CLASSIFICATION, NATURE, AND

TYPES OF AUDITS

Dr. Mwiga Wiljonsi Mbesi

 Classification of audits

Audits can be classified into three main categories:

1. Audits according to clientele

2. Audits according to work performed

3. Audits according to responsibility

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 Audit according to clientele

 This includes statutory and non-statutory audits

Statutory audits are audits

 which have to be undertaken following the requirements of the law. E.g. government
audit, Parastatal sector audit, corporative sector audit.

 Statutes which requires audits to be done include the company Act 2006 and financial
service and markets Act 2000.

Non-statutory (Private ) audits

 Are those carried out at the request of interested parties such as Sole traders,
Partnership, and joint ventures.

 In private audit owners are at liberty to specify the extent of the audit to be done

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 Comparison between statutory and non-
statutory audit
Statutory audit Non-statutory audit
1 Governed by statute It is governed by specific instructions to suit
the client

2 Rights and duties of the auditor are Scope of audit work can be varied/ either
specified by the statute restricted or extended /unrestricted

3 Audit report is written based on certain Report is made according to the terms of
statutory requirements agreement

4 Auditor has a statutory obligation Auditor is liable for negligence but can
which cannot be contracted out avoid claim

5 Audit is compulsory and must be Except for the requirement of taxation,

complete audit is not compulsory
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 Audit according to nature of work

 This refers to the manner of execution of the audit.

 These types of audits are governed by audit objectives, timing, size and nature of the
client. E.g. Environmental audit, operational audit, social audit etc.

 In every new audit situation, certain basic procedures for a new assignment, either as the
first auditor or as a successor auditor must be observed with conscience.

 In each case, however, the auditor will have to draw an action plan

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 Audit according to responsibility

 Audit classified according to responsibility are based on mode of appointment. E.g.

Government audit

 The audit of account of states, Government departments, undertakings, local bodies are
done by Government auditors.

 The appointment of auditor Controller and Auditor General (CAG) is as per the articles
of the constitution of the country.

 Under this act the President shall appoint the CAG, who is the prime authority in the
audit hierarchy of Government accounts.

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 Types of audits
There are various types of audits including financial and non-financial audits.

Financial audit:
 Address questions of accounting, recording, and reporting of financial transactions.

 Reviewing the adequacy of internal controls and falls within the scope of financial audit.

Non financial audit:

It is non statutory one and serves two purposes:

 It checks company’s compliance to standards

 It determines whether a product or service satisfy the customer’s demand in terms of

quality and features.

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 Types of audits
External Auditing

Gives confidence in the integrity of corporate reporting for the benefit of stakeholders
and society as a whole, by providing an external and objective view on the reports given
by management.

Internal Auditing

An independent, objective assurance and consulting activity designed to add value and
improve an organization’s operations.
Objective is to assist management and staff in the effective discharge of their duties.

Functions include:
 Examining, evaluating and monitoring the adequacy and effectiveness of the accounting
and internal control systems.
 Providing analyses, appraisals and recommendations concerning the activities reviewed.
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 Types of audits

Value for Money Audit: An investigation into whether or not the use of resources is
economic, efficient and effective.
 To identify and recommend ways in which the return for resources employed may be
maximized.

Environmental Auditing: A performance evaluation which aims to help safeguard the

environment.
 Facilitates management control of environmental practices.
 Assesses the degree of compliance with environmental legislation, external regulations
and company policies.

Public Sector Auditing National and local government, agencies, commissions, etc
 Scope and objectives are affected by interests and requirements of third party
organizations. Specific requirements, relevant regulations, ordinances or ministerial
directives may affect the audit mandate.
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 Cont………

Operational Audit:

 This type of audit appraises the activities of each operation as production, sales,
administration, accounting, engineering etc., in relation to the overall objective of the
concern.

 It also checks the control systems introduced in various operations of the business in
order to know their satisfactory working, the aim being to improve the system and its
operation wherever feasible.

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 Cont………
Social Audit:
 Social audit, therefore, becomes the review of assessing to what extent the
corporations have discharged their responsibilities and at what cost.

 In order to utilize the nation’s resources properly, many large scale

corporations have come into existence.

