PRINCIPLES AND PRACTICE OF AUDITING

Unit 1: INTRODUCTION TO AUDITING

Introduction Meaning Definition Objectives Difference between Accountancy and Auditing Types of Audit
Advantage of Auditing Preparation before commencement of new Audit. Audit Notebook Audit Working
Papers Audit Program Qualities of an auditor, Audit Planning, Audit Strategy, Audit Engagement, Audit
Documentation, Audit Evidence, Written Representation.

Unit 2: RISK ASSESSMENT AND INTERNAL CONTROL

Introduction, Audit Risk, Assessment of Risk, Internal Control Meaning and objectives Internal Check
Meaning, objectives and fundamental principles Internal Check as regards, Wage Payments, Cash
Sales Cash Purchases.

Unit 3: VERIFICATION AND VALUATION OF ASSESTS AND LIABILITIES

Meaning and Objectives of Verification and Valuation, Position of an Auditor as Regards the Valuation of
Assets, Verification and Valuation of Different items of Assets, Land and Building, Plant and Machinery,
Goodwill, Investments, Stock in Trade. Liabilities, Bills Payable, Sundry Creditors and Contingent
Liabilities

Unit 4: COMPANY AUDIT AND AUDIT OF OTHER ENTITIES

Company Auditor: Appointment, Qualification, Powers, Duties and Liabilities, Professional Ethics of an
Auditor. Other Entities: Audit Procedure of NGOs, Charitable Institutions, Educational Institutions,
Government, Local Bodies, Cooperative Societies, Hotels, Hospitals, Clubs and Banks.

Unit 5: AUDIT REPORT AND PROFESSIONLA ETHICS

Introduction, Meaning, Elements of Audit Report, Types of Audit Report, Independent Auditor’s Report
and Their Illustration, Professional Ethics: Code of Ethics, Professional Accountants in Public Practices
and Business, Fundamental Principles of Professional Ethics.
 Unit 1: INTRODUCTION TO AUDITING
Meaning of audit:

Traditional concept: The term audit is derived from the Latin word "AUDIRE" It means to hear". That is
during the ancient period some feared persons called as judges are appointed to hear the accounts
(called as hearers or auditors) maintained by the book-keepers, on the basis of the hearing audit) those
judges are going to give their own judgment

Modern concept: as per modem concept, Audit is too wider than the traditional concept it includes not
only checking of cash, but also verification of books of accounts, and the original source of transactions
by an independent qualified auditor and reporting to the management

Definitions of audit:

1. Prof. L.R.Dicksee. Auditing is an examination of accounting records undertaken with a view to

establish whether they correctly and completely reflect the transactions to which they relate"

2. SPICER and PEGLER defined auditing as "an examination of books of accounts and vouchers of a
business as will enable the auditor to satisfy himself that the balance sheet is properly drawn up, so as
to give true and fair view of that state of affairs of the business and whether the profit and loss account
gives a true and fair view of the or loss for the financial period, according to the best of his information
and the explanations given to him and as is shown by the books, and if not, in what respects he is not
satisfied.

3. Mantz defines auditing as being "Concerned with the verification of accounting data with determining
the accuracy and reliability of accounting statements and reports"

4. SAW Hanson defined auditing as, "An Audit is an examination of accounting records to establish
their reliability and the reliability of statement drawn from them"

FEATURES AND IMPARTANCE OF AUDITING

1) Audit is a systematic and scientific examination of the books of accounts of a business

2) Audit is undertaken by an independent person or body of persons who are duly qualified for the job

3) Audit is a verification of the results shown by the profit and loss account and the sate of affairs as
shown by the balance sheet

4) Audit is a critical review of the system of accounting and internal control.

5) Audit is done with the help of vouchers, documents, information and explain received from the
authorities.

6) The auditor has to satisfy himself with the authenticity the financial statements report that they exhibit
a true and fair view of the state of affairs of the concern

7) The auditor has to inspect, compare, check, review, scrutinize the vouchers the transactions and
examine correspondence, minute books of shareholders, directors, Memorandum of Association and
Articles of association etc., in order to establish correctness of the books of accounts.

ADVANTAGES OF AUDITING:

1. Verification of Books and Statement: The main object of audit is the verification of the books and
the financial statements of the company concerned.

2. Discover and Prevention of Error: While examining the books, auditors detect some errors. These
are various kinds of errors So audit is very useful in preventing and detecting the errors

3. Discovery and Prevention of Fraud: Fraud mean false representation trade intentionally with a view
to defraud somebody. It is the duty of the auditor that he should detect the fraud so audit main object
and advantage is that fraud may be detected and prevented Auditor may also suggest various methods
of internal which will prevent fraud.

4. Moral Check: When each staff of the company knows that these financial transactions will be
examined by the auditor. The fear of their detection acts as a moral check on the staff of the company.

