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INDRODUCTION
According to Mautz
Auditing is concerned with the verification of accounting data, with
determining the accuracy and reliability of accounting statements and
reports.
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Group 2 Sagar's Types of Audit
Features
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Group 2 Sagar's Types of Audit
TYPES OF AUDIT
Private Audit
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Group 2 Sagar's Types of Audit
Organizational Structure
Statutory Audit
Government Audit
Sole Proprietorship
Partnership Firm
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 Companies Act, 1956
- Financial audit -S.227
- Special audit -S.233A
- Cost audit -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
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Group 2 Sagar's Types of Audit
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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Group 2 Sagar's Types of Audit
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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Group 2 Sagar's Types of Audit
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.
B. BASED ON SCOPE
Based on Scope
Complete Audit
Partial Audit
Detailed Audit
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
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Group 2 Sagar's Types of Audit
C. BASED ON TIME
Based On Time
Continuous Audit
Final Audit
Interim Audit
I. Continuous Audit:
Meaning:
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Group 2 Sagar's Types of Audit
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.
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Group 2 Sagar's Types of Audit
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Precautions
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Group 2 Sagar's Types of Audit
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Group 2 Sagar's Types of Audit
Advantages
Interim audit is similar to Continuous Audit and enjoys similar
advantages:
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Group 2 Sagar's Types of Audit
Applicability:
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Group 2 Sagar's Types of Audit
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
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. 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.
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.
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Group 2 Sagar's Types of Audit
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.
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.
D. BASED ON OBJECT
Based on Object
Cost Audit
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Group 2 Sagar's Types of Audit
Management Audit
Internal Audit
Social Audit
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
companys auditor himself or to any other chartered accountant.
Auditors 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 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 auditors report. The report will also include statements
on any other matter as may be directed by the Central Government.
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
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Group 2 Sagar's Types of Audit
MEANING
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Group 2 Sagar's Types of Audit
V. Social Audit
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.
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Group 2 Sagar's Types of Audit
E. OTHER TYPES
Other Types
Special Audit
Occasional Audit
Secretarial Audit
Audit in Depth
Cash Audit
Operational Audit
Tax Audit
Environmental Audit
Propriety Audit
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Group 2 Sagar's Types of Audit
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-
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Group 2 Sagar's Types of Audit
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.
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.
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.
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