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

2. Classification of Audits
Statutory and Non Statutory Audits
Statutory audits cover :
Companies
Banking companies
Electricity Supply companies
Co operative societies
Public and Charitable Trusts
Corporations
Societies

3. Classification of Audits
Non statutory Audits Cover :
Proprietory concerns
Partnership firms
Unregistered clubs and societies, etc.
Internal audit & external audits :
Internal audit – by own staff
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 :
Interim audit–during the year for a particular period of the year to avoid too much in the end
Final Audit – after the end of the financial year to audit complete accounts
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
Cost Audit – examine cost records, weaknesses in system, obligatory for some
Tax Audit – u/s 44AB of I.T. Act
Management Audit – comprehensive and constructive examination of company’s organisational structure
Social Audit – special responsibility audit towards public, staff, government, etc
Balance Sheet Audit – commences from balance sheet and goes back to the books of accounts
Systems based Audit – evaluation of accounting system to ascertain reliability – proper system then minor checking, if not then detailed checking
Energy Audit – whether right amount of energy is used by the enterprise, done by technically qualified persons
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 :
Audit procedures – as felt required for framing proper opinion
Fraud and Errors – personal exps, cash exp, unusual trans, full records, adequate docs, etc.
Audit Evidence – sufficient audit evidence, internal control, cross verification of data, etc.
Audit Planning – One CA, simple.
Management Certificate – for accuracy of books of accounts
Analytical Review – Relevant for comparison
Audit Sampling – small entity, hence 100% verification

8. Audit of partnership firm
Special considerations :
Appointment – clear and concise letter of appointment
Partnership deed – registered, signed by all partners, ratios, capital distribution, etc.
Minute Book – if any, policy decisions and business decisions
Authorised Business – authorised business as per deed/modified deed
Books of accounts – whether reasonable and adequate
Unauthorised Acts – interest of all partners has been given justice
Taxes – provision for tax made in books of accounts
Division of Profits – in the pre decided sharing ratio

9. Continuous Audit Advantages : Quick preparation of final accounts
Early dividends to shareholders
Up to date accounts for banks/investors
Check on employees
Prevents Errors and Frauds
Familiarity with clients business
Thorough audit
Utilisation of Audit Staff

10. Continuous Audit Disadvantages : Expensive Audit in instalments
Errors and frauds in books already checked
Disrupts accounts work
Undue Reliance on Auditors

11. Final/Periodic/Annual audit
Advantages :
Inexpensive
Audit at a stretch
Less errors and Frauds
Does not Disrupt Accounts Work

12. Final/Periodic/Annual audit
Disadvantages :
Delay in Final accounts
Late dividends
Stale accounts for bankers/investors
No moral check on employees
No familiarity with Clients business
Sample Check
Uneven Work load for Audit Staff

13. Interim Audit Advantages : Quarterly results Interim Dividends
Quick preparation of final Accounts
Up to date accounts for banks/investors
Check on employees
Prevents errors and frauds
Thorough final audit
Utilisation of Audit Staff

14. Interim Audit Disadvantages : Expensive Audit in Instalments
Errors and Frauds in books aleady checked
Disrupts Accounts Work

15. Balance Sheet Audit Applicability : Strong internal control system
Large volume of transactions
Internal Audit Department exists
Accounts staff is highly qualified, professional management, computerised accounts

16. Balance Sheet Audit Method on B/S audit :
Review of Internal controls – whether effective, internal control in operation
Verification of Items in the final Accounts – verification, inspection, vouching, valuation, presentation and disclosure
Specific Items – all aspects of fixed assets, drs, crs, cash, stock, bad debts, contingent liabilities
Overall checking of final Accounts (Analytical Review) – important ratios, non recurring transactions, funds flow, minutes

17. Inherent Limitations of Auditing
An auditor cannot check each and every transaction
Audit evidence is not conclusive in nature
An auditor cannot be expected to discover deeply laid frauds
Audit cannot assure future profitability and future prospects
Auditor has to rely upon experts
Auditor is supposed to be but may not be independent
Financial statements though audited have their inherent limitations