•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
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
•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
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
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
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
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
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
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