Classification of Audit
Audit may be classified into two categories mainly ; -
(a) according to organizational structure of a business
(b) from practical point of view.
According to Organizational Structure of a Business
1. Statutory Audit
In case of many undertakings, audit is made compulsory under statute because these undertaking sare established by statute. The audit of their accounts is termed as statutory audit. The following are the examples of such an audit:
(i) Company Audit:- The audit of joint stock companies compulsory under the companies act. For the first time the Indian Companies Act, 1913, made it legally compulsory for joint-stock companies in India to get their accounts audited by an independent professional accountant, but now, the companies Act, 1956 and subsequent amendments have made tremendous changes in the rights,duties, powers etc., of an auditor.
(ii) Audit of Trusts :- Trust are usually created for the benefit of the weak and helpless persons like widows, minors etc., who are not in a position to have access to and understand the accounts of such trusts. Therefore the trustees are made responsible to look after the property and to maintain accounts. But in a large number of cases, the trustees either do not maintain accounts at all or if they are forced to do so, such accounts are very often misleading. To avoid such a situation specific provisions are sometimes made in the trust deed for the appointment of auditors to check the accounts of the trusts. In some of the state in India, Public Trust Acts, (for example,the Bombay Public Trust Act, 1950 etc.) have been enacted which provide for compulsory audit of the accounts of trust by qualified auditors.
(iii) Audit of other institutions :- There are other corporate bodies such as electricity and gas companies which has been formed under their respective statutes. There is another set of public bodies in the name of public corporations, for example, Reserve Bank of India, Industrial Financial Corporation, etc.; Which work according to the various Acts passed for the purpose. All these institutions fully recognise the significance of a professional audit which is compulsory for them.The powers, duties and liabilities of auditors are also well defined and fixed by statues.
2. Private Audit
The institutions which are private in character also get their accounts audited by some qualified auditors.As such an audit is not required by statute, it is known as private audit. There may be three types of such institutions which are as follows :
(i) Audit of the accounts of Sole Trader :- The appointment of an auditor in case of a proprietary concern rests absolutely on the proprietor. His rights, duties and nature of work will depend upon the terms given in the agreement. Such an auditor must get clear instruction in writing by his client as to what he has to do and how he has to proceed so that he can be held responsible for any charge of negligence and by producing the agreement, he can protect himself against such a charge.
(ii) Audit of the Accounts of partnership Firms :- In case of a partnership firm, the auditor is appointed by agreement between the partners. His rights, duties and liabilities are also defined by mutual agreement and can be subjected to modification.
(iii) Audit of the accounts of other individuals and institutions :- There are other individuals, e.g.,rent collectors, estate managers, etc., who have large income and huge expenditure. The qualified auditors are appointed by these individuals in order to verify various accounts prepared by the accountants.
3. Government Audit
The Government maintains a separate department in the name of accounts and audit department which performs the audit of its different departments and offices. This department is headed by the Comptroller and Auditor General of India who is assisted by different officials at various levels. The duties and liabilities of such auditors are not defined by statue. They are not public auditors and hence can not be appointed auditors for public concerns. They are meant for Government departments and as such, they work according to departmental rules and instructions.
4. Internal Audit
By virtue of the organizational pattern, some business institutions appoint auditors who are made responsible to have a constant and regular review of their accounts. Such auditors are of a permanent nature and are known as internal auditors. Such auditors, besides checking the accounts are required to report also as to how the system of accounting can be improved and the system of internal check be made economical and efficient. They can not be appointed as public auditors or external auditors and hence are not required to submit their reports in the manner in which external auditors do.
In short internal audit is the examination of books of account which is conducted by the salaried officials of a business known as internal auditors throughout the year. The scope of internal audit is a bit different. It is more closely related to managerial functions than to accounting duties.
