helpful
there is no time gap liabilities employees. The dui. of duties and direction of ongoing actviies.
audit is to
determine
Control isa management function, which is related to supervision
The purpose internal of for smooth working of business.
10. Determine Liability: on the part of employees. The intermal The manager concerned can remove the difficulties
to note the negligence
the staff. It is easy
are divided among internal audit. The managemeni can use
responsible for
carelessness.
5. Assets Protection: The assets protection is possible through
audit can pin point the person The cannot be used for private purposes. The
internal audit is to help an independent
audit. the assets for the benefit of business only. The assets
Audit : The purpose of assets is not possible as the
11. Help in Independent need of cent percent checking. In this way embezzlement of cash, misappropriation of stock and misuse of other
internal auditor and there is no
external auditor can rely on close watch assets.
due to internal audit.
internal auditor keeps over
there is saving of time and money labour is
check the performance appraisal. The 6. Division of Work : The internal audit is helpful to apply division of labour. The division of
The purpose of internal audit is to
12. Performance Appraisal: tool to necessary to watch the activities of
all employees including management. The auditor can suggest
must achieve plans. The internal audit is a
the targets fixed in budgets and business.
management the way and means to improve the performance of
function.
evaluate the working of each management records from errors and fraud
suggestions for improvement o 7. No Error and fraud : The internal audit is used to protect accounting
13. Provide Suggestions: The purrose of intermal audit is to provide and auditing go side by side when accounting work is over the audit will
startIn
to remove the difficuiies
The accounting
business activities. The internal audit staff can suggest the ways and means
such situation errors and fraud committed by the accounting staff will easily be detected and
rectified
Anyhow the internal auditor cannot compel the management to implement suggestions.
Internal audit is used to fix the responsibility having poor performance
ofpeople
14. New ldeas: The purpose ofinternal audit is to seek new ideas relating to procedures, market
8. Ficing Responsibility: auditor can evaluate the result
The management establishes the performance standards. The internal
financing and other business matters. The internal audit staff can provide new ideas about variou and action can be taken
business matters. The viable ideas can be put in to practice for the benefit of business.
people can be held responsible for below standard work
of all persons. The
against them.
resourc Th
15. Use
of Resources: The purpose of internal audit is to determine the proper use of
9. Helps External Auditing : The work performed by
internal auditor can help external auditor in
misuse of resources can increase the cost of doing the business. The proper use of
resoure neans of internal and extermal audit is almost the same. The
there is carrying out the audit. The audit procedure
efficiency on the part of management. auditor can go through the internal audit report at the
time of starting audit work. Anyhow cxternal
16.
Accounting Policies: The purpose of internal audit is to examine the accounting pol1ci The auditor is responsible for external audit.
understanding of accounting system and
procedure is helpful to device the effective audit Performance Improves: Internal auditor helpful
is to improve the performance of the organization
proedures. The intcrnal auditr
may find any weakness in
pi 0
10.
the basis of preparing budget for the next years. The projertod
t e a n n t i n g policies.
the intermal control. He can comn The achievements of previous year are
drawn up. An attempt ismade to get the positive result Thus
17,
Special Investigution: The purpome of internal
income statement
and balance sheet are
and employees.
audit may be to conduct abou internal audit improves performance of business
ay brasiters matter. Internal audit can be used
tool to note the
as a
special investiga gemen
funuaun. effectiveness of
man
 Auditing and Corporate Governa
rnance
to
check
the p r o p e r
use
resources.
of r e s o 1he
misuse of Classification ofAudit 41
40 Internal
audit is
used
use of resources
can
sources can be determi
opimum
: 1he
Use of Resources organization.
use the in the best
r e s o u r c e s i n
(auditor), in order to ensure maintaining the correctness, accuracy and learning of concepts, morals, standards
1 . Proper
can
the cost
increase
of
internal
audit is a
tool to
interest of accounting, legal demands, and also in order to offer a correct and true image regarding the financial
In this vay
resources
control the cost ofoutput. business matters. In case statements of the entity.
o f the business.
to investigate
in to the of
to confim o r clear clear any doubt. The main role of the external audit is also to ensure that the operations are complete and they respect
audit is ofhelp
Investigation:
Internal
examine the facis
and figures
can ho
be made at
The the principals and financial standards registered at the time they take place, So, this target refers to the
12.
be asked
to Such investigation
auditor can
matter in any
manner.
the about the
internal
can investigate
the accomplishmient of statutory responsibilities that the external auditor has, supplying an opinion
internal
auditor
or owners financial statements, relating if this shows a "correct and real image"
of naanagement
request
Exteral auditors are appointed by decision makers in the organization. They have to be independent,
Internal Audit
L i m i t a t i o n s of
There may necd be of ros
of internal
audit is staff shortage. easonable mcaning they can't have any sort of relation with the entity that is to be audited, so their work cannot be
The limitation hurdle to get benefit of internal
1. Staff Shortage : The shortage
of statf is a influenced. External auditors have access to all accounting documents in order to obtain the necessary
examine the record. ends. Thus there is
audit staff to starts when accounting s a time a
information for the formulation of an opinion expressed in an audit report forwarded to the decision .nakers
audit is that it
The limitation internal
of
2. Time Lag: entries. in the company
and checking of
lag between recording there may remain
undetected errors in the hoaksof 2.3.3 Difference between Internal and External Audit
internal audit is that
3. Error The limitation of such errors. If audit staff
internal audit staff to detect
accounts as it depends upon
the expertise of is Basis for comparision InternalAudit External Audit
undetected. In case or poor audit staff there is no
Meaning Internal audit refers
competent there is
less chance of error being to an
ongoing|External audit is an audit function
audit function performed
guarantee that audited
accounts are free from erors.
withinlperformed by the independent body|
not feel their responsibility in
an
organization by a separate which is not a part of the organization.
4. Responsibiliny: The limitation ofinternal audit is that management may internal auditing department.
may give staff suggestion for proper working of business.
completing the audit formalities. The audit
In this way the audit work cannot Objective To review the routine activities To
Thetop-level management may not pay attention to suggestions. analyze and verify the financia
and provide suggestion for
help the business. the statement of the company.
