11\'TERNAL AUDIT

l ..-- Internal audit is the process of verifyin g accurac ~ a~d. compl~ teness of accounting ~ ,'\
'
regular basis. This routine work is entruste d to one or more 1nd1vtduals either from among the emplc,.
the organis ation or from outside either on part time or contrac t basis. Persons who are adequatefv m.~
and e.xperienced to perform the job of internal audit of all the recorde d transaction, are entrusted
;;
audit respons ibility. It is conduct ed on the basis of internal audit schedul e, ensuring complete e-_~
of each and every recorde d financial transact ion, from the beginni ng till the end of the financial ~-w.~:t
process~ errors found and irregularities detected , if any, are reporte d to the concerned authority . r~
measur es are then implem ente~ to avoid recurren ce of the same.
Tools of Interna l Audit: The followin g are the too_ls of internal audit:
l. Check-l ist : To ensure that no operatin g areas and transact ions go uncheck ed, a schedule of cbttt ..:
is prepare 4, which covers the importa nt areas, aspects and transact ions to be checked.
Flow Chart : To ensure systema tic and chronol ogical order in the process of checking, a !}o,.- ~
..
11.
revealin g the order in which to proceed in the system of control, is prepare d.
11.l. Statistic al Sampli ng : It involve s random as well as
schedul ed checkin g of individuals aoo ~
perform ances.
1v. Walk through : It involve s systema tic and comple te check of records and each
and every ~
from the beginni
"' ...,, till the
ng end.
The objectiv e of internal audit is to ensure timely checkin g of day-to-d ay transactions of tht e!C
organiz ation on a daily basis, so that discrepa ncies found , if any, can be rectified and corrective ~~
taken in time to ensure continu ity in efficien t working of the organiz ation. It also enables preP:1-rlt~__,
,:
..,
monthly trial balance more easily for the purpose of measur ing perform ances on monthly basrs w
effectiv e control. It~ thus, helps speed up statutor y audit at the end of the year without any obstlicles-
The method of internal audit is similar to statutor y audit. The auditor checks all the R', :-
,:-t 1

transact ions maintai ned in various books on the basis of support ing docume ntary evidence on a_d:31~
Th~ ~tatutory auditor of the compan y cannot function as an internal auditor, as the inte~al auJit::;!\,.,
r

position of an employ ee under the manage ment. If the statutor y auditor functions as an tntet1~~ 1
~
..

wi ll not be able to give an indepen dent and objectiv e report under section 227 of the Co1nparu
The internal auditor is appoint ed by the manage ment of the organis ation a nd is, therefore. requ~ th
~ A~i.
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-
to the manag: ment. How_e ~er the stat~tory audi~or is appoint ed by the shareholders of ~-~~-
accorda nce with the prov1~10ns of section 224 of the Compan ies Act, 1956 and, there~ort> , c; ff\.~
•
report to the shareho lders m the form of Auditor 's Report. The inten1al auditor is requin.-~ to pt'
duties strictly in accorda nce -with the needs of the manage ment.
 ' L ,'

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1
 Less on 11 D Types of Auditing 329

. . an evalu~tiQr;t. aAtikSflE
llys 'of ttl&~u si~s.op...e.ca
Inte rnal audit 15 - ys-tem of internal contriS" tipn~ gnduGted by...the-inter
ol establlshecun.Jl r:t organ
f overa 11 s ' . nalAaadit sta1P..Jt is
~~ independent apprai~a
the . - - . . - - . • - ization.
Internal audit . l activity within ~n organiza
5 practices as protective and constru
tion for the rev
and ~ther bu~~!!uring and ctive arms of management. iew of accounting, financial
evaluating the effectivenes It is a type of control wh'ch
functions by s of other type of controls 1
. · .
Professor Walter B. Met~s I A d·t· "I
According ~o f financial , lnte~n~. u
critical revi:w 0 and operating act1v1t1es I mg means nt~rnal auditing consist of a continu
by a staff of auditors fun ou
ctioning as full time salar s,
employees. ied
. . ation, an internal audit. . .
1s c~rn~
In big organiz. t mandatory but organiza d out b~ the_ team of pr?fessional~ in the organ
internal audit 1~ _n~ernal contr tion gets the internal au ization. The
ol, the so dit done with a view to
effectiven~ss O in agement undness of financial syste evaluate the
an assurance about the m, effectiveness of busin
control process in the org ess pro cesses etc.
This provide~ m;~·encies/fra anization and it aids in ea
ud etc. it helps the statut rly
detection of me ic~ompany ory auditors too in gettin
audit report order, 2003, g the statutory audit done
effectively• As p_er sound int statutory auditor also req
company is having ernal audit system or not. uires to comment whether
the