From Practical Point of View :
All those forms in which audit is often conducted practically by business houses are as follows :-
1. Continuous Audit or Detailed Audit.
2. Periodical audit or Final Audit or complete Audit.
3. Interim Audit.
4. Occasional Audit.
5. Partial Audit.
6. Balance Sheet Audit.
7. Cash Audit.
8. Cost Audit.
1. Continuous Audit or Detailed Audit :-
According to spicer and pegler “A continuous Audit is one where the auditors staff is occupied continuously on the accounts the whole year round, or where the auditor attends at intervals, fixed or otherwise, during the currency of the financial year, and performs an interim audit; such audits are adopted where the work involved is considerable, have many points in their favour, although they are subject to certain disadvantages.” Thus, a continuous audit involves the conducting of audit of accounts throughout the year at regular intervals, fixed or otherwise, of say, one month or months. The accounts in such a case are subjected to audit as and when they are prepared. Such an audit is necessary only for big business houses.
Continuous Audit is applicable in case of following business concerns:
(i) where final accounts are prepared just after the close of the financial year, as in the case of a bank.
(ii) where the transactions are many in number and thus it becomes necessary to get them audited at regular intervals.
(iii) where the system of internal check in operation is not satisfactory.
(iv) where the statements of accounts are prepared after every month or quarter to be presented to the management.
(v) where sales effected are very large.
Advantage of Continuous Audit :
1. Easy and quick discovery of Errors and frauds: Errors and frauds can be discovered easily and quickly as the auditor checks the accounts at regular intervals and in details.
2. Helps the auditor in making valuable suggestions: since the auditor remains more in touch with the business, he is in a position to know the technical details of it and hence can be of great help to his clients by making valuable suggestions.
3. Quick presentations of accounts: As the checking work is already performed during the year, the final audited accounts can be presented to the share-holders soon after the close of the financial year at the annual general meeting.
4. Keeps the client’s staff regular: As the auditor visits the clients at regular intervals, the clerk will be very regular in keeping the accounts up-to-date.
5. Moral cheek on the clients staff: If the auditor pays surprise visits, it will have a considerable moral check on the clerks preparing the accounts.
6. Efficient Audit: As the auditor has more time at his disposal, he can check the accounts with greater attention and in detail and his work will be more efficient.
7. Preparation of Interim Accounts : If the directors of a company wish to declare an interim dividend. Continuous audit will help in the preparation of the interim accounts without much delay,
8. Audit staff can be kept busy: The audit staff may be sent to other clients after having finished the work for one client and thus can be kept busy throughout the year.
Disadvantages :
1. Alteration of figures: Figures in the books of account which have already been checked by the auditor at his previous visit, may be altered by a dishonest clerk to defraud the accounts.
2. Dislocation of client’s work: As the auditor visits frequently, it may dislocate the work of his client and cause inconvenience to the latter.
3. Expensive: It is an expensive system of audit as such an audit is carried on throughout the financial year at regular intervals.
4. Queries may remain outstanding : As there may be a long interval between the two visits, the audit clerk may lose the link between the past and present work and the queries which he wanted to-make may remain outstanding.
5. Mechanical work: Under such an audit, the work of the auditors becomes mechanical and his frequent visits may also cause boredom to him.
Precautions to guard against its disadvantages :
1. The auditor should issue clear instructions to the effect that the audited figures should not be changed without bringing itto his notice. If some alteration is necessary it should be done by passing rectification entries in the journal.
2. He should try to check the accounts of similar nature in one and continuous sitting as far as possible and if not possible he should check the transaction up to a particular date. He should also note important totals and balances up to that date in his diary and compare them at his next visit,
3. The auditor should prepare an exhaustive programme to prevent any loop-holes.
4. The explanations of important questions which he finds unsatisfactory should be noted in his note-book and efforts should be made to get the matters settled.
5. He should go through the past work and alterations, if any, before he begins his work.
6. The checking of impersonal accounts should be undertaken at the time of final audit because the fraud in personal accounts can easily be made by passing false entries in the impersonal accounts,
7. Special ticks should be used by the auditor while checking altered figures,
8. He should pay surprise visits so that the clerks of the client may not know the exact date of the visit of the auditor.
2. Periodical of Final or Complete Audit:- That system under which the auditor takes up his work of checking the books of account and other related documents, only at the end of the accounting period when the transactions for the whole period are completely recorded, balanced and a Trading profit and Loss Account and the Balance Sheet have been prepared, is known as periodical or final audit, He would complete his audit work in one continuous session or without any interval, In other words the auditor visits his client only once a year and goes on checking the accounts and other related documents until the audit work for the whole of the period is completed.