5. Duties:Ifthe duties of audit staff are not properly divided then the purpose of internal audit may be improvement.
Conducted by Employees Third party
defeated.
Auditor is appointed
2.3.2 External Audit Management Members
The external audit is done with the help of independent and external organizations to the audited
by
Users of Report Management Stakeholders
company This audit is oniented towards the financial analyze
activity and it is addressed mostly to the stakeholders of the company. The main
or the associated risks to the commercial
Opinion Opinion is provided on
the Opinion is provided on the truthfulness
responsibility of tne effectiveness of the operational and fairness of the financial
extemal audit is to realize the annual
starutory audit of financial statements, emitting an opinion on correct or activities of the organization.
statement
incorect of the coinpany.
reilecting of the company's financial
position. As part of it, external auditors examine and evaluate
the internal audit 2.4
activity. analyzing risks that could affect the financial CLASSIFICATION OF AUDIT ON THE BASIS OF TIMS
statements
Characteristies of External Audit
Audit be
can grouped into seven categories on the basis of time as dis cussed following:
The actvity of external audit refers to the 2.4.1 Continuous Audit
Statemems of the independent and systematic examination of tne ncial
organization. by third party, with
a ta Continuous audit is one where the auditor's staff is engaged continu.u
realize it
periodically according to the specific objectives, which makes it Isory to sly on the accounts whole the
legislation in force. cop year round and performs interim audit. It is an audit under which detailed examination of the books oiM
According to the C.IM.A. accounts is conducted continuously throughout the year. It is continuous: review of the
efined as (Chartered Institute of accounts of the
the recordings and Management Accountants), the extena
periodic examinatüon of
a is
organization. It is
generally applicable to banking company and insurance conipany.
accounting operations of the entity,, by
Dyo third party a
 Auditing and corporate
42
Governance
Advantages of Continuous
Audit
the routine audit
is done continuouslv- s Classification of Audit 43
a c c o u n t s : Snce,
Preparation of Final end.
(a) Quick immediately
after the year (D Absence of link: In the absence of well-planned audit work, an auditor may miss the thread of audit
Accounts can be prepared would be happy as they receive dividend
The shareholders
Oon work. Further, some important queries may be overlooked if no proper audit notes and queries are
Dividends to Shareholders: interim accounts and pay even 3
b) Early The Company
can prepare recorded by the audit staff during the course of the audit.
financial year.
after the end of the
shareholders. (g) Conflict between audit and accounts staff: The members of audit and accounts staff come in close
dividends to the final accounts are useful to banl
The up-to-date contact and sometimes it may result in spoiling the healthy relations between them and thereby the
Banks/Investors:
(c) Up-to-date Accounts
for loans and
investment. quality of audit may suffer.
decisions regarding
investors for taking
throughout the year, it acts as check on
(h) Dependence of the accounts staff on the auditor: The accounts staff may depend on the audit staf.
Since the auditors visit regularly
(d) Checkon Employees:accounts ready and up-to-date.
They may require the help of auditor for even small errors which they can discover or avoid by
to keep the
employees to detect and even taking proper care.
Constant checking by the audtors helps event
e) Prevents Errors and Frauds: Precautions or steps to be taken to overcome the drawbacks
errors and frauds, (a) Strict instructions: Strict instructions should be given to client's staff not to alter he auditedfigures
Since the auditor spends more time at the client's place, he
Cient's Business :
D Familiarity with Mistakes, if any, should be rectiied by passing rectification journal entries and not by alteration of
of client's business.
becomes familiar with all the aspects
time at his disposal to do a through checking ofall transactions figures.
g) Thorough Audit:The auditcr has more
material items. (b) Audit programme: Proper audit programme should be prepared by the auditor, so that the time of
This reduces the risk of missing any accounts and audit staff is not wasted.
can be kept busy throughout the year. Audit work can be
hy Utilization of Audit Staff: Audit Staff altered figures. Auditor should write in the
(c) Special ticks: Special ticks should be used for unaudited
evenly distributed to avoid overwork after year end. margin the actual figures audited with his audit pencil.
Disadvantages of Continuous Audit exhaustive audit notes. The queries and their explanation by the
(d) Audit notes: the auditor should keep
a) Expensive: Since the audtor spends more time on the audit work, the audit fees are much more client should be properly recorded.
Continuous Audit is thus expensive. However. only a large organization should opt for a Contimuous
close of the
Audit. (e) Checking the ledger: Checking the impersonal ledger should be done only after the
b) Audit in Installments: Since the audit work is done at intervals and not at one go, audit may be accounting year
should be made in addition to the regular visits.
inefficient. The queries during the last visit may remain unsolved. It is difficult at each visit to take up (D Surprise visits: Surprise visits
their duties that they may not lose
Rotation: There should be reasonable rotation of audit staff and
so
the work precisely at the stage of last visit. To overcome this disadvantage, audit should be well- (g)
planned All queries should be noted in the Audit Note Book and cleared before taking up fresh work. interest in their work.
The done and supervision over the audit staff.
work up to end of each visit, relevant voucher umbers, totals etc. should be carefully (h) Better control and supervision: There should be better control
noted in the Audit Note Book. should be noted in the audit diary and they should be
All the important figures in the balance sheet
c) Dislocation of client's work: If a proper audit rechecked at the time of subsequent visits.
programme is not adopted, continuous audit may
disrupt the routine accoaunting work of the client. Either the audit staff may have to sit idle or the
alteration should be done by means of a rectification entry in the journal.
(i) Rectification entry: Any
accounts staff of the client waste time for want of books of accounts. altered.
may figure already
the auditor for
Employees have to attend G Secret tick: The auditor should put a secret tick against any
explanation. They
have to keep aside their usual work to attend the auditors for
Audit
explanation. 2.4.2 Final Audit/Annual/Periodic
statement. It is an audit where
the auditor
(d) Errors and Frauds in Books It is an audit carried out after
the preparation of financial
Already Checked: If an
already checked by the auditor during his earlier visits, itemployee changes some figures in the boon
would be difficult to detect such errors takes his work of checking the books
of accounts only at the end of
the accounting year. The audit work
ef
up is very little impact on prevention
frauds subsequently. an is commenced and completed in a single
uninterrupted session. There
business. It sav es in
small and medium sized
(e) Monotonous- tiresome-tedious: checks. It is best suited for
Continuous visits eTors and frauds by way of moral
to the client's place may make the work ic dious
and the audit staff loses interest terms of time, energy and money.
from work
consequently. The quality of audit suffers.
