Type of auditing

Group 2 Sagar's Types of Audit
INDRODUCTION
The word, ‘audit’ is derived from the Latin term “audire” which means to
hear. In early days an Auditor used to listen to the accounts read out by the
accountant in order to check them. Businessman wanted assurance that their book-
keepers had accurately and properly kept the books of account. An auditor is an
independent expert who examines the account of a business concern and report
whether the final accounts are reliable or not.
The Indian companies Act, 1913, prescribed for the first time the
qualification for an auditor in India. A person passing the examination of the
Government Diploma in Accountancy conducted by the provincial Government
qualified to be an auditor. This is the latest development in the field of auditing.
Today computers are used not only for recording transactions but also for auditing.
The final accounts of a business concern are used by various persons such as
the owners, shareholders, investors, creditors, leaders, government etc. for different
purposes. All these users need to be sure that the final accounts prepared by the
management are reliable. An auditor is an independent expert who examines the
accounts of a business concern and reports the final accounts are reliable or not.
Different authorities have defined Auditing as follows:
“Auditing is the process of gathering and evaluation of the economic information with
the purpose of reporting on it”
According to Mautz
“Auditing is concerned with the verification of accounting data, with determining the
accuracy and reliability of accounting statements and reports”.
A.W.Hanson defined auditing as,
“An Audit is an examination of accounting records to establish their reliability and the
reliability of statement drawn from them”.
Statement on Standard Auditing Practices (SAP) 1 by ICAI
“Auditing is the independent examination of financial information of any entity,
whether profit oriented or not, and irrespective of its size or legal form, when such an
examination is conducted with a view to expressing an opinion thereon.”
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Features
1. It is the systematic and scientific examination of the accounts of a business.
2. It is an intelligent and critical examination of the accounts of a business.
3. It is done by an independent person or body of persons qualified for the job.
4. It is a verification of result shown by profit and Loss Account and the state of
affairs shown by Balance Sheet.
5. It is a critical review of the system of accounting and internal control.
6. It is done with the help of vouchers, documents, information and explanations
received from the authorities.
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TYPES OF AUDIT
CHART SHOWING DIFFERENT CLASSES OF AUDIT
A. Based on Organisational B. Based on Scope C. Based on time D.
Based on object E. Other Types
Structure
Statutory Non-statutory Govt. Continous Final Interim
Balance Sheet
Audit Audit Audit Audit Audit Audit
Audit
Private Audit
Sole Partnership Non-profit
Proprietorship Firm Organisation
Complete Partial Detailed Independent
Cost Management Internal Social
Audit Audit Audit Financial
Audit Audit Audit Audit
Audit
Special Occasional Secretarial Audit in Cash
Operational Tax Environmental Propriety
Audit Audit Audit Depth Audit
Audit Audit Audit Audit
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A. BASED ON ORGANISATIONAL STRUCTURE
I. Statutory Audit:
Statutory Audit is compulsory audit prescribed under statute i.e. law.
Appointments of auditors, removal, remuneration, rights, duties, liabilities are
governed as per the Provisions of the respective law applicable to the
organization. Scope of the audit work and all others terms are as laid down by the
law. It can be conducted only by a qualified Chartered Accountant.
Statutory audit is conducted after preparation of final accounts. Statutory
auditor has to report whether the balance sheet and profit and loss A/c are drawn
upon conformity with law and whether they show true and fair view. Statutory
auditor has to submit report to the shareholder. His remuneration is fixed by
shareholder. The concerns and the corresponding Acts are as shown in the
following Exhibit:
EXHIBIT [1.1] STATUTORY AUDIT
No. Concern Act
1 Companies
- Financial audit
- Special audit
- Cost audit
Companies Act, 1956
-S.227
-S.233A
-S.233B
2 Banks Banking Companies Regulation Act,1949
3 Insurance Companies Insurance Act,1938
4 Co-operative Societies Respective State Co-operative Act
5 Public Charitable Trusts Indian Trust Act etc.
6 Statutory Corporations Special Act of Parliament e.g. Life
Insurance Corporations.
7 Electricity Companies Electricity Supply Act, 1948
8 Registered Societies Societies Registration Act
9 Tax Payers Tax Audit under Income-tax Act
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Organizational Structure
Non-statutory (Private) Audit
Government Audit
Statutory Audit
Sole Proprietorship
Partnership Firm
Individuals and Non-
profit Organization