. The purpose of internal

(i} Pr~p er Cp.Ltt!On1~rol there Audit is to keep proper co
ntrol over business activ
there 1s proper co is maximum efficiency. Th ities. When
e internal control can deter
mine the degree of control
over work. .
.. . System: The purpose f . d. .
o mterna1 au 1t 1s to eva 1
(n_} Accou~t,ng roper autho
rity for uate t he accountin ·
g system. It 1s
·
1th trans actions like pu rchase, retirement and dis concerned
w checkingb Pcompared wit posal of fixed assets. Th
voucher can e h entries in order to deter e
mine that figures and facts.
.. M nagement The purpose
(n) Help a The ·ntemal au of internal audit is to.help the
dit can be used as a tool to management. Internal audit
weaknesses . 1
correct the situation. The or can point out the
perfonned properly· ma na geme nt functions can be
. ) W k' g Review: The
( purpose of internal audit
,v is to review the working
curren torye'a"r can be reviewed in detail. There is a need of business. The working
of
can be taken for proper worki. to locate the weak points.
The corrective measures
ng.
(v) Asset Protection: The
purpose ?f internal au~it
be there. Internal auditor ca is to ~rote?t the assets. Th
n examine the valuation, ~ proper record of assets
assets must be made under venficat1on and possessio must
proper authority . n. The purchase and sa
le of
(vi) Internal Check: The pu
rpose of internal audit is
of duties among the emplo to evaluate the internal ch
yees. When all staff me eck system. There is div
internal check system . The wo mber are working prope ision
rk of an auditor is reduced rly it means there is effectiv
. He can apply test checks e
(vii) Fair Statements: The to complete audit duty.
purpose of internal audit
of internal audit can help the is to detect the error in the
management to see that accounting records. The
accounting record is in ord work
(viiil_,,£hec~ Error. The pu er.
rpose of internal audit is
of internal auditor' goes side to detect the errors in the
by side therefore there are accounting records. If the
rectify mistake to prepare ac minimum chances of errors work
counts at the end of year . The accounting staff ca
in order to help the exter n
(ix) DetecJ.fr.iu.rl: The purpo nal auditor.
se of internal audit is to de
-oraccounting staff is over the tect frauds in the books of
internal audit is started. Ac accounting . When the wo
_ , between recording and counting staff remains ale rk

(i
,. d.
De termine Liability: The
ded among the staff. It is ea
checking. Thus detection
purpose of internal audit
of fraud is possible with it.
is to determine liabilities
rt because there is no tim
e

sy to no te the ne of employees. The dutie

·?otnt the person responsible for gli ge nce on the part of emplo s a~e
carelessness. yees. The internal audit
can pin
~~
or/~fimore acannd rely on internal auditorThanedputherporeseis ofnointneernedalofaudit is to help an independent audit. The external
eJp.- i n . l n ~
t
mo
ney due to internal audit. cent percent checking . In
this way there is saving
 ments an d limitation .

• • • • ••• d volunta ry audit. Audit 'Nh'

. uired under law~ tne-eornpah1<=:s Act, ,91ch
~roadly , audit can be _divided !nto _two _categori es I.~- aud~t req af-11e'§"'g
ov<:r':8d W'ublic and Chantab \e l"ru ~~.
1s pr~scnb ed by a slatuene g1slation 1ntluaes ·Audit of e ornP ative soci_e~ies,
d 5 Audit of Partners hip f:~\s,
Bank111g Compan ies, Electrici ty Supply Compan ies, Co-OP r tar)' audit 1
1nclu e rrn ,
Corpora tion set up under Act of Parliam ent etc. Wherea s vo un
Sole Propriet orship, Hindu Undivide d Families etc.
k defined under the
e of war . auctit
d sed
Further, audit can also be classifie d on the basis of metho s u d't process or scop . · 0 \SO audit, Funcr10 ·
Audit '- · na1
These types of audit includes Internal Audit, Manage ment Au 1 '
Aud it, System Audit, Propriet y Audit, Efficienc y Audit etc.

f olrowing types of audit are discuss ed from syllabus point of view:

Internal audit

- Financia l Audit

Secreta rial audit

Cost audit

Tax Audit

Bank Audit

Co-ope rative Societie s Audit

Trust Audit

Insurance Audit

Partnership Audit

Sole Proprietorship Audit etc.