 Auditing and Corporate
4 Governance
Advantages of Final Audit
Classification ofAudit 45
normal time on the audit work, the dit fees aree
audit are also
(a) Inexpensive: Since
the audit spends nomal (b) Interim Dividends: Interim audit is also advisable when a company intends to pay interim
dividends
small organization (a sole trader or a firm) can
an copt for
Even a Interim audit would ensure that there are enough profits to justify payment of interim dividends.
Final Audit is thus inexpensive.
a
financial audit.
Final
of an independent () Sale of Business: In case of a sole partnership fim, interim audit becomes necessary on admission
Audit to obtain the advantages
without any gaps, audit is.
work is done at a stretch, retirement or death of a partner, dissolution of partnership, sale of a firm to a company, valuation of
Stretch: Since the audit u
(b) Audit at a
The work is done continuously and not in
immediately.
ineta goodwill etc.
effñiciently. All queries are solved
simple
ments (d) Changes in Firm: In case of a proprietor, interim audit may be conducted when the business is
The audit planning and programme are
checked at a stretch, no employee can c h a . proposed to be sold, to fix the purchase consideration.
c) Less errors and Frauds: Since the books
are
ange any (e) Changes in Firm: In case of a partnership firm, interim audit becomes necessary on admission.
figures in the audited books. retirement or death of a partner, dissolution of partnership, sale of firm to a company, valuation of
statt is not disturbed anytime during the acoa
(d) Do not Disrupt Accounts Hork:
The
need for the
accounts
accountants to attend to audit work every now and accounting
then,
goodwill etc.
year. There is no
How is it conducted ?
Disadvantages of Final Audit An interim audit should be done as if it is the final audit for the concerned period. Thus, it would
(a) Delay in final Accouns: Since the routine audit is done after a year end, the Final accounts ay be involve not only vouching but also verification of assets and liabilities, valuation ofclosing stock, computation
delayed and ready long after the year end of depreciation, confirmation from parties and so on. Once an interim audit is done, at the time of the final
by Late Dividends to Shareholders: The shareholders would be unhappy as they receive dividends long audit, the auditor has to concentrate only on the remaining period. Thus, interim audit helps in timely
after the end of the financial year. It would be difticult for a Company to prepare interim accounts completion of final audit. The auditor at the time of final audit, however, should ensure that there are no
and pay interim dividends to the shareholders during the financial year. 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.
e) Stale Accouns for Banks/Tnvestors: The final accounts are available long after the end of the accounting
year. Such stale accounts are not useful to banks and investors fro taking decisions regarding loans
Advantages
Interim audit is similar to Continuous Audit and enjoys similar advantages:
and investment.
(d) No Moral check on Employees: Since the auditors visit only at the end ofthe year, dishonest employee aQuarterly Resuis: Apublic limited company listed
statutory provision of declaring quarterly results.
on the stock exchange can comply with the
have a chance to commit frauds during the year and clean up the accounts just before the auditors
(b) Interim Dividends to Shareholders: The shareholders would be happy as the Company can pay
arrive, e.g. teeming and lading.
interim dividends to the shareholders.
fe) No Familiariry with Client's Business: As the auditor spends a litle time at the client's place, he
(c) Quick Preparation of Final Accounts: Since the interim audit is already done, the Final Accounts
cannot become familiar with all aspects of latter's business. They may affect the quality of audit. can be prepared immediately after the year end.
( Sample Check: Since the auditor has to complete the audit in a short time, he has to resort to sample (d) Up-to-date Accounts for Banks/Tnvestors: The up-to-date interim accounts are useful to banks and
checking. The increases the risk of missing material items. investors for taking decisions regarding loans and investment.
g) Uneven Hork-load for Audit Staff: Audit staff is overworked immediately after year end and (e) Check on employees: lnterim audit acts as check on the employees to keep the accounts ready and
Comparatively less busy at otherT times. up-to-date.
2.4.3 Interim Audit
Prevents errors
and frauds:
and even prevent errors and
Checking by the auditors for the purpose of interim audit helps to detect
Meaning: Interim Audit is an audit conducted in between the annual audits. It is conducted to
frauds
out the interim
profit and know the financial position at the end of a n (g) Thorough Final audit: The auditor has more time at his disposal at the time of final audit, which
Cxample, audit of accounts
an part of accounting year. the reduces the risk of missing any material items.
prepared for the period of six months from 1st April to 30th Septen
would be Interim Audit. (h) Uilizution of Audit staf: audit staff ean be utilized in a better manner. Interim audit is done when the
When Conducted ? audit staff is relatively free.
Interim Audit conducted in the following cases
is Disadvantages
fay (a) Expensive: Since the auditor does two audits in one year, the audit fees are more to that evtent.
Quarterly Results: Piblic Limited
results. It is Companies listed on ne stock exchange has to declare quarterly Interim Audit is thus expensive.
preferable, though not compulsory, to declare the
such results terim a
t
on the basis or
 Auditing and Corporate Governan
46 Classification of Audit 47
the audit work is done at two stages (interim and final) and not
(b) Audit in Installnments: since at
go, audit may be inefficient. It is difficult at the time of final audit to take up the work precisnlOne
at the Objective: While conducting a balance sheet audit, the auditor can rely upon the system of internal
To overcome this, audit should be well-plann controls and internal checks and also onthe reports of the internal auditor. Wherever internal controls and
the time of interim audit
stage where it was left at checking of vouching, posting, casting and other
interim audit, relevant voucher numbers, totals, etc. shoula checks are sound, he can reduce the extent of routine
The work done up to end of the be
book. routine tests. However, he should increase the extent of checking to obtain audit assurance if he finds that
carefully noted in the Audit Note
accounts staff. To avoid this adu there are weaknesses in the internal control systems.
