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

Organizational Structure

Statutory Audit

Government Audit

Non-statutory (Private) Audit

Sole Proprietorship

Partnership Firm

Individuals and Non-

profit Organization

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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 Insurance Corporations.
7 Electricity Companies Electricity Supply Act, 1948
8 Registered Societies Societies Registration Act
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:

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 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.
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 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.

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

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 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

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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 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.
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

Based On Time

Continuous Audit

Final Audit

Interim Audit

Balance sheet Audit

I. Continuous Audit:
Meaning:

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 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 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.

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 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.

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 clients 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
clients place may make the work tedious and the audit staff

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 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.
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

clients 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.

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 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 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
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 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 Clients Business: Since the audit
spends little time at the clients place, he cannot become familiar
with all the aspects of clients 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.
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.

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 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 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.

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 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 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:
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 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.
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 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.

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.
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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.
19
 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.
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

Based on Object

Independent Financial Audit

Cost Audit
20
 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.

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:
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 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

22
 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:
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.

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 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.
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
24
 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.

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.

25
 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
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.

26
 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

Other Types

Special Audit

Occasional Audit

Secretarial Audit

Audit in Depth

Cash Audit

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.

27
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.

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-

28
 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.
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-

29
 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.

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.
30
 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 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
31
 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.

32