5. Independent Opinion: - Auditing is very useful to obtain the independent opinion of the auditor about
the business condition. If the accounts are audited by the independent auditor, the report, of the auditor
will be a true picture and it will be very important for the management. Keeping in view the report, owner
of the business will be able to prevent frauds and errors in future.

6. Protects the Interest of Share Holder: - Audit protects the interest of shareholders in the case of
Joint Stock Company. Through audit shareholders are assured that the accounts of the company are
maintained properly and their interest will not suffer

7. Check on Directors: - Audit acts a check upon the directors and precaution against fraud on the part
of the management.

8. Proper Supervision: Sometimes owner of the business cannot look after the business personally.
Audit acts as a check on employees and it saves the owner from losses.
9. Valuable Advice: - The auditor has expert knowledge about the accounts and finance problems, so
he may be consulted about these problems

10. Disputes Settlement: In case of partnership, audit is very useful in settling the disputes among the
partners. If any partner dies, or retires, the audited balance sheet will be very useful in estimating the
value of goodwill,

11. Loan Facility: - If accounts are audited, then true picture will be known to the financial institutions
and they will never hesitate to lend the money

12 Insurance Claim: - In case of fire insurance and participation of fraud claims can be settled on the
basis of audited accounts of the previous years.

13. Property Value Assessment: If the accounts have been audited, then it is easier to value property
when the business is sold. In the eyes of law audited accounts are considered more reliable.

14 Correct Information about Business: Due to the fear of audit work accounting always remains up
to date and correct information is given to the members in time

15. Advantage for General Public:- Audited financial statements present the real position the company
before the general public. Keeping in view the position of a company one can do the investment

16. Useful for Tax Department: Assessment of tax becomes very easy job for the tax department
keeping in view the audited accounts they imposes the taxes

DISADVANTAGES OF AUDITING:

1. Non-detection of errors/frauds: Auditor may not be able to detect certain frauds which are
committed with malafide intentions.

2. Dependence on explanation by others - Auditor has to depend on the explanation and information
given by the responsible officers of the company Audit report is affected adversely if the explanation and
information prove to be false

3. Dependence on opinions of others: Auditor has to rely on the views or opinions given by different
experts via Lawyers, Solicitors, Engineers, and Architects etc. he cannot be an expert in all the fields

4. Conflict with others: Auditor may have differences of opinion with the accountants. Management,
engineers etc. In such a case personal judgment plays an important role. It differs from person to
person.
5. Effect of inflation-Financial statements may not disclose true picture even after audit due to
inflationary trends

6. Corrupt practices to influence the auditors: The management may use corrupt practices to
influence the auditors and get a favorable report about the state of affairs of the organization

7. No assurance: Auditor cannot give any assurance about future profitability and prospects of the
company

8. Inherent limitations of the financial statements - Financial statements de not reflect current values
of the assets and liabilities. Many items are based on personal judgment of the owners. Certain non-
monetary facts cannot be measured Audited statements due to these limitations cannot exhibit true
position.

9. Auditing is a post-mortem examination: auditing work begins where accounting ends then the
auditor is fully depends upon the accounting transaction provided by the in the throughout the year. So
auditing work is not suitable for the current position of the business. But it is useful to the future business
situation

10. Detailed checking not possible: Auditor cannot check each and every transaction. He may be
required to do test checking

Differences between Accounting & Auditing:

Criterion Accounting Auditing

Accounting is keeping records of Auditing is critical examination of the

Definition the financial transactions and financial statements to give an
preparing financial statements opinion on their fairness

Periodic process and carried out

Continuous with daily recording of
Timing after the preparation of final
financial transactions
accounts

Beginning Starts where book-keeping ends Starts where accounting ends.

Concentrates on the current

Concentrates on the past financial
Period financial transactions and
statements
activities
 All transactions, records and
Final financial statements and
Coverage statements having financial
records.
implications

Very detailed and captures all

Uses financial statements and
Level of Detail details related to financial
records on sample basis.
transactions and records

Checking details related with all Carried out through test checking or
Type of Checking
financial records sample checking.

To accurately record and present

To verify the accuracy of the
Focus all financial transactions and
financial statements
statements.

To determine the financial

To add credibility to the financial
Objective position, profitability and
statements
performance.

Governed by Accounting
Legal Status Governed by Standards on Auditing
Standards

Performed by Accountants Auditors.

Carried out by an internal Carried out by an external person or

Status
employee independent agency

Appointment By the management By the shareholders

Specific qualification is not Some specific qualification is

Qualification
compulsory compulsory

Remuneration Type Salary Auditing fee

Remuneration Fixation By the management By the shareholders
Scope Determination by the management by the relevant laws

Necessary for all organizations in

Not necessary in the day-to-day
Necessity the day-to-day or routine
operations
operations

Financial statements e.g. Income

Deliverables Statement or P/L, Balance Sheet, Audit Report
Cash Flow Statement, etc.