Interim audit disrupts the work of advantage
(c) Disrupts Accounts Work:
with the client to avoid disruption in routine ac Need of Balance Sheet Audit: With the development of industries and computerization of accounts,
the audit programme should be coordinated accounts
to co-ordinate with and attend to the audit the need for balance sheet audit has increased. Now, the statutory auditor can reduce the extent of routine
work. The client should appoint an employee specially tors
Audit and Interim Audit checking and concentrate more on critical examination of the Balance Sheet due to the computerized recording
2.4.4 Distinction between Continuous
of large number of transactions and adoption of EDP system controls in data processing.
SI No Basis of Difference Continuous Audit Interim Audit
audit commences after the finalisatio Procedure of Balance Sheet Audit
Time of Audit The audit continues at regular orThe Isation As per the guidelines of national and international accounting bodies, the auditor should follow carefully
irregular intervals throughout ofthe books of accounts at the end of
planned audit procedures:
the year. the financial years and continuous till it i
(a) For identification of areas where sample testing is sufficient.
completed.
Nature of The checking of accounts is Intensive and detailed checking is not (b) For performance of certain compliance procedures and substantive procedures in some areas.
checking
detailed and intensive. possible. Only test checking is possible (c) For analytical review of Financial Statements.
Suitability The audit is very suitable for The audit is suitabie for small business (d) For verification of assets and liabilities stated in the Financial Statements.
large-scale business undertakings undertakings. (e) For scrutiny of books of accounts to check whether Financial Statements are in conformity with the
records.
with a multitude of transactions.
Errors and frauds Is a detailed and intensive checking Even after the completion of the audit, ( For evaluation of the internal control system and critical examination of the assertions made in the
Financial Statements.
and as such. there is very little the possibility remains that frauds and () For ensuring the compliance of all legal requirements relating to adequate disclosure of material facts
possibility of frauds or errors
errors einghave not been detected in the Financial Statements.
undetected Advantages of Balance Sheet Audit
Cost This cost is high because the The cost is low because it is once in a
(a) Balance sheet audit commences after the completion of books of accounts. The management prepares
auditor has to do a lot of work. year job. the Balance Sheet, therefore
Verification of the time of audit changes in the accounts is not possibleonce the verification
process is
|Verification of Assets and Liabilities This work is done at started.
Assets and is done at the close of the financial
(b) No interruption from the accounts department. Checking be done
Liabilities year
can
smoothly without any breaks
in between.
2.4.5 Balance Sheet audit (c) No loose links because audit is conducted in a continuous flow, which reduces the chances of
Meaning: Balance Sheet Audit is an American terms which means verification ofthe items appearing issing the verification of any aspect.
in the balance sheet. It includes venification and valuation ofassets and liabilities appearing in Balance Shet. (d) Sample tests reduce the time involved for routine
checking. The saving on account of time results in
and loss account is not given much importance in this the
Profit type of audit. In balance sheet audit, cost eftectiveness.
auditors assume that there is a reliable system of internal check and intemal audit. Balance sheet is also
referred as Limited Audit'. Such a type of audit is used where the size of the type of audit is used wherC
Applicability of Balance Sheet Audit
size company is very
Balance sheet Audits are not conducted in all Such Audits
of the large. Under balance sheet audit accounts are verified and tests are imposed cases. are conducted in case of very large
on those items in Profit and Loss Alc which are ad organization banks, etc. in the following circumstances:
directly related to assets such as depreciation, repau>,
debis etc.
 Auditing and Corporate Gov
48 ernano
controls have
been and to
ped
developed and
tested Classification ofAudit
(a) The Internal Control
System is very
strong. The
of detecting
and preventing
errors and frauds over t 49
capable
years. The
controls are
large that a n in-dept
checking is impossible.
A detailed
tailed vouch-and 2.4.7 Difference between Balance sheet and Continuous Audit
oftransaction is
so
(b) The volume be ready in time. Balance sheet Audit Continuous Audit
accounts arte to
final
possible if the
post audit is
not
therefore, need Balance sheet audit is taken up at the end of the Continuous audit is examination
internal audit department.
The statutory auditor, eed no duplicate of records continuously
has its o w n financial period, when Financial Statement are throughout the year, at regular or irregular intervals.
(c) The concern
this work. drawn from completed books of accounts and
the management is professional and accounts are com
highly qualified.
(d) The accounts statfis
other records.
Annual Audit
between Balance
sheet Audit and
Mandatory, and prescribed by different
2.4.6 Difference statutes. Not mandatory Optional. It is conducted at thediscretion
afier the financial period and are carried a
Balance sheet audit and
annual audit both
commence
on unn of the management.
to be the sanie
but balance sheet audit is a recent concept,
recer
completed.Both are generally taken Statutory audit is conducted with the objective Continuous audit is conducted with the objective of
they are
are concentrated
on verification
of balance sheet items. The main stinction isis
distinction
given a .
of cnsuring truth fulness and fairness of the
where the eftorts review ofinternal controls. Checks and financial or non-
under Financial statements of an entity. financial operations ofthe organization.
Aniual Audit
Balance Sheet Audit Its scope is prescribed by the governing law.
Annual Audit Its scope is decided by the management and auditor
Balance Sheet Audit | through the Letter of Engagement.
suitable for large| Annual audits are suitable in small organization The auditor is an independent person and is
Balance Sheet audit are more Continuous audit can be conducted by anyindependent
wide spread and and where intenal control system is reviewed bv
Organisations where branches are appointed by the shareholders, on whose behalf agency or by the employees of the enterprise. It is
large mumbers and annual auditor, whether statutory or voluntary
intemal control systems are centralized the audit is conducted.
conducted on behalf of the management.
transactions are recorded at different places.
of small A qualified CA can be a statutory auditor. | No qualification is prescribed.
Annual audit is to
Balance sheet audit is limited to The auditor's term ends at every AGM. How- The auditor's term may continue at the will ofthe
ever he can be re-appointed if he is not
Verification of balance sheet items and their Review the internal control systems and qualified. management.
internal checks, and adherence to management Report to shareholders/ owners in a format Report to the management in no prescribed format.
comparison with previous year figures.
prescribed under law.
policies.
