Field and Types of Audit

Chapter 2

Field of Auditing

Internal Audit Frequent or ongoing audit conducted by

a firm's own (as opposed to independent) accountants to:

1. Monitor operating results2. Verify financial records3. Evaluate internal controls 4. Assist with increasing efficiency and

effectiveness of operations 5. To detect fraud.

Cont..

Internal audit can identify control problems, and aims at correcting lapses before they are discovered during an external audit.

Although the internal auditors are the firm's employees, they normally do not audit themselves or their own departments, but entrust it usually to independent auditors.

External Audit

Periodic or specific purpose audit conducted by external (independent) qualified accountant(s).

Its objective is to determine, among other things, whether

1. the accounting records are accurate and complete

2. prepared in accordance with the provisions of GAAP

3. the financial statements prepared from the accounts present fairly the organization's financial position

4. the results of its financial operations.

Cont. An external audit is a review of the financial

statements or reports of an entity, usually a government or business, by someone not affiliated with the company or agency.

External audits play a major role in the financial oversight of businesses and governments because they are conducted by outside individuals and therefore provide an unbiased opinion.

Cont.…

External audits are commonly performed at regular intervals by businesses, and are typically required yearly by law for governments.

Time Frame

External audits are typically conducted once a year at the end of the company's or government's fiscal year. They are performed after the entity's in-house bookkeepers prepare a year-end financial report, which is one of the documents verified in an external audit.

Companies and governments will typically issue quarterly financial reports throughout; however, these are usually by internal accountants and bookkeepers, and have not been externally reviewed for accuracy.

Significance

Because external audits are performed by third-party accountants, they represent an unbiased view of an entity's financial standing. For governments, this independent review will ensure taxpayers that budgeted funds are being appropriately spent and the revenues are not being under- or over-projected.

In the private sector, external audits are valuable to stockholders as they provide an independent assessment of the company's financial holdings and can be used to determine investment levels in the business.

Types of Audit

According to nature of work audit may be classified as:

1. Final or completed audit2. Continuous or running audit3. Interim audit

Final Audit

A final audit is a type of audit which is started after the close of the accounting year of a business and it is carried out until completion.

This is the most satisfactory form of audit from auditor’s point of view and therefore the most common.

The auditor is placed in possession of the full facts relating to the year under review and he can pursue the books and accounts

Advantages of Final Audit

1. Alteration Chances LimitedIn the other types of audit the alteration is possible in the audit. But in the final audit the alteration of any type is not possible after the audit.2. Checking of Complete Record

In the final audit there is complete checking of the books of accounting. He can decide either to check cent percent or by sampling.

Cont..

3. Advantage for the ShareholdersFinal audit serves the shareholders by giving them the most reliable financial information for the investment purpose.

4. Advantage for the OwnerSometimes the business is so large that even one owner doesn’t know the real position about the business. So final audit throws light on the business position and provides him satisfaction.

Cont..

5. Convenient or SuitableFinal audit is very suitable for the auditor and client staff. It saves both the parties from continuous disturbance.

6. Saving of TimeIn the continuous audit the work of audit is continuous through out the year. It takes a lot of time. But as compare to it final audit takes a very short time. So, in the final audit the time is saved.

Cont..

7. Legal DemandFinal audit is also helpful in checking either the management has fulfilled the legal requirements or not. The management is bound to fulfill the legal requirement.

8. EconomicalFinal audit is beneficial for the client. It is not a regular burden on him, because it is conducted only once in a year at the end of the accounting period. So, it gives the maximum benefit with minimum cost.

Cont..

9. Improves the EfficiencyIn this audit the performance of the staff improves due to finding out the weak points of the employees by the auditor by overcome these weakness the staff can improve his efficiency.

10. Submission of Audit ReportAbout the fairness and correctness of accounts final report is very important for the good will of the company.

Cont…

11. Planned WorkThe final audit has minimum time. So, the work of audit is completed under planning. An audit program is maintained which provides the schedule of the working of the audit staff and the principal auditor can control the audit work.

12. GuidanceThe auditor not only provides the true and fair information but also guide the management how can they improve their accounting systems.

Cont…

13. No RelationsThe merit of final audit is that it provides no chance to audit staff to develop friendly relation with accounting staff. The accounting staff is not in a position to get undue benefit from audit staff.

Disadvantages of Final Audit1. Shortage of Time

The auditor has many clients and their financial year ends on the same date. So it becomes very difficult for the auditor to finish the work in time. It is a disadvantages of final audit.

2. Delay in ReportThe decisions of the business are made on the basis of the audit report. But this report is made one or two months late. So there is also delay in the making of important decisions.

3. Complete Checking Not PossibleIt is very difficult for the auditor to check complete records of the organization.

Continuous or Running Audit Examination and verification of a firm's

financial transactions and their supporting documents, carried out daily or on fixed interval basis. Continuous-audit is performed usually by the firm's internal auditors to eliminate the year-end workload.

This audit is possible in following cases:1. In the businesses with numerous transactions2. In a business with a large turnover or there is

necessity of considerable detailed checking.

Cont…

3. In establishments where the final accounts and balance sheets are required soon after the close of the accounting period like banks.

