Unit 2 Types of Auditing

Unit 2 : Types of Auditing
By Radhika

1. Audit of A/c of various
forms of organization:
i. Audit of a/c of Sole Trader
ii. Audit of A/c of Partnership firm
iii. Audit of a/c of Joint Stock Company
iv. Audit of A/c of Trust
v. Audit of A/c of A/c of Co-operative societies

Cont.
i. Audit of a/c of Sole Trader
 No legal obligation
 Gets his a/c audited with a view to keep regular and
correct accounts
 Since there is no legal obligation but it is advisable to get
auditor
 An agreement will be drawn with auditor

Cont.
ii. Audit of Partnership firm:
 No legal obligation
 For getting advantages of audit they get their a/c audited
 Auditor should first examine the partnership deed
 Various matters covered in the deed

Cont.
iii. Audit of a/c of Joint Stock Co.
 Under the provisions of Indian Co.’s Act 1956 it is
compulsory ..
 The co.’s act contains various provisions dealing with
appointment, reappointment, termination, remuneration, rights
& liabilities of auditor.
 Shareholders are the real owners of the co.
 Auditor’s report

Cont.
iv. Audit of Trusts A/c
 Often created for the benefit of some religious or charitable
institutions
 Trust money/fund may not be used for whom it is meant
 And also the beneficiaries don’t have any concern or idea
about the a/c of the trust though it meant form them
 Earlier the trustees either presented no a/c or misappropriation
of the trust fund
 Therefore in some states of India it is compulsory
 Auditor and also Trust deed is included

Cont.
v. Audit of A/c of A/c of Co-operative societies
 Generally done by the registrar
 They keep panel of qualified auditors

2. From view point of Law:
i. Statutory Audit [Compulsory]
ii. Voluntary Audit [Private]

Cont.
i. Statutory Audit [Compulsory]
▬ Certain type of undertakings established under some law.
a) Company Audit
b) Audit of Trusts
c) Audit of Institutions
d) Government Audit
e) Compulsory Audit
- For Businessman [40 lacs]
- For Professional [10 lacs]

Cont.
ii. Voluntary Audit: [Private Audit]
▬ For private concerns which are not established by any statute.
a) Sole Proprietary Concerns
b) Partnership Firms
c) Other Institutions or Professional Persons [Doctors, Engineers,
Solicitors]

Types of Audit on the Basis
of Time
i. Interim Audit
ii. Annual Audit

Cont.
i. Interim Audit:
- In big businesses accounts are audited throughout the year.
- But in small business a/c are audited once only.
- When an audit is conducted between two periodical audits
for some interim purpose like declaring interim dividend
termed as interim Audit.
- Generally an audit of a/c of first six months of the financial
year…
- Time saving
- Advisable to declare interim dividend
- Moral check on employees as Auditor frequently visits
the business
- Useful at the time of sale of the busi.

Cont.
ii. Annual or Final Audit :
- Audit is taken up at the end of the financial year when the final
a/c are prepared
- The auditor attends only once at the end of the year & complete
the work at a stretch in continuous session.
- “ a final audit is one which is not commenced until after the end
of the financial period, & is then carried on until completed.”
- It also called Periodical Audit or Complete Audit
- Such type of audit done only once in a year
- Auditor & his staff visit at the end of the year
- Such Audit completed on continuous sitting

Types of Audit on the basis of
Scope
i. Internal Audit
ii. External Audit
iii. Branch Audit

Cont.
i. Internal Audit:
- In large co. in order to detect and prevent frauds and errors;
the continuous audit is carried out by paid employees of the
co.
- Some undertaking appoint auditors for constant & regular
checking of a/c
- Such arrangement is known as “Internal Audit”
- “Internal Auditing is an independent appraisal of activity
within an organization for review of operations by measuring
& evaluating the effectiveness of other controls”

Cont.
- A separate department is maintained for internal audit in big
organizations which is known as Internal Audit Department.
- Salaried Auditors or sometimes may be the full staff
appointed to do so.
ii. External Audit:
- When a busi. appoints a professional auditor for a fixed
remuneration, the audit done so, called “External Audit”
- Duties and responsibility of an Auditors…
- The external auditor is required to give his report.
- The external auditor is accountable to the client & some times
to the third parties also for work done by him.

Cont.
iii. Branch Audit:
- In case of joint stock co…..
- The statutory auditor of the co. is responsible for the audit of
the branch a/c
1. Acc. To sec. 228…[branch office outside india]
2. Where a/c are audited other than the co.’s auditor…
3. In general meeting the person other than the auditor should be
appointed by BoD.
4. The Branch Auditor.. Duties, qualification, responsibilities,
remuneration, powers etc will be decided by BoD

Types of Audit from the point
of view of Specialty:
i. Cost Audit
ii. Management or Efficiency Audit
iii. Propriety Audit
iv. Special Audit
v. Social Audit

Cont.
i. Cost Audit
- Busi. Like manufacturing, production, processing or mining;
such undertakings have to maintain their cost a/c
- This will help them to fix up selling price and will also help
in reducing wastage.
- First time in India by the amendment in co.’s Act 1965 Cost
Audit made compulsory for such industries….
- “Cost Audit is the verification of the correctness of cost a/c
and of the adherence to the accounting plan”
- To check records of material
- To scrutinize wage records
- To examine factory, office & selling overheads records

Cont.
- Check records of fixed assets and verify depriciation
- WIP, stores & spare-parts
- To check variance between actual cost data & budgeted
figures
- To reconcile cost & financial records
ii. Management of Efficiency Audit:
- It is a modern concept
- Such audit attempts to evaluate the performance of various
management processes & functions

Cont.
- It is an audit to examine, review & appraise the various
policies actions of the management on the basis of certain
objective standards.
iii. Propriety Audit:
“It refers to an audit in which the various actions and decisions are
examined to find out whether they are in public interest and
whether they meet the standards of conduct. While
undertaking a propriety audit, the auditor does not merely
evaluate the evidence supporting a transaction . He Attempts
to examine the regularity, prudence and impact of the various
actions and decisions.”