(a) As no routine chccking is done so check on
Examination of items of profit & Loss Critical examination of financial statements (a) Very costly as more time is spent on continuous check.|
Accounts with direct relation to Balance and checking whether they are in conformity employees is lost.
Sheet items. with the books of accounts maintained. (b) Reliance on internal control is assumed and no (b) Figures can be altered once the audit is over for a
Concentrated efforts are made for ettorts are made for review ofintermal controls certain period.
verification of Balance Sheet and or checks
examination of Profit & Loss No timely detection (c) Frequent visits by the auditor or his team may create|
(e) of errors and trauds as it
Account. but not for internal control commenees at the end of the financial year inconvenience to the accounts department.
systems und works like a post-nortem analysis.
The concept of balance sheet audit has its origin Generally, annual audit is treated as baline
of (od) ln this era ofcomputerization, the quantum (d) There are chances of collusion between the client
because
Ilowever,
in the USA and is more popular in companies audi India.
In of errors has reduced, but blunders may occur staff ar.d auditor's staff because of frequent visits
and EDP accounting,
working globally. compulerization cept
due to programming errors in the system ot and distribution of duties among them.
in India as a separate cOn
gainng popularity recordng of transaclions and preparation
o Fmanetal Sutetnents.
 e Governand
50
THE BASIS OF SCOPE
2.5 CLASSIFICATION OF AUDIT ON
2.5.1 Complete Audit Classification of Audit 51
to check each and every transaction record.
auditor is required
In this type of audit, the document or correspondencan theh 2.6.2 Cost Audit
of accounts.
transaction.

He has to examine each

This type of audit is not

and every voucher,

possible for large
sized organizations.
ce
relating to t It is a type of audit which involves verification of cost records maintained by the organization. U/s
233(B) of the Companies Act 1956 the Central Government may direct an audit of cost records by a person
2.5.2 Partial Audit who is qualified. Appointment of auditor is done by the board of directors subject to the approval of the
is not required to examine
all the books of accounts. Onl Central Government.
In Partial audit, the auditor
by the clients may
be scrutinized. Auditor has to statett ofn The auditor reports to the government, the copy of the report sent to the company. Cost audit is
accounts or some
transactions as desired the a
ar prescribed for certain types of industries with a view to achieve the following objects:
covered by the audit.
This type of audit cannot be
followed in the case of statutory followed
audit. It may be followed :
in the
case
(a) to grant the price concession of the company;
audit is legally required. (b) to fix up selling price
is not convenient when the
statutory audit. This audit
(c) to safeguard interest of customers;
2.5.3 Detailed Audit
(d) to consider the question of protection to be
transactions are examined in detail by the auditor granted to the company;
Under detailed audit, few business Spicer: (e) to ascertain the causes of loss suffered by the company.
which starts with books of prime entry and ends with the balan
lanceshee
Pegler have defined it as, "An audit 2.6.3 Management Audit
order of recording the transactions in the primary book
The checking sequence is arranged in
Management audit involves examines of the plans, policies, procedure, method and strategies and
transactions are traced through various stag
Thus, for the purpose of detailed audit certain evaluates the performance of management with a view to improve organizational effectiveness. It does not
beginning to their end with the help of available
evidence. This technique of examination is also called avd look into the past, present but also in the future. According to Leslie R. Howard, Management Audit is an
in-depth. To take an example, detailed audit of purchase of goods for inventory would consist of tracin investigation of a business from the highest level downward in order to ascertain whether sound management
transaction though all the points of transaction cycle viz. equisitionung the goods, ordering thegoe prevails throughout thus facilitating the most effective relationship with the outside world and the most
requisitioned, receiving the goods ordered and preparing the payment voucher. efficient organization and smooth running of internal organization.
2.6 CLASSIFICATION OF AUDIT ON THE BASIS SPECIFIC OBJECTIVES 2.6.4 Social Audit
Social Audit is a recent development
auditing. in the field of
based on the modern concept ot It is
2.6.1 Special Audit social responsibility of business. Social audit examines to what extent the business is discharging its social
Central Govermment has power to order a special audit ofthe accounts of a company for a spesiresponsibilities. It exanmines the comtribution of the concerm to the society at large. t reviews and evaluates
period. This is under Section 233A of the companies Act, 1956. Special audit is ordered without providin the performance of the concern in the following areas of social welfare and awareness.
an opportunity to the company, where the central government is of the opinion. (a) Contribution to natural economic growth through expansion, employment
generation etc.
(a) When affairs of any company are not managed as per the sound business principles. (b) Welfare of Employees e.g. training to employees, employment to handicapped or backward
people,
When company 1s being managed in a
provision of education, housing and health facilities to employees and their families.
(b) manner which is likely to cause serious injury or damageto
interest of trade or industry. (c) Product relations including quantity, quality and price of product supplied.
(c) When financial position of a company is such as to endanger its solvency. (d) Carc for environment e.g. shifting to industrially undeveloped regions, control of pollution.
Special audit can be entrnusted by the central government to the company's auditor himself or to (e) Quality of life including social and family welfare schemes, employees self reliance schemes,
adoption
of villages, upkeep of
other chartered accountant. Auditor's remuneration
will be fixed by the Central Government and
gardens and parks.
company Auditor submits his report to the central government. On the basis of his report the
pad by () Social or national development i.e. promotion of sports, music, games, art and culture, social audit
enables the managers to keep in mind their social obligations. This would
Government may take adequate actions. Such
auditor has the same rights, duties, powers and help to improve the image
the statutory auditor of the liabilnu of the organization.
company. The special auditor will have the same
Us 227. The report will include all matters required to be included in an
powers and duties as proV2.7 0THER TYPES OF AUDIT
auditor's report. The report w
include statements on any other matter
as
may be directed by the Central
2.7.1 Independent Financial Audit
Government. financial audit is conducted for the purpose of ascertaining whether the balance sheet
ndependent
dprofit and loss account of a business give a true and fair view of the operations and working results of
 orate Go
Auditing and Corporate Governan
52 qualified
auditors for clients
who
It is
conducted by professionally organizations
and shareholder. y be
be s Classification of Audit
a business respectively.
