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.
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.

TYPES OF AUDIT
CHART SHOWING DIFFERENT CLASSES OF AUDIT
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
Organizational
Structure

Non-statutory (Private)
Audit
Government Audit
Statutory Audit
Sole Proprietorship
Partnership Firm
Individuals and Non-
profit Organization


9 Tax Payers Tax Audit under Income-tax Act

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 CAGs duties have been specified by the Comptroller and Auditor Generals 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 latters 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.
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.


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 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:

Based on Scope
Detailed Audit
Partial Audit



Complete
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.
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 1
st
April 2002 and ends on 31
st
March,
2003 normally, audit work would begin in April 2003 and continue thereafter. But in case of
Continuous Audit the work would begin in 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
Based On Time
Final Audit
Continuous Audit
Interim Audit
Balance sheet
Audit


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 Clients Business: Since the auditor spends more time at the
clients place, he becomes familiar with all the aspects of clients business.

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.

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 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 for taking decisions regarding loans and investment.

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 1
st
April to 30
th

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.




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 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:

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 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

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;
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.

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 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.
Cost Audit
Management Audit
Internal Audit
Social Audit
Based on Object
Independent Financial
Audit


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.


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:

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.


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

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.
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.


V. Social Audit

1. 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
areas of social welfare and awareness like Contribution to natural economic growth through
expansion, employment generation etc, 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. Product relations including quantity, quality and price
of product supplied etc.

E. OTHER TYPES




















Occasional Audit
Special Audit
Secretarial Audit
Audit in Depth
Cash Audit
Other Types
Operational Audit
Tax Audit
Environmental
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
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.

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.
9. Cash Book.
10. Bank Pass Book.
11. Customers 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.

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.



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 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 30
th
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.