Cont.
iv. Special Audit
- Provisions of Special Audit has been made by sec. 233(A)
- Such audit becomes necessary under some special
circumstances only so called ‘special audit’.
- It is in fact examination of the management of the company
and is not detailed investigation
- Only Central Govt. is empowered to order for it
- Any C.A or co.’s auditor may be appointed as a sp. Auditor
- The report of sp. Audit is required to be made to Central
Government not to the members of the co.
- The expenses determined by the Central Govt. but paid by
the co.

Cont.
v. Social Audit:
- It provides protection to customers, employees all those are
affected by the decisions of the company.
- It is done to see that the co. does not misuse its powers
- Thus it is done by independent external to verify truthfulness of
the co.’s social activities.
- It is concerned with checking effects of the co.’s activities on
the people, on environment, and on business relations of the co.
- It includes propriety credit.
- Eg. Quality of production, cordial relations between employer
and employees, policies regarding wages, price and profits,
proper and fair trade practices, health security and welfare,
training, education and development of employees.

Types of Audit on the basis of
Continuity:
i. Continuous Audit
ii. Complete Audit
iii. Partial Audit
iv. Auditing in Depth

Cont.
i. Continuous Audit
A continuous audit is one in which the auditor visits his clients
office at regular or irregular intervals through out the year to
verify the account. The objective of CA may be-
– To get final account audited immediately after the closure of
accounting year.
– When the business is very large.
– When internal control system is into effective.
– When regular final accounts are required.

Cont.
Advantages:
1. Detailed Checking
2. Detection of Fraud
3. Moral check
4. Preparation of Final A/c
5. Interim a/c
6. Technical details
7. Planning auditor’s work
8. Accurate a/c
Disadvantages:
1. Alteration of figures
2. Thread of work lost
3. Work disturbed
4. Mechanical work
5. Depends on Audit staff
6. Expensive

Cont.
 Precautions to be taken for continuous audit:
1. He should record important balances, totals etc and verify the
same in his next visit.
2. Strict instructions should be given prohibiting the alteration of
figures after checked by the auditor.
3. For each visit special ticks should be used.
4. Its always better to verify the nominal account at the end of
the year.
5. An exhaustive audit programmed must be prepared.
6. He should ensure that normal working is not affected.
7. As far as possible, he should pay surprise visits.

Cont.
ii. Complete Audit
- As it name implies, audit of each and every transaction
entered
- The auditor checks all the transactions in all books of
accounts with supporting documents
- It includes checking, posting, casting, balancing
- Such audit done where a/c have not been previously audited

Cont.
iii. Partial Audit
- Sometimes Audit may be asked to conduct audit of only some
records or books, for part or whole year
- E.g: an auditor may be asked to audit only the receipt side of
the cash book.
- But such audit is not proper
- However in case of sole proprietary ship or partnership
concerns it can be done
- Such audit is undertaken when owner suspects that frauds have
been committed in certain books.

Cont.
iv. Audit in Depth
- This implies that a few transactions are selected at random and
they are thoroughly checked through its stages, from origin to
conclusions.
- It includes not only examining the documents but also verify
that the system of internal check in operation is effective
before resorting to random or selective checking of the
transactions.

Cont.
Stages:
1. Requisition from the shopkeeper
2. Analysis of quotation from the supplier
3. The purchase order issued by purchase department
4. The entire entries made for the transactions of above matters
5. The report regarding quality of goods
6. Entry made by the shop-keeper regarding goods received
7. Checking the relevant invoices and entries in the financial
books with the goods receipts documents and purchase order.

Audit Programme
 Before commencing the audit he should plan his work so that is
over without delay.
 chalks out a detailed programme
 It explains the work to be done by the audit staff.
 “a detailed plan of the auditing work to be performed,
specifying the procedure to be followed in verification of each
item in the financial statements, and giving the estimated time
required”.
 Hence it is a statement giving instructions and guidance to the
audit staff as to the audit procedure.
 It arranges and distributes the work among the audit staff.

Audit Note Book
 An audit note book is one of the most important document
maintained by the auditor.
 It is defined as a record used mainly in recording audit,
containing data on work done and comments made.
 Audit Note book contains information regarding the day to
day work performed by the audit staff, notes about errors,
explanations required etc.
 The auditor can use it as an authentic evidence in the court if
there is any case against him.

Cont.
Contents of Audit Note Book:
1. Nature of business and important documents such as MOA,
AOA, Partnership deed etc.
2. List of books of accounts.
3. List of officials, their duties and responsibilities.
4. Copy of the audit programme.
5. Information on missing receipts, vouchers etc.
6. Details of errors discovered.
7. Explanations sought from the officials.
8. Points to be included in the audit report.

Unit 2 Types of Auditing

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Unit 2 Types of Auditing