proprietors, partners,
financial audit has

various
been made

individuals,
members
compulsory for many
client which is

of non-profit
cntities
a usefül

established
document

under
for third
ve A
respective
Acts. The
parties . as
well
ndependsaud The principal of "audit
to small sized companies as
in depth" is
applicable in the case of large-sized companies. It is not
they do not have internal check

53
suitable
to submit his report to the required to be checked. The auditor should resort to in system. All the transactions of small firms are
is required
2.7.2 Occasional Audit efficacy of the internal check system which is in depth audit only when he is satisfied with the
occasional need of
the business ofF the client client. It is done operation. The extent of efficiency of intenal check
system will decide the extent to which the auditor should
This audit is
carried out according
to the
is legally not compulsory. T a apply the
where the audit select those transactions which are material in technique of"in-depth audit". He should
the business
the o w n e r s of will mention the terms o relation to the affairs of the
specific desire of
c
and reference. His report 2.7.5 Cash Audit company.
to the terms
conduct the audit according
letter he has received. It is a
partial audit and not
per the
a
complete audit. In this type of audit, the auditor examines
2.7.3 Secretarial Audit transactions. He examines cash
receipts and cash payments. The only the cash
the company is in accordance with he receipts and
e.
ensures that the working of pro revenue in nature. Cash transactions are checked with the help of
payments may be capital or
A company secretary
laws. The secretarial
audit is conducted to
msure th ene i receipts and vouchers and other evidences.
1956 and other applicable 2.7.6 Operational Audit
of the Companies Act. been establ1shed while implementine tha
and adequate compliance
to various legal requirements has Operational audit is conducted to see
non-compliance is brought to light and if possihle that the business operations are
improved in future. Operatonal
taken by the management and any
inadvertent
tn audit goes beyond financial audit. It is conducted for
the following
purposes:
2.7.4 Audit in Depth To improve the
profitability.
Pern define auditing-in-depth as it implies the
examination ofthe system applied withi To guide
the management in
Taylor and achievement of organizational objectives.
transactions from their origin to their conclusion investio
business entailing the tracing of certain
authorization. "It is a method according to
stigating
which
To examine the efficiency of the management in conducting various
each stage the records created and their appropriate at To evaluate the management operations.
selected transactions are subject to a thorough scrutiny in forming an opinion as regards the accuracyof
af policies and procedures.
To advice the
data so scrutinized". management on business operations.
2.7.7 Tax Audit
Under this type of audit. the auditor examines thoroughly selected transactions right from their on
to the conclusions. All records and documents pertaining to the transactions are checked in detail. The ba Statutory audits as well as the cost audit are taken as result of
up
companies Act, 1956. However, a new concept of tax audit has been evolved specific provisions conta1ned in the
pupose of this type of audit is to see wherher the system of internal check or control system is effecti
Act, 1961. In India, the Indian Income Tax Act, 1961, lately under the Income Tax
This type of audit enables the auditor tu suggest to the management a better procedure for recordingt provides for compulsory audit of accounts of certain
assesses whose turnover or
ransactions to avoid any loop holes for committing frauds. For example, the item sales will be examines receipts exceed the specified limit. The Income Tax Act has provided for rules
and regulations regarding tax audit. The tax audit
follows: can be undertaken by the practicing member of the
institute of Cost and Works Accountants of India. There
(2) Order from the customer.
Accountants Act, 1949. From time to time. the institute of
are no
specific rules laid down by the Chartered
Chartered Accountants of India issues certain
(6) Acceptance of the order guidelines regarding conduct of Tax Audit. The objective
of such audit is to assist the tax authorities in
(c) Intimation to the dispatch section send determination of correct tax liability. The
to goods. tax auditor has
report about the transactions which have an
to
(d) Gate Pass. effect fixation of tax liability
on
(e) Challans outward duly 2.7.8 Environmental Audit
acknowledged by the recipients.
(f) Goods outward Register 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 eflect of the activities of an
gStock Register. audt 1S a
organization on environment. Environment
(h) Copy of Invoice. management tool comprising a systematic, periodic and objective evaluation of how well organization.
managenent and equipment are perfonning to safeguard the environment. It is concerned with assessing
(i) Cash Book.
wnether the company policies meet regulatory requirements as perceived by the management
G) Bank Pass Book.
Environmental factors play a very important role in evaluation of future performance and cash flows
k) Customer's Ledger. of companies. Environmental factors affect assets and liabilities of as organization. The effect ofenvironnental
 Auditing and orporate Governanc
India the
Govt. has ibed
prescrihe
54 Audit. In ion Classification of Audit
(Protectnmen
the Environmer
ion
Environmental o9f
factors can be a s s e s s e d
with the help of
statement
under the provisions
Pollution Board
every year by
even.
5S
to the
State SHE audit reports highlighting strengths and
301
'Environment
Audit Report'
termed as
to submit
this
statement
weaknesses/vulnerability of the various systems/measures
industry has
for protection against risks of safety, health and pollution and
Act, 1986. Every qualificationa
suggestion on appropriate follow-up actions
be submitted periodically
nowledge of are to to the mana
technical
suilable
SHE audit is mostly adopted
gement.
September the auditor to have
facto by large public sector
audit requires the impact
of environmental
undertakings.
The
environmental
laws and
regulations
sand ability
to assess
conducted, generally, by small tea mcial 2.7.10 Propriety Audit
environmental
The
environmental
audit 1s
one person
cannot have variea
erng In the words of Kohler,
"Propriety means that which meets the tests of public interest, commonly
performance of the company.
because a
professional
accountant
or any
wledge accepted customs and standards of conduct".
three or four persons Applied to audit, propriety audit can be defined as "an
required for it. Audit
examination of actions and decisions to find out
whether they are in public interest and meet the standards
Environment (She) of proper conduc.".
