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Chapter 3 : Types of Audit T.Y. B com (Honours) Academic Year : 2009-10 Trimester : V.

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Presentation on theme: "Chapter 3 : Types of Audit T.Y. B com (Honours) Academic Year : 2009-10 Trimester : V."— Presentation transcript:

1 Chapter 3 : Types of Audit T.Y. B com (Honours) Academic Year : 2009-10 Trimester : V

2 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

3 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

4 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

5 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)

6 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)

7 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

8 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

9 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

10 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

11 Final/Periodic/Annual audit Advantages : 1) Inexpensive 2) Audit at a stretch 3) Less errors and Frauds 4) Does not Disrupt Accounts Work

12 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

13 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

14 Interim Audit Disadvantages : 1) Expensive 2) Audit in Instalments 3) Errors and Frauds in books aleady checked 4) Disrupts Accounts Work

15 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

16 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

17 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

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