4. In the concerned where there is an inadequate or no system of internal check or internal control.

5. In concerned where monthly profits and loss and balance sheets and other interim accounts are regularly required.

Advantages of continuous audit

1. Early discovery of errors and frauds is possible as the auditor checks the records at periodical interval.

2. Close and extensive examination of each transaction can be carried out, as the number of transactions to be checked will be small.

3. Quick presentation of financial statements to shareholders is facilitated, as the auditor would require to examine the financial statements only at the close of the year, due to detail checking which had already been done.

Cont…

4. Maintenance of up to date accounts and observing accuracy is forced as the client staff knows that the auditor may any time demand up to date books.

5. Declaration of interim dividend with confidence can be made by the directors as audited interim accounts show profit actually earned.

Disadvantages of Continuous Audit

1. Alteration of FiguresThe records and figures in the books of accounts, which have already been checked by the auditor, may be altered after the audit is over.

2. ExpensiveContinuous audit is more expensive as compared to other kinds of audit, because the auditor has to devote more time to this audit.

3. InconvenienceIn this audit, the auditor visits the client’s office at regular intervals to check the accounts and records these frequent visits made by the auditor may disturb the client staff.

Interim Audit

Interim audit is the audit which is conducted between the two annual audits for the purpose of finding the interim dividend. It may be monthly quarterly or half yearly. When any partner or owner or director or a businessman wants to know the reliable results during the financial year then such type of audit may be applied.

Cont…

Interim audit is an audit conducted during the fiscal year usually as a means of minimizing the work and time involved in concluding the audit after the fiscal year. A corporation might have an interim audit covering the first nine months of the fiscal year so that at the end of the fiscal year most of the auditing will focus on the last three months of the fiscal year thus allowing for a comprehensive audit and early completion of the audit reports. An interim audit does not usually yield any formal reports from the external auditors.

Cont… An interim audit is a type of auditing strategy

that is normally utilized at some point during the current fiscal year. This type of audit makes it possible to complete at least some of the tasks that are involved with the preparation of a final audit once the fiscal year has closed. The benefit of this approach is that it is possible to provide shareholders and other interested parties with final audit data sooner than if the final audit was commenced after the fiscal year was completed.

Cont….

Like any type of auditing task, an interim audit will involve close examination of financial records. Interim auditing standards are the same as those used to conduct any type of accounting or inventory check, and must comply with all policies and procedures that are part of the final audit process.

Cont…

Continuous audit and an interim audit are sometimes confused, the two approaches are actually very different. A continuous audit typically provides audit information that is accurate up to a specified date within the fiscal year. For example, a continuous audit may be conducted monthly, with each new audit showing changes that occurred since the last audit period.

Cont… In contrast, an interim audit normally covers a

longer time period and is intended to make it possible to expedite the completion of a final audit.

It is not unusual for this type of audit to cover the first three quarters of the fiscal year, making it possible to complete a number of auditing tasks that will not require repetition when the analysis of the fourth quarter is undertaken. The end result is that much of the work for the final audit is completed before the end of the fiscal year.

Cont… Typically, an interim audit does not result in the

issuance of formal reports that are widely shared with investors or the general public. Officers and management of the company are normally made aware of the results of the audit, since the data may indicate the need to address some specific issue regarding stock, reporting procedures or some other aspect that impacts inventories. Formal reports are not released until the final audit is completed and the auditors are ready to release their final opinions on the status of the company’s accounting processes.

Advantages of Interim audit1. Publication Of Interim Figures :-

In some cases the publication of interim figures is compulsory. So in such cases interim audit is very useful.2. Easy Detection Of Errors :-By conducting the interim audit errors and frauds can be easily detected in time.3. Check On Staff :-When the staff of the client knows that at any time during the year accounts can be checked for the interim period then they will maintain their accounts and records up to date which will increase their efficiency.

Cont…

4. Completion Of Final Audits :-If interim audit is countered then final audit can be completed very soon and easily.

5. Suggestions Implementation :-In case of interim audit auditor's suggestions can be quickly implemented.

6. Convenient Interim audit is very convenient for the management because they invite the audit staff when their business activity is low.

Cont…

7. Interim Dividend The management can easily prepare the accounts for proposed interim dividend. Interim audit is very useful to declare this dividend.

8. Case Of New Partner In a business when new partner enters, interim audit determines correct position of assets and liabilities..

Cont…

9.Death Case When any partner dies then interim audit is very helpful in determining the position of assets and liabilities .10. Retirement Case If any partner wants to leave or retire from the business then interim audit can easily determine the correct position of its assets and liabilities.

Disadvantages of interim audit1. Burden Of Work

Audit staff will have also to prepare the audit notes when they will finish the interim audit. So the burden of work increases in this way.

2. More Expensive This type of audit increases the expenses of business because it is not compulsory by law.

Cont…

3. Changing In Figures A dishonest official may change the figures of accounts which is already audited by the auditor. So there are chances of fraud in such type of audit.

4. Not Useful For Third Party It has no use for third party because this audit is used only to improve the efficiency and effectiveness of the accounting system.