Health and audit. The
as
word
2.7.9 Safety, of
environnmental
extension Thus under propriety audit, the auditor
said to be an expansion or
and the publi not only examine the transactions from the books of accounts
audit may be
consumers
of
SHE like satety with the help of vouchers and documents, but he verifies also as to how far
cover non-
financial areas
USA and folloua transactions effected from the
used to led by decisions or actions are
been increasingly
others o v e r the
last three
decades or so the world over
other proper or reasonable.
no leakage of revenue or wastage of funds

The propriety audit is concerned with examining that there is

employees and by mistake or fraud. It is concerned with ascertaining
countries including India. appropriateness from legal, financial or economic point of view.
hazards of illness and injuries
caused by accidents due to
This has been
necessitated by growing and natural calami -ties. Apart fromafore.
resaid Propriety audit is a very important part of the Government audit. In India, the CAG is expected to
deforestation, pollution, greenhouse effect
machinery and loss of economical
viakit examine propriety of expenditure and has to ensure that:
rapid industrialisation,
also risks of damage
to expensive plant and viability
hazards, there are (a) The authority sanctioning the expenditure does not get the benefit directly or indirectly;
of an enterprise. (6) The person who is spending has exercised the same prudence, as he would have exercised while
and good corporate governance ensures satisfacto
Therefore, in many countries,
legislations requure spending for himself
and the state. SHE audit is concened
protection measures by ndustry
safety, health and environmental (c) Public money is not utilized for the benefit of a person or a group of persons.
with verification of the efficacy of such measures.
(d) Public money is utilized for the purpose for which it is to be spent.
Safety audit 2.7.11 Bank Audit
of critically examining and analysing every aspect of a
Safety audit may be defined as a system The huge amount of public monies are handled by the banks make it imperative that the activities of
and process designs, layout and construction, operating
safety system e.g., management policy, plant the industry are closely monitored and regulated without strangulating the spirit of entrepreneurship. Audit
accident prevention and management procedures.
procedures, emergency plans, personal protection systems, forms an integral and important part of such monitoring and regulation. The Auditors have to certify that
Such audit which is conducted by properly qualified persons
like safety experts aims to focus on vulnerability statement of accounts of the bank as at the closure of the financial year reveal true and fair view of the Bank'
or weaknesses of safety measures. financial position, adequate provision for Non-Performing Asset(NPA)/bad debis has been made in the
Health audit books. All expenses/income have been duly accounted for and profit is correctly worked out. The Banking
Health audit means systematic and critical verification of and reporting on strengths and weaknesses Regulation Act, 1949 contains the provisions relating to the maintenance of accounts and their audit.
of all spects related to management of health of employees or of the public. 2.7.12 Co-operative Society Audit
There are certain features of co-operative which are similar to those of companies. As in the case ofî
Environmental audit
from manage-ment while the
companies, in co operative societies also, there is a separation ownership
of
Environmental audit for industrial or commercial establishments refers to checking ofthe effectivene members. The management of its affairs is in the
Or otherwise of
on capital of a co -operative society is contributed by all the
systems or nmeasures adopted for prevention or minimisation of soil, air and water polu This necessitates an independent financial
ction o
hands of only some of the members' elected for this purpose.
audit of co-operative societies is required by
The objcl of such audit is to
environment legal or otherwise.
ensure by an undertaking of obligations relating to protection
fulilment audit of accounts of co-operative societies. Considering this,
societies is that, unlike most companies the
law in India. However, an important feature of co operative
SHE auditors nals o
may be internal i.e. in- house personnel, or external, i.e., outside pror
Consultants
 Auditing and Corporate GOvernane
56 w h o do
nor possess
adequate manageria
adequat
Classification of Audit
societies are
often
managed by persons
auditors
or
co-operative
caciciies are, therefore
sociciies
57
aairs of co-operative
independent
financial
2.7.18 Compliance Audit
skils. The
or accounting also.
CCnnical
some of these aspects
A compliance audit is a type of audit that checks against internal policies and procodures as well as
on
required to report
and/or for
hose for
those
whose benefit
who law and regulation. Law and regulation here wve mean the government's law where the business is operating.
or trust
2.7.13 Trust Audit
audit of
trusts
assures
the
creators
are
reliable. Therefore in the For example, in the banking industry, there are many kinds of regulation required bankers to follow and
financial statements
of the trust thCase comply with. Most of the central banks required commercial banks to set up the complaint review
Independent
the financial trus-tees shall get
deed that the
trust is created (i.e.,
beneficiaries)
in the relevant
law and/or
in the trust
Act, I961,
provides for
non-inclusiom financial (assessment) or compliance audit to make sure that they are complying those law and regulation set.The
it isspecifically provided
In India the
Income-Tax
their accounts audited
get
certainto
audited pursuant
entity may also assign its internal audit function to review whether the entity's internal policies and procedures
trust audited. trusts are complying and effectively follow. A compliance audit is part of the system that use by the entity's
statements of the
taxable income.
Many pubiic
trusts in their management to enforce the effectiveness of the implementation of the government's law and regulation.
incomes of public Income Tax Act, 1961.
and the entity's internal policies and procedures.
tne requirement of the
2.7.14 Insurance Audit of account ofthe
the insurance
; 2.7.19 Integrated Audit
records and books
examination of the operations,
audit is an the appropriate premium4 or
The insurance
ensure that the customer has paid Integrate audit is happen when there are two different areas of audit requirements. For example
audit to Insurance Rem
conpany. Auditor performs an conversant with the provisions of the gulatory there is a financial audit along with social audit or there are some areas need to be confirmed with the
auditor should be
to him. The of accounts and audit financial audit.For example, a NGO requires their financial statements to be audited along with technical
cover provided
maintenance
the
.
ot the
contains the provision
Act 1999 which areas that those NGO spending the money for.For example, NGO is working on public health and most of
and Development,
insurance companies. the money spend are related to public health. Besides the expenses reports that present the expenses that
Firm Audit NGO paid for and need to be audited by the financial auditor, there is the number of technical reports like
2.7.15 Partnership
to get their financial statements andi
fims in India are not legally required health reports which need to be verified by technical auditors that have experienced in assessing health
At present, partnership
audited accounts helps in proper valuation of report. This is called an integrated audit. The integrated audit also happens when the entity operates in
financial statements audited as
Still, many fims get their The audited accounts are alsn
deceased Partner to their legal heirs etc. many ditferent countries and the financial statements are an audit by different audit firms.
goodwill, distribution of share of the
banks. The audit should be carried out as per the terms af
useful to get the loan sanctioned from the
partnership deed and Partnership Act.
