Chapter 3 :

Types of Audit

T.Y. B com (Honours)

Academic Year : 2009-10

Trimester : V
Classification of Audits
Statutory and Non Statutory Audits
• Statutory audits cover :
a) Companies
b) Banking companies
c) Electricity Supply companies
d) Co operative societies
e) Public and Charitable Trusts
f) Corporations
g) Societies
Classification of Audits
Non statutory Audits Cover :
1) Proprietory concerns
2) Partnership firms
3) Unregistered clubs and societies, etc.

Internal audit & external audits :

1) Internal audit – by own staff
2) External Audit – performed by duly
qualified professional accountants
Classification of Audits
• Primary distinction between internal and
external auditor
• Responsibility – Internal auditor to management
and external auditor to owners of the concern
• Scope of Work – Internal auditor will define on
basis of business activity, external auditor will
define on the basis of the information required
to express opinion
• Approach – Internal auditor has to ensure that
the accounting system is efficient as well as
internal controls to ensure reliability of financial
records. External auditor does not have any
limitation, there is no fear or favour
Classification of Audits
Interim, Final and Continuous audits :
1) Interim audit–during the year for a
particular period of the year to avoid
too much in the end
2) Final Audit – after the end of the
financial year to audit complete
accounts
3) Continuous Audit – Continuous and
several visits ( similar to internal audit)
Kinds of Audit
These audits have specific purpose and may or may not be
statutory

1. Cost Audit – examine cost records, weaknesses in system, obligatory for

some
2. Tax Audit – u/s 44AB of I.T. Act
3. Management Audit – comprehensive and constructive examination of
company’s organisational structure
4. Social Audit – special responsibility audit towards public, staff, government,
etc
5. Balance Sheet Audit – commences from balance sheet and goes back to the
books of accounts
6. Systems based Audit – evaluation of accounting system to ascertain
reliability – proper system then minor checking, if not then detailed checking
7. Energy Audit – whether right amount of energy is used by the enterprise,
done by technically qualified persons
8. Secretarial Audit – for Compliance with provisions of various Corporate Laws
in terms of legality as well as in terms of timeliness. (replaced by compliance
certificate by Company Secretary)
Audit of small entities
 Special considerations :

a) Audit procedures – as felt required for framing

proper opinion
b) Fraud and Errors – personal exps, cash exp,
unusual trans, full records, adequate docs, etc.
c) Audit Evidence – sufficient audit evidence, internal
control, cross verification of data, etc.
d) Audit Planning – One CA, simple.
e) Management Certificate – for accuracy of books of
accounts
f) Analytical Review – Relevant for comparison
g) Audit Sampling – small entity, hence 100%
verification
Audit of partnership firm
 Special considerations :

a) Appointment – clear and concise letter of appointment

b) Partnership deed – registered, signed by all partners,
ratios, capital distribution, etc.
c) Minute Book – if any, policy decisions and business
decisions
d) Authorised Business – authorised business as per
deed/modified deed
e) Books of accounts – whether reasonable and adequate
f) Unauthorised Acts – interest of all partners has been
given justice
g) Taxes – provision for tax made in books of accounts
h) Division of Profits – in the pre decided sharing ratio
Continuous Audit
Advantages :

1)Quick preparation of final accounts

2)Early dividends to shareholders
3)Up to date accounts for
banks/investors
4)Check on employees
5)Prevents Errors and Frauds
6)Familiarity with clients business
7)Thorough audit
8)Utilisation of Audit Staff
Continuous Audit
Disadvantages :
1)Expensive
2)Audit in instalments
3)Errors and frauds in books already
checked
4)Disrupts accounts work
5)Undue Reliance on Auditors
Final/Periodic/Annual audit
Advantages :
1)Inexpensive
2)Audit at a stretch
3)Less errors and Frauds
4)Does not Disrupt Accounts Work
Final/Periodic/Annual audit
Disadvantages :
1)Delay in Final accounts
2)Late dividends
3)Stale accounts for bankers/investors
4)No moral check on employees
5)No familiarity with Clients business
6)Sample Check
7)Uneven Work load for Audit Staff
Interim Audit
Advantages :

1)Quarterly results
2)Interim Dividends
3)Quick preparation of final Accounts
4)Up to date accounts for
banks/investors
5)Check on employees
6)Prevents errors and frauds
7)Thorough final audit
8)Utilisation of Audit Staff
Interim Audit
Disadvantages :
1)Expensive
2)Audit in Instalments
3)Errors and Frauds in books aleady
checked
4)Disrupts Accounts Work
Balance Sheet Audit
Applicability :
1)Strong internal control system
2)Large volume of transactions
3)Internal Audit Department exists
4)Accounts staff is highly qualified,
professional management,
computerised accounts
Balance Sheet Audit
Method on B/S audit :

1) Review of Internal controls – whether

effective, internal control in operation
2) Verification of Items in the final Accounts
– verification, inspection, vouching, valuation,
presentation and disclosure
3) Specific Items – all aspects of fixed assets, drs,
crs, cash, stock, bad debts, contingent liabilities
4) Overall checking of final Accounts
(Analytical Review) – important ratios, non
recurring transactions, funds flow, minutes
Inherent Limitations of
Auditing
1) An auditor cannot check each and every
transaction
2) Audit evidence is not conclusive in nature
3) An auditor cannot be expected to discover
deeply laid frauds
4) Audit cannot assure future profitability and
future prospects
5) Auditor has to rely upon experts
6) Auditor is supposed to be but may not be
independent
7) Financial statements though audited have
their inherent limitations