II. Government Audit
 Meaning and Scope: Government audit is a control measure for public
accounting of government funds. It covers the audit of all expenditure and
receipts done by the executive and audit of commercial accounts maintained
by public enterprises. Public enterprises are classified under three categories
department undertaking, statutory corporations financed by government and
government companies set up under the Companies Act, 1956.
 Who conducts it: In India, the Accounts and Audit Department of the
Government of India, headed by the Auditor General of India (CAG),
carries the audit work. The CAG’s duties have been specified by the
Comptroller and Auditor General’s Act, 1971
III. Non-statutory audit:
Non-Statutory Audit is voluntary audit. They are not compulsory under
any law. It is carried at the discretion of the proprietor terms and conditions of the
audit are determined as per the agreement made between the auditor and
proprietor. Example: Financial audit of the sole trader and partnership firm.
Voluntary audit also covers non-financial audit. Internal audit, management audit,
social audit, operational audit etc.
Private Audit
Private audit are carried out at the behest of the interested parties and not
to fulfill statutory requirements. The terms and conditions between the client and
the auditor defines the scope of latter’s work. Sole proprietors, partnership firms,
certain individuals such as rent collectors, estate managers, etc. and non-profit
organizations such as schools, hospitals, clubs, etc., get the accounts audited for
various reasons. Some of these are to meet the requirements laid down by internal
rules and regulations, to ensure reliability of financial statements and derive
related advantages. These are listed below:
1. Audit of Small Entities (Propriety Audit)
“Guidance Note on special considerations in the Audit of Small Entities” by
the Institute of C.A of India published in October, 2003
Meaning and Features
A small entitle (SE) has the following features:
a. There is a concentration of ownership and management in a small
number of individuals (e.g. proprietor or partner).
b. Source of income are few.
c.Activities are simple.
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d. Record-keeping is simple and personalized.
e.Internal control is limited.
f. Management may at times ignore such internal controls.
Special Features of Audit
a. Audit Procedures: The nature and extent of audit procedures and
working papers are influenced by special features of SE described as
above.
b. Fraud and Errors : Auditor should check the following circumstances
which indicate the possibility of fraud and Errors:
 Whether owner needs to manipulate the accounts (as the SE is his
only source of income).
 Whether personal and business transactions are mixed up.
 Whether advisor (lawyer, etc) are changed frequently.
 Whether advisor starts too late or has to be finished in a hurry.
 Whether there are unusual material transactions around year-end.
 Whether there are unusual transactions with group concern.
 Whether excessive fees/ commission is paid.
 Whether there disputes about taxes.
 Whether accounting records are partly missing.
 Whether cash transactions are too many.
 Whether documents for many transactions are inadequate.
 Whether many confirmations for debtors/stock have not been
received back.
 Whether owner/senior manager have not been leave for long
period.
 Whether working capital is insufficient.
 Whether remarks in earlier audit report are ignored.
 Whether stock records are not kept.
c. Audit Evidence:
a) Adequate audit evidence may not be available. The owner may want
that some transactions are not recorded at all. The internal controls,
which should generate the documents, may be weak.
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b) Auditor should focus on cross-checking of data, quantity
reconciliations, analytical review, external confirmations and review of
transactions after year-end.
d. Audit Planning: Audit of a Se may be done by a sole C.A. Hence, audit
planning will be simple.
e. Management Certificate: Auditor should obtain a written certificate from
the owner that the accounting records/ financial statements are complete
and accurate.
f. Analytical Review: Evaluating the Gross Profit Ratio over years/trade is
often very helpful in case of a SE.
g. Audit Sampling: In view of the small size, it may be possible to check
100% entries or at least select a; large sample size for checking.
2. Audit of Partnership Firm
The matters which should be specially considered in the audit of accounts of a
partnership firm are as under:
a. Appointment: Confirm that the letter of appointment, signed by a
partner, on behalf of firm, clearly states the nature and scope of audit
expected by the partners specially the limitation, if any, under which the
auditor shall have to function.
b. Partnership Deed: Examine the partnership deed signed by all partners
and its registration with the registrar of firms. Also ascertain from the
partnership deed about capital contribution, profit sharing ratios, interest
on capital contribution, powers and responsibilities of partners, etc.
c. Minute Book: Study the minute book, if any, maintained to record the
policy decision taken by partners specially the minutes relating to
authorization of extraordinary and capital expenditure, raising of loans,
purchase of assets, extraordinary contracts entered into and other such
matters which are not of a routine nature.
d. Authorized Business: Verify the business in which the partnership is
engaged is authorized by the partnership agreement; or by any extension
or modification thereof agreed by the partners subsequently.
e. Books of accounts: Examine whether books of accounts appear to be
reasonable and are considered adequate in relation to the nature of the
business of the partnership.
f. Unauthorized Acts: Verify generally that the interest of no partner has
suffered prejudicially by an activity engaged in by the partnership which
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it was not authorized to do under the partnership deed or by any
violation of a provision in the partnership agreement.
g. Taxes: Confirm that a provision for the tax payable by the firm has been
made in the accounts before the arrival at the amount of profit divisible
among the partners. Also see that the various requirements of law
especially applicable to the partnership firm like section 44(AB) of the
Income-tax Act, 1961 have been complied with.
h. Division of Profits: Verify that the profits and losses have been divided
among the partners in their agreed profit-sharing ratio.
3. Audit of trusts (non-profit organizations)
1. The audited statements can serve as a basis for relying on the persons at
the helm of affairs i.e., members of governing body or managing
committee.
2. It helps in dealing with third parties.
3. It helps in protecting the assets and ascertaining the liabilities.
B. BASED ON SCOPE
I. Complete Audit:
In this type of audit, the auditor is required to check each and every
transaction recorded in the books of accounts. He has to examine each and every
voucher, document or correspondence relating to the transaction. This type of
audit is not possible for large sized organizations.
II. Partial Audit:
In Partial audit, the auditor is not required to examine all the books of
accounts. Only a part of the accounts or some transactions as desired by the clients
may be scrutinized. Auditor has to state the area covered by the audit.
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Based on Scope
Detailed Audit
Partial Audit
Complete Audit

This type of audit cannot be followed in the case of statutory audit. It may be
followed in the case of statutory audit. This audit is not convenient when the audit
is legally required.
III. Detailed Audit
Under detailed audit, few business transactions are examined in detail by the
auditor. Spicer and Pegler have defined it as, “An audit which starts with books of
prime entry and ends wit the balance sheet. The checking sequence is arranged in
order of recording the transactions in the primary book”.
Thus, for the purpose of detailed audit certain transactions are traced through
various stages from beginning to their end with the help of available evidence.
This technique of examination is also called audit-in-depth. To take an example,
detailed audit of purchase of goods for inventory would consist of tracing the
transaction though all the points of transaction cycle viz., requisitioning the goods,
ordering the goods requisitioned, receiving the goods ordered and preparing the
payment voucher.
C. BASED ON TIME
I. Continuous Audit:
 Meaning:
Continuous audit is defined by R.C. Williams as one where the auditor
is constantly or at (regular or irregular) intervals engaged in checking the
accounts during the period. Continuous Audit means an audit at regular
intervals throughout the accounting year. Generally, the audit work begins
after the accounting year is over. But in case of Continuous Audit, the work
begins the accounting year itself.
For example, if the accounting year begins on 1st
April 2002 and ends on
31st
March, 2003 normally, audit work would begin in April 2003 and
continue thereafter. But in case of Continuous Audit the work would begin in
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Based On Time
Final Audit
Continuous Audit
Interim Audit
Balance sheet Audit