Advantages :
1. The Work of audit does not present any inconvenience and dislocation in the work of the concern as the auditor comes only once a year.
2. It is less expensive and more useful for small business concerns than continuous audit.
3. In periodical audit the work of the auditor can be finished quickly and within a reasonable time.
4. The audit work does not become mechanical for the auditor.
5. Undue collusion is not established between the auditor and the clerks.
Disadvantages :
1. In periodical audit, detailed checking of accounts is not possible.
2. There is a greater chance of errors and frauds in accounts as the auditor visits his client only once a year and not at regular intervals.
3. If such a audit is undertaken in large concerns it takes more time to complete the audit and hence presentation of auditor’s report to the shareholders is delayed. But shareholders are usually very anxious for the dividends which cannot be declared until the final accounts have been prepared and audited. Therefore, such an audit is not practicable for big concerns.
Difference between continuous Audit and final Audit
1. Under continuous audit, the auditor or his staff, for the purpose of checking the accounts, visits his client’s at regular or irregular interval during the financial year. On the other hand, in case of final audit, he visits the cilent only at the end of the accounting period.
2. In continuous audit, the audit work is carried on almost simultaneously with the recording of transactions, while in final audit, accounts are audited much after their recording.
3. Continuous audit is commenced and carried on before the close of the financial period to which it is related. While final audit is undertaken when all the accounts have been recorded, balanced and a Trading and Profit and Loss Account and the Balance Sheet have been prepared.
3. Interim Audit :- Interim audit is one which is conducted in between the two annual audits for some interim purpose, say, to enable a company to declare an interim dividend. This kind of audit involves a complete checking of the accounts prepared by a company for a part of the year to the date set of interim accounts, say, quarterly or half-yearly accounts.
Advantages :
1. This audit is helpful when the publication of interim figures becomes necessary.
2. With interim audit, the final audit can be completed easily and within short period of time.
3. Errors and frauds can be more quickly found and detected during the course of the year.
4. Since the interim audit is performed during the course of a year, it helps in exercising moral check on the staff of the cilent.
Disadvantages :
1. There is greater possibility of altering figures in the accounts which have already been audited.
2. Interim audit involves additional work as the audit staff will have to prepare notes after finishing the interim audit.
Distinction between Continuous Audit and Interim Audit :
1. In case of continuous audit, the auditor undertakes the audit work for the whole financial year at intervals according to cilent’s own need and convenience, while in interim audit, the audit, work is done only up to a definite date.
2. Under continuous audit, verification of Assets and Liabilities is done at the close of the financial year, but under interim audit, this work is done at the time of audit.
3. When continuous audit is done, the trial balance is not to be prepared necessarily at intervals,but in case of interim audit, the trial balance has to be prepared.
4. The auditor has to give the report at the close of financial year when continuous audit is done,but in case of interim audit, such a report is to be submitted at the time of audit.
4. Occassional Audit:-
An audit which is conducted occasionally, that is, once a while whenever the need arises and the client desires it to be undertaken. For instance, the audit is not compulsory in case of sole proprietorship and partnership business but whenever the need arises, the owners can get the accounts audited.
5. Partial audit:-
Under partial audit, an auditor is asked to check some of the records and books for a part or whole of the period. For example, auditor may be instructed to audit only the payment side of the cash book because he himself receives cash and cheques on behalf of his business. Such an audit is not permitted in case of private or public limited companies.
6. Balance Sheet Audit :-
Under such an audit, the auditor checks capital, reserves, assets liabilities, etc., given in the Balance Sheet. Those items of Trading and Profits and Loss Account are also checked which have a bearing on the Balance Sheet items. For example, the purchase of goods on credit will increase the liabilities to creditors, increase the stock and will be shown in the Trading Account as an increase in purchases and closing stock. So this item will have to be verified. This type of audit canbe successful in those business concerns where efficient system of internal check and control is in operation. Such an audit is popular in U.S.A.