Government Audit

Manag ement Audit

Functional Audit

Propriety audit

Efficien cy audit
 • 11 of owner.. Lt.is because of audit that th .
8
a, sa~ct~~f ns various departments. owner Wtlt bs satt~fitld obou rn -
_ .~. _ 1
1·~\\,orktn9 . a l')qsine~!i ~tlf)n:!;
~ction !nd_Preventio n_ o.f ~rrors and l!rauds: The
Jl!V

i (iiJ ~ t y
w
are discovered by the process of audit and ·t errors whether comm tt'ld
oer,15erat~;r to comm it an error or fraud as the account~Sapresence p-rev~nts theu· 0CCU~'!Or.$\'1flO('".F.Jn\\\,
No one "': etected,
Just Hke errors, frauds are discovered b re s~bJe-c t to audrt ar'fd hertce th~'l;wl~~ ~hfJ futuna
(\f

of pein~minated totalty. Y audit and its presence mm,m,ze:s·futur@. ::~:b~r

'f not 8 iJ ~ t,,v;::,~ M \/

'...~caaofL..o f Book~ Another advantage of audit is the veri - -

("!~ta1ning the records up to date at all times. ncatton of th e books of ae-,,r.A)unts this~~~
r~ dependent Opinion: Auditing is very useful in obt . . . . .
(1-v) _In ss condition. If t~e accounts ~ e audited by an inde~:1~g t~e m?ependent opmton of the auoH.ot about
oudsrnf;r in all respects and it will be of extreme importance fo~ t~n auditor' the report of the audatot W\\\ be true
an _, _ ...-. - ~ ......SP- , . e management of the compari:V .
(~) Moral Check: The proce~s of a~dit will ~stablish a c~eck on the minds of the staff working m the buSJness ano
tt,ey 'Nill not~ able to commit any trregulan:t,,, as they Wlll have a fear and ~;11 also be aware that the accounts 'MU
t>e examined in the neahr futur~ andf that ~ct1on w?uld be taken against them if any irregulartty is discovered. Thus
the audit prevents the ap~mn~ o any 1rregulanty before it starts and the staff hence becomes more actwe ar,d
responsible. "!"h~_f::_~9!}h_eJr getting Gaught act as-a moral check on the..staff of the company.
(vi) Pr_otec~igtrtS"ahainferests -of-Shareholder-s: Audit helps in protecting the mterests oi
shareholders in case of joint stock company. Audit gives assurance to the shareholders that the accounts oi
the company are being maintained properly and their interest will not suffer under any circumstances.