April 2002 itself and continue at regular intervals till it is complete. Thus in
Continuous Audit, accounting and auditing work is done almost side by side.
Continuous Audit, however, does not mean the audit work goes on for 365
days of the year. The auditor may make periodical visits, say, every two or
three months during the year and at the end of year we would verify the final
statement of account.
 Necessity
Continuous Audit is necessary in the following cases-
a. Where the volume of transaction is very large and complex.
b. where the management requires monthly or quarterly audited
statements of accounts or the statements of accounts are required
immediately after the accounting year;
c. Where the system of internal control or internal check is weak.
d. Sometimes continuous audit becomes necessary for self-survival
against cut-throat business competition.
e. When interim dividend is to be declared.
 Advantages of Continuous Audit
a. Quick Preparation of Final accounts: Since, the routine audit is done
continuously; the Final Accounts can be prepared immediately after the
year end.
b. Early Dividends to Shareholders: The shareholders would be happy as
they receive dividends soon after the end of the financial year. The
Company can prepare interim accounts and pay even interim dividends
to the shareholders.
c. Up-to-date Accounts for Banks/Investors: The up-to-date final accounts
are useful to banks and investors for taking decisions regarding loans
and investment.
d. Check on Employees: Since the auditors visit regularly throughout the
year, it acts as check on the employees to keep the accounts ready and
up-to-date.
e. Prevents Errors and Frauds: Constant checking by the auditors helps to
detect and even prevent errors and frauds.
f. Familiarity with Client’s Business: Since the auditor spends more time
at the client’s place, he becomes familiar with all the aspects of client’s
business.
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g. Thorough Audit: The auditor has more time at his disposal to do a
through checking of all transactions. This reduces the risk of missing any
material items.
h. Utilization of Audit Staff: Audit Staff can be kept busy throughout the
year. Audit work can be evenly distributed to avoid overwork after year
end.
 Disadvantages of Continuous Audit:
a. Expensive: Since the auditor spends more time on the audit work, the
audit fees are much more. Continuous Audit is thus expensive.
However, only a large organization should opt for a Continuous Audit.
b. Audit in Installments: Since the audit work is done at intervals and not
at one go, audit may be inefficient. The queries during the last visit may
remain unsolved. It is difficult at each visit to take up the work precisely
at the stage of last visit. To overcome this disadvantage, audit should be
well-planned. All queries should be noted in the Audit Note Book and
cleared before taking up fresh work. The work done up to end of each
visit, relevant voucher numbers, totals etc. should be carefully noted in
the Audit Note Book.
c. Dislocation of client’s work: If a proper audit programme is not
adopted, continuous audit may disrupt the routine accounting work of
the client. Either the audit staff may have to sit idle or the accounts staff
of the client may waste time for want of books of accounts. Employees
have to attend the auditor for explanation. They have to keep aside their
usual work to attend the auditors for explanation.
d. Errors and Frauds in Books Already Checked: If an employee changes
some figures in the books already checked by the auditor during his
earlier visits, it would be difficult to detect such errors and frauds
subsequently.
e. Monotonous- tiresome-tedious: Continuous visits to the client’s place
may make the work tedious and the audit staff loses interest from work
consequently. The quality of audit suffers.
f. Absence of link: In the absence of well-planned audit work, an auditor
may miss the thread of audit work. Further, some important queries
may be overlooked if no proper audit notes and queries are recorded by
the audit staff during the course of the audit.
g. Conflict between audit and accounts staff: The members of audit and
accounts staff come in close contact and sometimes it may result in
spoiling the healthy relations between them and thereby the quality of
audit may suffer.
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h. Dependence of the accounts staff on the auditor: The accounts staff
may depend on the audit staff. They may require the help of auditor for
even small errors which they can discover or avoid by taking proper
care.
 Precautions
a. Strict instructions: Strict instructions should be given to client’s staff not
to alter the audited figures. Mistakes, if any, should be rectified by
passing rectification journal entries and not by alteration of figures.
b. Audit programme: Proper audit programme should be prepared by the
auditor, so that the time of accounts and audit staff is not wasted.
c. Special ticks: Special ticks should be used for unaudited altered figures.
Auditor should write in the margin the actual figures audited with his
audit pencil.
d. Audit notes: the auditor should keep exhaustive audit notes. The
queries and their explanation by the client should be properly recorded.
e. Checking the ledger: Checking the impersonal ledger should be done
only after the close of the accounting year.
f. Surprise visits: Surprise visits should be made in addition to the regular
visits.
g. Rotation: There should be reasonable rotation of audit staff and their
duties so that they may not lose interest in their work.
h. Better control and supervision: There should be better control and
supervision over the audit staff. All the important figures in the balance
sheet should be noted in the audit diary and they should be rechecked at
the time of subsequent visits.
i. Rectification entry: Any alteration should be done by means of a
rectification entry in the journal.
j. Secret tick: The auditor should put a secret tick against any figure
already altered.
II. Final Audit
It is also known as periodical audit. It is generally start after the completion
aspect more than the depth aspect of audit. The danger of alteration of figures or
manipulation of accounts is totally absent. Generally, it starts after the close of the
financial period. There is very little impact on prevention of errors and frauds by
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way of moral checks. It is best suited for small and medium sized business. It saves
in terms of time, energy and money.
 Final Audits have the following advantages –
a. Inexpensive: Since the audit spends normal time on the audit work, the
audit fees are also normal. Final Audit is thus inexpensive. Even a small
organization (a sole trader or a firm) can opt for a Final Audit to obtain
the advantages of an independent financial audit.
b. Audit at a Stretch: Since the audit work is done at a stretch, without any
gaps, audit is carried out efficiently. All queries are solved immediately.
The work is done continuously and not in installments. The audit
planning and programme are simple
c. Less errors and Frauds: Since the books are checked at a stretch, no
employee can change any figures in the audited books.
d. Do not Disrupt Accounts Work: The accounts staff is not disturbed
anytime during the accounting year. There is no need for the accountants
to attend to audit work every now and then.
 Final Audit has the following disadvantages –
a. Delay in final Accounts: Since the routine audit is done after a year end,
the Final accounts may be delayed and ready long after the year end.
b. Late Dividends to Shareholders: The shareholders would be unhappy as
they receive dividends long after the end of the financial year. It would be
difficult for a Company to prepare interim accounts and pay interim
dividends to the shareholders during the financial year.
c. Stale Accounts for Banks/Investors: The final accounts are available long
after the end of the accounting year. Such stale accounts are not useful to
banks and investors fro taking decisions regarding loans and investment.
d. No Moral check on Employees: Since the auditors visit only at the end of
the year, dishonest employee have a chance to commit frauds during the
year and clean up the accounts just before the auditors arrive, e.g. teeming
and lading.
e. No Familiarity with Client’s Business: Since the audit spends little time
at the client’s place, he cannot become familiar with all the aspects of
client’s business. They may affect the quality of audit.
f. Sample Check: Since the auditor has to complete the audit in a short time,
he has to resort to sample checking. The increases the risk of missing
material items.
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g. Uneven Work-load for Audit Staff: Audit staff is overworked
immediately after year end and comparatively less busy at other times.
III. Interim Audit:
 Meaning:
Interim Audit is an audit conducted in between the annual audits. It is
conducted to find out the interim profit and know the financial position at
the end of a part of the accounting year. For example, an audit of accounts
prepared for the period of six months from 1st
April to 30th
September,
would be Interim Audit.
 When Conducted:
Interim Audit is conducted in the following cases –
a. Quarterly Results: Public Limited Companies listed on the stock
exchange has to declare their quarterly results. It is preferable, though