KEY POINTS
2.7.16 Sole Proprietorship Audit 1. The nature and scope of audit vary due to various factors such as: the size of organisation, the
strength of internal control system, legal requirement etc.
Like partnership fims, sole proprietary concerns are also not legally required to get their financial
2. Statutory Audit is compulsory audit prescribed under statute i.e. law.
statements audited by independent financial auditors. However, many such concerns get their financial
3. Government audit refers to the audit of accounts of Goverament departments and offices, Government
statements so audited for the following reasons. Audit assures the proprietor that the accountant has maintained
companies and statutory or public corporations.
the books and prepared the financial statements properly.
4. Private audit is not compulsory under any statute, but is undertaken by the owners voluntarily to get
2.7.17 Efficiency Audit the benefit of audit.
Efficiency audit or performance audit is a form of audit which is being carried out for ascertaining S. Internal audit is a review of operations and records undertaken within a business by specially assigned
the efficiency/performance of a staff.
system/process/input. This is being carried out to judge whether the resul
as achieved are in 6. The activity of external audit refers to the independent and systematic examination of the financial
conformity with set standards or not. Appraisal of how a particular activity is carying ou statements of the organization by a third party with specific objectives, which makes it compulsory
the company's
policies and procedures. Such review may cover any activity within a department, divisiou, to realize it periodically according to the legislation in force.
or local area. A
pèrformance audit can be a review of a program to assure that it is tive occupied continuously on the accounts whole the
The program may
apply to management and accounting procedures, satisfying its objecu 7. Continuous audit is one where the auditor's staff is
guidelines, or policies. The year round and performs interim audit.
audit may take into account the
anticipated benefits ofa program relative to the actual Also
pertorina 8. Interim Audit is an audit conducted in between the annual audits.
relevant may be the costs and time
associated with the performance. r
activity. A report of management's abilities is 9. The auditor at the time of final audit should ensure that there are no alterations in the books previusly
prepared to meet particular goals. Included
in the report are typio y checked by him.
controls and measures of the effectiveness of ternal
efficiency
of procedures and processes. The m
organization or by external interested performance audit may be the
parties. initia
 ate Govep
Auditing and Corporate Govenance
of the iterme
items appearin Classification of Audit
59
verification
58 which
means
in
American
terms
the
is an liabilities.
2. Give one word/term/ phrase for each of the following statements
Sheet Audit
nsaction-..
and
10.
Balance
including
valuation of assets check cach
and every
transaction
recorded in the
sheet to (a) Which audit is carried on throughout the year ?
balance
auditor is required
audit, the Ans. Continuous audit
11. In case ofcomplete all the books
of unts, rather
accouns
books of accounts.
to
examine
he (b) Which type of audit proves be helpful in declaration of Interim dividend.
the auditor
is not required wil
12. In
Partial audit,
as per
the terms of engagement Ans. Continuous Audit
transactions
some in detail by the auditor
examine only transactions are
examined
(c) Final Audit can also be termed as ?
13. Under
detailed audit,
few business
verification
records maintained by the
of cost aintained by ow.
organization Ans. Annual Audit
which involves
14. Cost Audit
is a type ofaudit plans, policies,
procedure, method and
strategi
e s an (d) Which type of audit is suitable, when there is a strong intermal-check system ?
audit involves
exanmines of the
to improve
organizational ef
15. Management with a view ess, Ans. Periodical Audit
of management
evaluates the performance
(e) The type of audit, which is carried on at the middle of the year is known as ?
QUESTIONS FOR DISCUSSION
Ans.Interim audit
(f) The type of audit followed by Banking Companies is the
Ans. Annual Audit
AObjective Type Questions
of the financial year. (g) The audit which examines only a part of the accounts of a business, it is termed as
(a) Periodical Audit is carried
on at the Ans. Partial Audit
Ans: End
(h) The type of audit that refers
otherwise known as
to enquiry against justification and necessity of expenses is known as ?
b) Final Audit' is also annual audit
Ans. Propriety audit
Ans: balance sheet audit, periodical audit or
i) Systems audit implies
(c) Periodical Audit is started after preparing Ans. Enquiring accounting and control systems
Ans: Final accounts
G) The audit which is not a statutory requirement, but conducted at the desire of the owners, is known
d) Management Audit is bynature. as
Ans: Voluntary Ans. Private audit
(e) Comptroller and Auditor General (CAG) of India is appointed by_
Ans: President
BShort-Answer Type Questions
1. Write Short notes On
( The audit of Government Offices is done by the auditors appointed by.
Ans: Comptroller and Auditor General of India (a) Periodical Audit
(b) Final Audit
(g) When an auditor is an employee ofthe organisation being audited, the audit is classified as
audit. (c) Partial Audit
Ans: Internal
d) Continuous audit
(e) Interim audit
(h) Joint audit implies
(1) Performance audit
Ans: Audit by two firms of C.A 2. Differentiate between
audit is also known as
Eficiency audit. (a) Continuous and Interim audit
Ans: Management
(b) Internal and External Audit
) Audit is undertaken to check whether the various (c) Government Audit and Commercial Audit
activities of the organisation are d out
efficiently or not. (d) Balance Sheet Audit and Annual Audit
Ans: Performance audit
 60 Auditing and Corporate
Governance
C. Long-Answer Type Questions
1. Classify audit in termis of
organizational structure. Differentiate among statutory, government and
pmvate audit.
Why private audit isvoluntary audit ?
3. What are the
objectives of internal audit?
4.
ldentify the advantages and disadvantages of internal audit.
5.
Classify audit on the basis of time.
6. What are the advantages and disadvantages of continuous audit ?
7. What are the advantages and
8. What is interim audit?
disadvantages of final audit ?
When and how it is
9 What do you mean conducted?
by balance sheet ? Write a note on
the
10.
Classify audit on the basis of scope. procedure of balance sheet audit.
11. Briefly explain complete audit,
Classify audit on the basis of specific partial audit, and detailed audit.
12. What do you mean objectives.
by cost audit ? How
13. What is continuous audit and what management audit is different than
are the cost audit ?
of continuous audit? precautions which should be taken to
avoid the
14. What are the cases in which
special audit may be calle
disadvantages
lled by Central
Government ?