(vii) Reliance b,Y_ Ou'"tsi deI.$; Outsiders like creditors, debenture holders and banks etc. wm rely on the book.s
of accottRts-and financial statements of the business if they are audited by an independent authonty (externai
auditor).
(Viii) Ensures Compliance with Legal Requirements: AUQited statements are necessaf'J to fulfl\l ceratm
legal requi~.!:!!~~~~~ing ~ g yJr.e ments of stock exchange etc.
{Ix) Reinforce and Strengthen Internal Control: Since auditing exercise involves the review of intern-al
control system , an auditor will identify the gaps in internal control system and can suggest the necessary
a,ge in the internal control system.
· Loan F~~J!L!r= Money can be borrowed easily on the basis of audited balance sheet from fin~nc\a\
u 1<:rtrs. If accounts are audited the true picture will be visible to banks and it wmbe easy tor thern to tssu-2
s as early as possible.
 _
_c~ec~ing, _verifica.!ion a~d _ex~ ~in ~tio~
.. -~f acco u_r!!_s,:. Jhe audit can. be sJartPd oofy 1Nf1~r- tre
Audit deals with refore 1t cs
st
accoi.Hlting ends. There exi s an interrel atio nsh ip b~ ee~ a~co untm g and auditing prin cipte s Tne
~ prop er dev elop m~~ t 0 ~ acc oun tin~ pnn_ c 1ple , the developmen t o-f aud it1ng pro ~dure and
. ._,_at a by diffe rent persons . Let' s hav e a looi<'
The term aud1t1ng is defi ned in vari ous way s
t principles is not ~?sst~le.
at on these defirnt,ons,
Definition of Auditing
min atio n of suc h reco rds to esta blish thei r relia bility and the reHaothty of the
1. "An audit is an exa
- A.W . Han son
statemen t draw n from them ".
t is an exa min atio n of acc oun ting reco rds und erta ken with a view to esta blish ing whe ther the-y
2. "An audi
h they relate. In som e inst anc es it may b'e
correctly and com plet ely refle ct the tra·n sac tion to whic - L_R. Diekse:e
asce rtain whe ther the tran sac tion are sup port ed by auth ority".
necessary to
proc ess by whi ch a com pete nt, inde pen den t per son acc umu late ana eva luat es
3. "Auditing is the
abo ut qua ntifi able info rma tion rela ted to a spe cific eco nom ic enti ty for the purp ose of
evidence
enc e betw een the qua ntifi able info rma tion anc
determining and reporting on the deg ree of corr esp ond - Are ns and Loe bbe cke
established crite ria".
et and profit and loss acc oun ts prep ared by otne rs
4. "An audit denotes the exa min atio n of Bala nce she
the book s, acc oun ts and vou che rs rela ting ther eto in such a man ner that the auditor may be
· together with
satis fy hims elf and hon estl y repo rt that in his opin ion, such Balance she et is property draw n up so
able to
to e~hi bit a true and corr ect view s of the stat e of affairs of the particula r con cern acc ordi ng to the
~s - F .R..M. De Pau la
by the boo ks of acco unts~.
information and explanations give n to him and as sho wn
5
~Y be said to the veri fica tion of the acc urac y and corr ectness of the books of acc oun ts by an
· '.'A~dit
pers on qua lified for the job and not in any way con nec ted with the pre par ation of .suc h
~c~uen~ ,?nt - R.8 ,. Bos e
s·
 OF INTERNAL AUDIT
BENE'FITS _ · ·
• th t proper accounting system is introouced
( 1.) ·P roper ~~O}:!l)tlng System: The benefit of internal au d'it _,s · a cessed for mainta· -- ,
Accotmt~ng-system is---a-chain of activities in an entity by which transactions are pro •ntng
financial record. There is a need of orderly devices to achieve desirable results .
(ii) Better Management: The benefit of internal audit is that there is be~er manageme~. cf ~u~i;ess ~ncem.
The atrditorcm·rpoihl out the weak areas of management. The goals of business can be ac ,eve · · _ ere LS prope~
internal control, internal check and internal audit. It should be noted that management could rely on tntemat audrt
for best results.
(iii) Progressive Re~iew;,.. The internal audit is beneficial to review progress of a busine:3s_concern. T_he
figure's--otl)feVious years are compared with this year. Moreover the performance result of 5 ,mil~r comparues
can be compared to determine the progress made by the entity. The management can rev,ew progress
through internal audit.
{iv) Effective Control: The internal audit is helpful to have effective control over business activities. Control rs
a management function, which is related to supervision and direction of ongoing activities. The manager
concerned can remove the difficulties for smooth working of business.
(v) A~.:5ets -Pcotection: The assets protection is possible through internal audit. The management can use
the ' assets for the benefit of business only. The assets cannot be used for private purposes. The
embezzlement of cash, misappropriation of stock and misuse of other assets is not possible as the internal
auditor keeps close watch over assets.
{vi) Division of Work: The internal audit is helpful to apply division of labour. The division of labour is
necessary to watch the activities of all employees including management. The auditor can suggest the way
and means to improve the performance of business.
(vii) No Error and fraud: The internal audit is used to protect accounting records from errors and fraud . The
accor:,nting-aricf auaiting go side by sjde when accounting work is over the audit will start. In such situation
errors and fraud committed by the accounting staff will easily be detected and rectified.
(viii) Fixing Responsibility: Internal audit is used to fix the responsibility of people having poor performance.
The management establishes the performance standards. The internal auditor can evaluate the result of all
p ersons. The people can be held responsible for below standard work and action can be taken against them.
(.Ix) Helps ~'!te~ Auditing: The work performed by internal auditor can help external auditor in carrying
out the aaa1t.1he audit procedure of internal and external audit is almost the same . The auditor can go
t~rough the internal audit report at the time of starting audit work. Anyhow external auditor is responsible for
external audit.
 ti) ~ -Sh~§: The .limitation of internal audit is staff shortage. There may be nee~ of reasonable aud.i t
~i.aff to examine tl1e record · The shortage of staff is a hurdle to get benefit of internal audit.
(ii} rune Lag:. 1)1e _limttation of internal audit is that it starts when accounting ends. Thus there is a time \ag
..,,eh,een recording and checking of entries.-
(fri) &ror: The frmttation of in~ema\ audit is that there may remain undetected errors in the books of accoun~

;~-
as it rlepe~ds upon lhe expert., se of internal audit staff to detect such errors. \f audit staff is competent there-,s
g_1ance of ~rro1:rrb ?l ng undetected. \n case of poor audit staff there ls no guarantee that a-udiied accoo,nts
I
I
-are tree from errors.
fJV) Responsibility. The Hrnitation of internal audit is that management may not feet the1r responsib itity in
i completing the audit formalities. The audit staff may give suggestion for proper working of business . TI:e top-
tevel management may not pay attention to suggestions. In this way the audit work cannot he \p the business,
Jy}lfuties: lf the duties -of audit staff are not properly divided then the purpose of inte ma\ audit m a y b E
defeated .