not compulsory, to declare such results on the basis of interim audit.
b. Interim Dividends: Interim audit is also advisable when a company
intends to pay interim dividends. Interim audit would ensure that
there are enough profits to justify payment of interim dividends.
c. Sale of Business: In case of a sole partnership firm, interim audit
becomes necessary on admission, retirement or death of a partner,
dissolution of partnership, sale of a firm to a company, valuation of
goodwill etc.
d. Changes in Firm: In case of a proprietor, interim audit may be
conducted when the business is proposed to be sold, to fix the
purchase consideration.
e. Changes in Firm: In case of a partnership firm, interim audit becomes
necessary on admission, retirement or death of a partner, dissolution
of partnership, sale of firm to a company, valuation of goodwill etc.
• How Conducted:
An interim audit should be done as if it is the final audit for the
concerned period. Thus, it would involve not only vouching but also
verification of assets and liabilities, valuation of closing stock, computation
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of depreciation, confirmation from parties and so on. Once an interim audit
is done, at the time of the final audit, the auditor has to concentrate only on
the remaining period. Thus, interim audit helps in timely completion of
final audit. The auditor at the time of final audit, however, should ensure
that there are no alterations in the books previously checked by him. He
should carefully compare the final accounts with the interim accounts to
find out if they are consistent.
 Advantages
Interim audit is similar to Continuous Audit and enjoys similar advantages:
a. Quarterly Results: A public limited company listed on the stock
exchange can comply with the statutory provision of declaring
quarterly results.
b. Interim Dividends to Shareholders: The shareholders would be
happy as the Company can pay interim dividends to the shareholders.
c. Quick Preparation of Final Accounts: Since the interim audit is
already done, the Final Accounts can be prepared immediately after
the year end.
d. Up-to-date Accounts for Banks/Investors: The up-to-date interim
accounts are useful to banks and investors for taking decisions
regarding loans and investment.
e. Check on employees: Interim audit acts as check on the employees to
keep the accounts ready and up-to-date.
f. Prevents errors and frauds: Checking by the auditors for the purpose
of interim audit helps to detect and even prevent errors and frauds.
g. Thorough Final audit: The auditor has more time at his disposal at the
time of final audit, which reduces the risk of missing any material
items.
h. Utilization of Audit staff: audit staff can be utilized in a better
manner. Interim audit is done when the audit staff is relatively free.
 Disadvantages and Precautions:
a. Expensive: Since the auditor does two audits in one year, the audit
fees are more to that extent. Interim Audit is thus expensive.
b. Audit in Installments: since the audit work is done at two stages
(interim and final) and not at one go, audit may be inefficient. It is
difficult at the time of final audit to take up the work precisely at the
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stage where it was left at the time of interim audit. To overcome this,
audit should be well-planned. The work done up to end of the interim
audit, relevant voucher numbers, totals, etc. should be carefully noted
in the Audit Note book.
c. Disrupts Accounts Work: Interim audit disrupts the work of accounts
staff. To avoid this advantage, the audit programme should be co-
ordinated with the client to avoid disruption in routine accounts work.
The client should appoint an employee specially to co-ordinate with
and attend to the auditors.
IV. Balance Sheet Audit:
Balance Sheet Audit is an American terms which means verification of the
items appearing in the balance sheet. It includes verification and valuation of
assets and liabilities appearing in Balance Sheet.
Profit and loss account is not given much importance in this type of audit.
In balance sheet audit, the auditors assume that there is a reliable system of
internal check and internal audit. Balance sheet is also referred as ‘Limited Audit’.
Such a type of audit is used where the size of the type of audit is used where the
size of the company is very large. Under balance sheet audit accounts are verified
and tests are imposed only on those items in Profit and Loss A/c which are
directly related to assets such as depreciation, repairs, bad debts etc.
 Applicability:
Balance sheet Audits are not conducted in all cases. Such Audits are conducted
in case of very large organization banks, etc. in the following circumstances –
a. The Internal Control System is very strong. The controls have been
developed and tested over the years. The controls are capable of
detecting and preventing errors and frauds.
b. The volume of transaction is so large that an in-dept checking is
impossible. A detailed vouch-and-post audit is not possible if the final
accounts arte to be ready in time.
c. The concern has its own internal audit department. The statutory
auditor, therefore, need no duplicate this work.
d. The accounts staff is highly qualified, the management is professional
and accounts are computerized.
 Method:
Balance Sheet Audit is conducted in the following manner –
1. Review of Internal Controls: The auditor must evaluate the system of
internal controls in the following respects –
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a. Whether the internal controls are effective: If the internal controls are
effective, auditor can concentrate on material items instead of checking
arithmetical accuracy of vouchers and books. He should study the
internal control system with the help of questionnaires, manuals,
organization charts and flow charts.
b. Whether the internal controls are in operation: He should carry out
tests to ascertain that the controls are actually in operation. Based on
his evaluation of the internal controls, the auditor should plan his
audit programme.
2. Verification of Items in the Final Accounts: He should verify the major
items of assets and liabilities and income and expenditure appearing in the
Final Accounts (Balance Sheet and Profit and Loss) in the following manner
a. Verification: He should carry out physical verification of major items
of assets and liabilities on sample basis.
b. Inspection: He should inspect documents of title etc. in respect of
major items on sample basis to verify whether such transactions
actually occurred, and whether such transactions are recorded in the
books for the right amount.
c.Vouching: He should vouch only the major transactions on sample basis
to ascertain whether such transactions are actually occurred by the
concern; and whether such transactions are recorded in the books for
the right amount.
d. Valuation: He should satisfy himself that the assets and liabilities are
properly valued.
e.Presentations and Disclosure: He should check whether the assets,
liabilities, income and expenses are presented and disclosed in the
Final Accounts properly, according to the recognized accounting
policies and the requirements of law.
3. Specific Items: The auditor should pay special attention to the following
specific items in the Final Accounts –
a. Verify fixed assets, investment physically;
b. Check the addition to and deduction from fixed assets and
investments;
c. Check the amount of depreciation charged;
d. Check the accounts of major debtors and creditors and obtain
confirmations and statement of accounts;
e. Verify cash and stocks physically;
f. Check valuation of stocks;
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g. Ascertain amount of bad or doubtful debts;
h. Check estimates of contingent liabilities.
4. Overall Checking of Final Accounts (Analytical Review):
a. Compare the amount of each item for the previous year with that of
the current year. Investigate the reasons for abnormal variations.
b. Check major rates e.g. Current Ratio, Debt Equity Ratio, Gross Profit
Ratio, Operating Ratio, Expenses Ratio, Stock Turnover, Net Profit
Ratio, Return on Capital Employed and Debtors Turnover etc.
c. Check quantitative ratios (input-output ratios), Material
Consumption ratio and quantity reconciliations.
d. Check all unusual or non-recurring transactions.
e. Check statement of Sources and application of Funds and Cash Flow
Statement.
f. Check the Minute Books.
 Procedure to conduct Balance Sheet Audit:
1. Before commencing the audit see that the system of internal control is
effective and qualified staff is appointed.
2. Examine the minute book and consider those items which have bearing on
final Accounts.
3. Compare the Profits and Loss Accounts and Balance Sheet of the current
year with that of the previous year and find out any material difference.
4. Compare the increase and decrease in each item appearing in Profit and
Loss Account and Balance Sheet.
5. Investigate into the causes of any variations in gross profit and consider
the valuation of stock.
6. Examine reconciliation of material consumed and stock.
7. Examine the details of material consumed and find out its ratio to
production.
8. Find out whether there is any change in depreciation and see its effects on
Profit and Loss Account and Balance Sheet.
9. Investigate into the items of non-recurring nature and see that Profit or
Loss on sale of fixed asset is properly ascertained.
10. Get the details of asset and liabilities as on the date of Balance Sheet.
18