 Like individual, these corporations have also some social responsibilities

towards the society to which they belong.

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 Cont………
Cost Audit:

 Cost audit is mainly a preventive measure.

 It acts as a guide for policy formulation and decision making. It is to judge the
efficiency of expenditure while the work is in progress.

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 Internal auditors

 work within an organization and report to its audit committee and/or directors.

 They help to design the company’s organizing systems and help develop
specific risk management policies.

 They also ensure that all policies implemented for risk management are
operating effectively.

 The work of the internal auditor tends to be continuous and based on the
internal control systems of a business of any size.

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 External Auditors

 They are independent of the organization they are auditing.

 They report to the company’s shareholders.

 They provide their experienced opinion on the truthfulness of the company’s

financial statements and perform work on a test basis to monitor systems in
place.

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 Internal vs. External

Appointment

 External auditors are appointed by the shareholders of a company

 External auditors must be appointed from a different company independent of

their own whilst internal auditors are usually employees of the organization.

 Keeping the clients happy as an external auditor is often more difficult than
internally as you already know those around you in the second instance.

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 Internal vs. External

Objectives

 The objectives for an external auditor are usually defined by statute whilst
management will set the objectives for internal audits.

 External auditors generally have free reign to examine and assess every aspect
of the system whilst management can pinpoint and highlight certain areas they
want internal auditors to focus on. There are various types of internal audit.

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 Internal vs. External

Responsibility

 External auditors are responsible to the owners of the company which could be
anybody from its owners to the shareholders to the government or general
public.

 Internal auditors are responsible solely to the company’s senior management.

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 Differences between internal and external
audits
1. What is the purpose of the audit?

Internal audit considers whether business practices are helping the business manage
its risks and meet its strategic objectives - it can cover operational as well as financial
matters.

External audit considers whether the annual accounts give a 'true and fair view' and
are prepared in accordance with legal requirements.

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 Cont….

2. Who are the auditors?

Internal auditors can be employed by the business or outsourced. While an

accounting background is common, they can also come from other
backgrounds.

External auditors are an outside firm of accountants who are 'Registered

Auditors‘.

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 Cont….

3. How is the audit agenda set?

 It is part of the internal control system working as a control tool, but with a sense
of the future operating environment of the entity. The internal audit
agenda is set internally in the light of the business’s risks and objectives.

 It is carried with a view to give opinion on the accounts whether the

accounts presents a true and fair view. The external audit firm will set its
own programme of work based on its assessment of the risks of the
accounts being materially misstated.

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 Cont….

4. Who does the auditor report to?

 Internal auditors report are for internal decision making. Ultimately

internal auditors report to the audit committee (if there is one) or
the Board so there is high level oversight.

 External auditors report primarily to the shareholders or the trustees

for an unincorporated charity (but also see 5 re management letters).

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 Cont….

5. What sort of report will they receive?

 Internal auditors provide a tailored report which recommends on efficiency and
economic use of resource of the organization. It is about how the risks and
objectives are being managed.

 External auditors' main report focuses on whether the accounts give a true and fair
view and comply with legal requirements. If other things come to light which the
auditors think should be brought to the client's attention they will
be reported separately to the directors in a 'management letter'.

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 Cont….

6. What happens after the audit?

 The internal audit follow up will be agreed on a case by case basis. It can
include looking to see whether recommendations have been implemented
and/or consultative help to guide the implementation of recommendations.

 There is no external audit follow up by the auditors, until the planning stage
of the next year's audit; when past issues should be considered.

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 Cont….

7. Are the auditor's reports publicly available?

 Internal auditors' reports are not published publicly.

 The main external auditors' report will be publicly available. 'Management letters' are
not publicly available.

8. Is it legally required?

 Internal audit is discretionary. Engagement is not statutory equipment, however it is

emphasized

 External audit’s engagement is statutory requirement

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 Cont….

 External audit is a regulated activity, it can be helpful both in terms of

perception and to some extent as a quasi-health check on the key elements of
an organization's accounting.

 Internal audit is not regulated, can be used more flexibly and may well look
at areas that fall under the external audit radar. Its presence should add
value and have a positive impact in helping the organization move forward .

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 END OF PRESENTATION

THANK YOU FOR LISTENING

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