11. Verify the statement of fixed asset additions made and destructions made.
Also verify changes if any.
12. Pay attention to the valuation of the fixed assets.
13. Consider the details of current assets and enquire into the variations in
current assets.
14. Consider, in detail, any substantial changes in items of Balance Sheet from
the normal figure.
15. Verify the assets and properties held and liabilities arising.
16. See that adequate provision is made for all the known liabilities.
17. Ascertain any capital commitment.
18. Scrutinize contingent liabilities.
19. See that adequate provision is made for actual liability.
20. Collect a list of contingent liabilities from the officer of the company.
21. See the resolutions regarding transfers.
22. Obtain a copy of all suits field by the company against the company.
23. Evaluate the system of internal control and see how far it is effective.
24. See whether the presentation of financial statements is done properly as
per the provisions of law.
25. Check the Statements of Sources and Application of funds.
 Position of auditor:
In Balance sheet, the auditor checks the items appearing in Balance
Sheet. He does not follow the normal procedure of audit In Balance sheet, the
auditor checks the items appearing in Balance Sheet. He does not follow the
normal procedure of audit. He does not check all the transactions taken place.
U/S 227 (3) the auditor is required to state in his report, “whether the Balance
Sheet and Profit an Loss Account dealt with by the report are in agreement
with the books of accounts and returns.”
Now the question arises as to when the auditor can say so when he does
not check all transactions. It may be informed that he has not done his duty
honestly. However, the law does not prescribe any procedure to conduct the
audit. If the auditor is satisfied with the books of accounts, he may say so.
According to Mr. Irish, The Australian Accountant, Balance Sheet audit is an
American Term which conveys two things:
i. It means limited audit since it is confined to the items connected with
balance Sheet.
19

ii. In such audit test are imposed on internal control. The test includes
scrutiny of records, comparison of income and expenses, investigation of
material information and analysis of appropriations.
 Suitability:
Balance Sheet audit is suitable under the following circumstances:
1. Where the volume of transaction is very large.
2. Where the system of internal check/internal control is very effective.
3. Where qualified accounts are employed to record the transactions.
4. Where mechanized system of accounting is in operation.
D. BASED ON OBJECT
I. Special Audit:
Central Government has power to order a special audit of the accounts of a
company for a specific period. This is under Section 233A of the companies Act,
1956. Special audit is ordered without providing an opportunity to the company,
where the central government is of the opinion.
a. When affairs of any company are not managed as per the sound business
principles.
b. When company is being managed in a manner which is likely to cause
serious injury or damage to the interest of trade or industry.
c. When financial position of a company is such as to endanger its solvency.
Special audit can be entrusted by the central government to the company’s
auditor himself or to any other chartered accountant. Auditor’s remuneration will
be fixed by the Central Government and pad by the company Auditor submits his
report to the central government. On the basis of his report the Central
20
Cost Audit
Management Audit
Internal Audit
Social Audit
Based on Object
Independent Financial Audit

Government may take adequate actions. Such auditor has the same rights, duties,
powers and liabilities as the statutory auditor of the company.
The special auditor will have the same powers and duties as provided U/s
227. The report will include all matters required to be included in an auditor’s
report. The report will also include statements on any other matter as may be
directed by the Central Government.
II. Cost Audit:
It is a type of audit which involves verification of cost records maintained
by the organization. U/s 233(B) of the Companies Act 1956 the Central
Government may direct an audit of cost records by a person who is qualified.
Appointment of auditor is done by the board of directors subject to the approval of
the Central Government.
The auditor reports to the government, the copy of the report sent to the
company. Cost audit is prescribed for certain types of industries with a view to
achieve the following objects:
a. to grant the price concession of the company;
b. to fix up selling price;
c. to safeguard interest of customers;
d. to consider the question of protection to be granted to the company;
e. to ascertain the causes of loss suffered by the company.
 Scope:
Cost audit refers to audit of records relating to utilization of materials,
labor and other items of cost as may be prescribed by the Central Government.
Cost audit shall be in addition to financial auditing conducted U/s 224. The
procedure is similar to that of financial audit.
 Qualifications:
The cost auditor shall be either a cost accountant within the meaning of
the cost and works accountant Act, 1959 or any Chartered Accountant within
the meaning of the Chartered Accountants Act, 1949 or other person possessing
prescribed qualifications. A person not qualified to be appointed as auditor of a
company under section 226 cannot act as its cost auditor.
 Appointment:
A cost auditor is to be appointed by the Board of Directors with prior
approval of the Central Government.
III. Management Audit:
21

Management audit involves examines of the plans, policies, procedure,
method and strategies and evaluates the performance of management with a
view to improve organizational effectiveness. It does not look into the past,
present but also in the future.
According to Leslie R. Howard, Management Audit is an investigation of a
business from the highest level downward in order to ascertain whether sound
management prevails through out thus facilitating the most effective relationship
with the outside world and the most efficient organization and smooth running
of internal organization.
 Scope:
The scope of management audit is quite comprehensive. It involves
critical review of all aspects and processes of management. It also includes
the objectives, the plans, the organization structure control and any other
specific function assigned by management from time to time. It includes the
appraisal of the decisions taken by the top management in achievement of
organizational objectives.
It revolves around the following factors/ steps:
a. Identify the objectives of the organization.
b. Break the overall objective into targets and plans.
c. Review the organizational structure.
d. Examine the performance of each functional area.
e. Check that delegated authorities are not exceeded.
f. Audit the integrity of the information system.
g. Assess the efficiency with the resources are utilized.
h. Suggest a realistic course of action on the basis of the examination.
 Advantages
a. Management audit helps to establish a system of incentives and rewards
for the managers on the basis of performance.
b. It helps in taking decisions regarding takeover of a sick unit. It can
indicate whether the management was responsible for the sickness.
c. It can help an investor or lender to decide about investing in a company
or advancing a loan to a company.
d. It helps the foreign collaborators in studying the performance of the
local management.
 Criticisms:
22

a. It is regarded as a vague concept and serves no major purpose.
b. It is easy to review and criticize past actions, when all the information is
available. The manger has to take quick decisions on the basis of
whatever information is available. Management audit, critics say, is
nothing but post-mortem which may discourage managers.
IV. Internal Audit:
 MEANING
Prof. Meigs: Internal Auditing is a continuous, critical review of financial and
other operating activities by a staff of auditors, functioning as full time
salaried employees.
SAP 7 issued by the Institute of Chartered Accountants of India (ICAI)
defines Internal Audit as follows: Internal Audit is separate component of
Internal Control established to determine whether other internal Controls are
well designed and properly operated.
 Guidance Note by ICAI: Internal Audit is an independent appraisal activity
within an enterprise for the review of accounting, financial and other
operation and controls as a basis for service to management. It involves a
specialized application of the techniques of auditing. Thus –
a. Internal Auditing is normally done by the employees of the concern.
b. It is part of the system of internal controls.
c. It is a critical review of other internal controls i.e. of (i) accounting
controls and (ii) operational controls.
d. The review is done by normal auditing techniques such as vouching,
verification etc.
 Scope And Objectives:
1. Review of Accounting System and Internal Controls: Management is
responsible for establishing a reliable accounting system and internal
controls. Management in turn expects the Internal Auditor to review the
accounting system and Internal Controls, check that they are effective and
suggest improvements.
2. Examination of Accounting Controls : Internal Auditor has to review the
operation of Accounting Controls to see that –
a. All transactions are duly authorized.
23

b. All transactions are properly recorded.
c. All transactions are recorded promptly as soon as they occur.
d. The accounting policies adopted by the management are
implemented.
e. The assets of the concern are safeguarded.
f. Errors and frauds are prevented and detected.
g. The books of accounts are complete and accurate.
h. The final accounts are reliable and ready in time.
3. Examination of Operational Controls: Internal Auditor must review
the working of the Operational Controls to see that the management
policies in respect of the operation and administration of the concern
are implemented. This ensures that the business is conducted in an
orderly and efficient manner. Thus Internal Auditor should review
Quality Control, Budgetary Controls, Internal Check etc. The Internal
Auditor has to ensure that the resources (assets) of the concern are
used efficiently and economically.
4. Physical Verification: Internal Auditor should physically verify the
assets of the concern such as fixed assets, cash, inventory etc.
5. Relying Upon Internal Audit:
 Same Audit Techniques: Despite the above difference between the
Internal Audit and the external or statutory audit, Internal Audit is
quite useful to the statutory auditor. The techniques of auditing used
by both are same. Both audits cover the same area of work.
 Evaluation: SAP 7 recommends that External auditor should study
and evaluate the Internal Auditing.
Evaluation involves: -
a. General Evaluation of the Internal Audit department as such
and;
b. Evaluation of the specific internal audit work done by the
Internal Audit department.
 General Evaluation: This involves the following aspects-
a. Organizational Status: The external auditor should ascertain the
organizational status of Internal Auditor, i.e.
 Whether Internal Auditor reports to the directors or to
any lower level of management.
24

 Whether any restrictions are imposed by the
management on the work of Internal Auditor.
 Whether the Internal Auditor is free to communicate
fully with the external auditor
b. Scope of work & Follow-up: Next, the external auditor should
ascertain the scope of work given to the Internal Auditor. He
should find out to what extent he management accepts and acts
on the reports and recommendation of the Internal Auditor.
c. Qualified Staff: The external auditor should ascertain whether
the Internal Audit staff is competent i.e. qualified and
experienced.
6. Evaluation of Specified Internal Audit Work: The external auditor
should study the copies of all Internal Audit reports. He should
carefully study the reports to-
a. Check the scope of work and the internal audit programme.
b. Check that work was planned, supervised and reviewed
properly.
c. Check that sufficient evidence was obtained.
d. Check that the Internal Audit report is proper and complete.
e. Check the follow-up action taken on the report.
7. Co-ordination: The external auditor and internal auditor should work in
a co-ordinated manner. They should regularly meet during the year. The
Internal Audit work should be planned in consultation with the external
auditor.
8. Reliability and Sample Checking: Such evaluation helps the external
auditor to judge the reliability of Internal Audit work. It helps him to
decide the extent of sample checking to be done in statutory audit. It
helps him to decide what to check, when and how much.
9. Responsibility: However, finally the statutory auditor is entirely
responsible for his audit work. His responsibility is in no way reduced
because he has relied upon the Internal Audit.
10. Reporting: Statutory auditor has to report under the companies, Act
(MAOCARO 1988), in case of specified companies, whether the
company, has an internal audit system commensurate with its size and
nature of business.
V. Social Audit
25

Social Audit is a recent development in the field of auditing. It is based on
the modern concept of social responsibility of business. Social audit examines to
what extent the business is discharging its social responsibilities. It examines the
contribution of the concern to the society at large. It reviews and evaluates the
performance of the concern in the following areas of social welfare and awareness.
1. Contribution to natural economic growth through expansion, employment
generation etc.
2. Welfare of Employees e.g. training to employees, employment to
handicapped or backward people, provision of education, housing and health
facilities to employees and their families.
3. Product relations including quantity, quality and price of product supplied.
4. Care for environment e.g. shifting to industrially undeveloped regions,
control of pollution.
5. Quality of life including social and family welfare schemes, employees self
reliance schemes, adoption of villages, upkeep of gardens and parks.
6. Social or national development i.e. promotion of sports, music, games, art
and culture, social audit enables the managers to keep in mind their social
obligations. This would help to improve the image of the organization.
E. OTHER TYPES
26
Occasional Audit
Special Audit
Secretarial Audit
Audit in Depth
Cash Audit
Other Types
Operational Audit
Tax Audit
Environmental Audit
Propriety Audit

I. Independent Financial Audit
Independent financial audit is conducted for the purpose of ascertaining
whether the balance sheet and profit and loss account of a business give a true and
fair view of the operations and working results of a business respectively. It is
conducted by professionally qualified auditors for clients who may be sole
proprietors, partners, various individuals, members of non-profit organizations
and shareholders. Independent financial audit has been made compulsory for
many entities established under respective Acts. The auditor is required to submit
his report to the client which is a useful document for third parties as well.
II. Occasional Audit:
This audit is carried out according to the occasional need of the business of
the client. It is done at the specific desire of the owners of the business where the
audit is legally not compulsory. The auditor will conduct the audit according to
the terms and reference. His report will mention the terms of reference as per the
letter he has received.
III. Secretarial Audit
• Concept: -
A company secretary ensures that the working of the company is in
accordance with the provisions of the Companies Act, 1956 and other
applicable laws. The secretarial audit is conducted to ensure that full and
adequate compliance to various legal requirements has been established while
implementing the decisions taken by the management and any inadvertent
non-compliance is brought to light and if possible, is set right.
 Duties To Be Discharged By The Company Secretary :-
The whole-time company secretary conducts secretarial audit to
discharge various statutory duties for company Act, 1956 has laid down
various statutory duties for company secretaries such as filing of statutory
declaration with the registrar of companies as to compliance in respect of
incorporation, giving notice to the registrar of an increase in share capital,
authentication of balance sheet and profit and loss account, filing of certificate
as to compliance of requirements of Schedule XIII, etc.
Under the listing agreement clause 47(a), every listed company is
required to appoint a company secretary who would act as a compliance officer
and would be responsible for monitoring the share transfer process and act as a
liaise with investors and various authorities such as SEBI, etc.
27

• Statutory Status:-
The companies Act has made secretarial audit compulsory for
companies having paid-up share capital of rupees fifty lakhs or more and for
companies having paid-up share capital of rupees ten lakhs or more but less
than rupees fifty lakhs. The companies falling in the first category have to
mandatory appointed a qualified whole-time secretary who ensures
compliance with statutory requirements.
Section 383A of the companies Act, lays down that companies with
paid-up capital of rupees ten lakhs or more but less than rupees fifty lakhs are
required to engage the services of a secretary in whole-time practice and obtain
a ‘secretarial compliance certificate’ fro him as to ensure compliance with the
provisions of the Act. Thus, secretarial audit in the form of submission of a
compliance certificate has been made mandatory by the Companies Act, 2000
for such companies.
IV. Audit in Depth:
Taylor and Perry define auditing in depth as it implies the examination of
the system applied within a business entailing the tracing of certain transactions
from their origin to their conclusion investigating at each stage the records created
and their appropriate authorization. “It is a method according to which a few
selected transactions are subject to a thorough scrutiny in forming an opinion as
regards the accuracy of the data so scrutinized”.
Under this type of audit, the auditor examines thoroughly selected
transactions right from their origin to the conclusions. All records and documents
pertaining to the transactions are checked in detail. The basic purpose of this type
of audit is to see whether the system of internal check or control system is
effective. This type of audit enables the auditor to suggest to the management a
better procedure for recording the transactions to avoid any loop holes for
committing frauds.
For example, the item sales will be examines as follows:
1. Order from the customer.
2. Acceptance of the order.
3. Intimation to the dispatch section to send goods.
4. Gate Pass.
5. Challans outward duly acknowledged by the recipients.
6. Goods outward Register.
7. Stock Register.
8. Copy of Invoice.
28

9. Cash Book.
10. Bank Pass Book.
11. Customer’s Ledger.
The principal of “audit in depth” is applicable in the case of large-sized
companies. It is not suitable to small sized companies as they do not have internal
check system. All the transactions of small firms are required to be checked. The
auditor should resort to in depth audit only when he is satisfied with the efficacy
of the internal check system which is in operation. The extent of efficiency of
internal check system will decide the extent to which the auditor should apply the
technique of “in-depth audit”. He should select those transactions which are
material in relation to the affairs of the company.
In-depth audit is beneficial to the auditor as follows:
a. It will enable the auditor to satisfy himself as to the efficiency or otherwise of
the internal check system.
b. It will acquaint the auditor as to how far the procedure for receipt and
payment of cash purchase and sale of the goods as prescribed by the
company has been properly followed or not.
c.The auditor will be able to find out the weak points of the existing procedures
for making entries in the books of accounts.
d. The auditor can suggest a better procedure to the management for recording
transactions so as to avoid any frauds.
V. Cash Audit:
It is a partial audit and not a complete audit. In this type of audit, the auditor
examines only the cash transactions. He examines cash receipts and cash payments.
The receipts and payments may be capital or revenue in nature. Cash transactions are
checked with the help of receipts and vouchers and other evidences.
VI. Operational Audit:
Operational audit is conducted to see that the business operations are
improved in future. Operational audit goes beyond financial audit. It is conducted for
the following purposes:
 To improve the profitability.
 To guide the management in achievement of organizational objectives.
 To examine the efficiency of the management in conducting various operations.
 To evaluate the management policies and procedures.
 To advice the management on business operations.
29

VII. Tax Audit:
Statutory audits as well as the cost audit are taken up as result of specific
provisions contained in the companies Act, 1956. However, a new concept of tax
audit has been evolved lately under the Income Tax Act, 1961. In India, the Indian
Income Tax Act, 1961, provides for compulsory audit of accounts of certain
assesses whose turnover or receipts exceed the specified limit. The Income Tax Act
has provided for rules and regulations regarding tax audit. The tax audit can be
undertaken by the practicing member of the institute of Cost and Works
Accountants of India.
There are no specific rules laid down by the Chartered Accountants Act,
1949. From time to time, the institute of Chartered Accountants of India issues
certain guidelines regarding conduct of Tax Audit. The objective of such audit is to
assist the tax authorities in determination of correct tax liability. The tax auditor
has to report about the transactions which have an effect on fixation of tax liability.
Compulsory Tax Audit v/s 44AB
Under the above section, tax audit is compulsory for a person carrying on
any business or profession if:
a. In the case of business whose total sales turnover or gross receipts exceed
Rs.40,00,000 in the previous year, and
b. In the case of a profession, if the gross professional receipts’ in the previous
year exceed Rs.10,00,000.
c. In the case of an assessee covered under sections 44AD, 44AE, 44BB or
44BBB.
The audit report in prescribes form should be obtained from the auditor and
filed with the Return of Income. The tax auditor cannot accept more than 30 tax
audit assignments in a financial year.
VIII. Environmental Audit:
In recent times, new type of audit has emerged which is known as
Environmental Audit. The objective of such an audit is to examine the effect of the
activities of an organization on environment. Environment audit is a management
tool comprising a systematic, periodic and objective evaluation of how well
organization, management and equipment are performing to safeguard the
environment. It is concerned with assessing whether the company policies meet
regulatory requirements as perceived by the management.
Environmental factors play a very important role in evaluation of future
performance and cash flows of companies. Environmental factors affect assets and
liabilities of as organization. The effect of environmental factors can be assessed
with the help of Environmental Audit. In India the Govt. has prescribed
30

‘Environment Audit Report’ termed as ‘Environment statement’ under the
provisions o9f the Environment (Protection) Act, 1986. Every industry has to
submit this statement to the State Pollution Board every year by 30th
September.
The environmental audit requires the auditor to have suitable technical
qualifications, knowledge of environmental laws and regulations sand ability to
assess the impact of environmental factors on financial performance of the
company. The environmental audit is conducted, generally, by small teams
numbering three or four persons because a professional accountant or any one
person cannot have varied knowledge required for it.
IX. Propriety Audit:
In the words of Kohler, “Propriety means that which meets the tests of
public interest, commonly accepted customs and standards of conduct”. Applied
to audit, propriety audit can be defined as “an examination of actions and
decisions to find out whether they are in public interest and meet the standards of
proper conduct”. Thus under propriety audit, the auditor not only examine the
transactions from the books of accounts with the help of vouchers and documents,
but he verifies also as to how far transactions effected from the decisions or actions
are proper or reasonable. The propriety audit is concerned with examining that
there is no leakage of revenue or wastage of funds by mistake or fraud. It is
concerned with ascertaining appropriateness from legal, financial or economic
point of view.
Propriety audit is a very important part of the Government audit. In India,
the CAG is expected to examine propriety of expenditure and has to ensure that:
1. The authority sanctioning the expenditure does not get the benefit directly
or indirectly;
2. The person who is spending has exercised the same prudence, as he would
have exercised while spending for himself;
3. Public money is not utilized for the benefit of a person or a group of
persons.
4. Public money is utilized for the purpose for which it is to be spent.
31

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