Report Submission To the management To the shareholders

 Accountants may make
suggestions for the improvement Auditor usually does not make
Guidance
of accounting and related suggestions
activities

Generally ends with the Liability after preparation and

Liability
preparation of the accounts submission of the audit report
Shareholders’
Accountant does not attend Auditor may attend
Meetings

Accountant is not usually

Professional Auditor can be prosecuted for
prosecuted for professional
Misconduct professional misconduct
misconduct

Removal By the management By the shareholders

Objectives of Auditing:

Primary objective:

As per Section 227 of the Companies Act 1956, the prim duty (objective) of the auditor is to report to the
owners whether the balance gives a true and fair view of the Company's state of affairs and the profit
and A/c gives a correct figure of profit of loss for the financial year

Secondary objective:

It is also called the incidental objective as it is incidental the satisfaction of the main objective. The
incidental objectives of auditing are

1. Detection of Errors,
2. Detection of Frauds, and
3. Prevention of Frauds and Errors.

DETECTION OF ERRORS:

Error refers to unintentional miss-statements or miss-descriptions in the records or books of accounts by

the books keepers. In other words, they are unintentional mistakes arising on account of negligence or
ignorance Errors may be basically of two types

1. Principle Errors:
These errors arise generally when the principals of accountancy are not while recording a
transaction. For instance a capital expenditure is recorded as revenue expenditure or vice versa
such errors are difficult to detect as the Trial Balance tallies in spite of such errors. Basically it
 arises on account of ignorance of accounting principles Following are the examples of principles
errors:

→Incorrect allocation of expenditure between capital and revenue (Revenue receipt is recorded as a
capital receipt)

→ Valuation of assets against the fundamental principles of accountancy (Overvaluation or

undervaluation of stock on account of ignorance)

→Wages paid for installation of plant and machinery is recorded as wages paid to workers

→Incorrect provisions for doubtful debts and discount on debtors

→Rent paid to landlord debited to the landlord account instead of rent account

Clerical Errors: -

These errors anse on account of negligence of the accounting staff. They are called Technical errors
clerical errors may be further divided as errors of omission, Errors of Commission, Duplicating Errors
and Compensating Errors

1) Errors of Omission: These are the errors which arise on account of transaction into being
recorded in the books of accounts either wholly or partially. If a transaction has been totally
omitted it will not affect trial balance and hence it is more difficult to detect On the other hand if a
transaction is partially recorded, the trial balance will not agree and hence it can be easily
detected

Detection:- An auditor may detect the error by comparing the data of previous with this item. We
may say that critical analysis of the auditor locate such type of errors.

2) Errors of Commission: An error of commission is one where a transaction has been recorded
but mistake has been committed in recording it on the books of original entry or in posting there
from to ledger
E.g. wrong entries, wrong Calculations postings, carry forwards etc. such errors can be located
while verifying
Detection - Such errors can be detected by checking the arithmetical accuracy of the original
books. It can also be discovered when somebody challenges the transaction.
3) Error of duplication: Error of duplication arises if the same transaction is recorded twice in the
books of original entry and also posted twice in the ledger.
Detection-careful vouching is the only answer to detect duplication error.

4) Compensating Errors: When two/more mistakes are committed but those errors are counter
balances each other. Such an error knows a Compensating Error. E.g. if the amount is wrongly
debited by Rs 100 less and Wrongly Credited by Rs 100 such a mistake is known as
compensating error.

PROCEDURE TO BE FOLLOWED TO DETECT THE ERRORS

Following procedures may be adopted by the auditor to detect the errors.

1. Check the opening balances from the balance sheet of the last year
2. Check the posting into respective ledger accounts
3. Check the total of the subsidiary books
4. Verify all the castings and the carry forwards
5. Ensure that the list of debtors and creditors tally with the ledger accounts
6. Make sure that all accounts from the ledger are taken into accounts
7. Verify the total of the trial balance
8. Compare the various items from the trial balance with that of the previous year
9. Find out the amount of difference and see whether an item of half or such amounts entered
wrongly
10. Check differences round figures as Rs 1.000, Rs 100 etc.
11. See where there is misplacement or transposition of figures that is 45 for 54.
12. Ultimately careful scrutiny is the only remedy for detection of errors.
13. See that no entry of the original book has remained un-posted.

DETECTION OF FRAUDS
The term fraud means the willful misrepresentation made with an intention of deceiving others. It
is a deliberate mistake committed in the accounts with a view to get personal gain, in accounting,
fraud means two things.
I. Misappropriation of cash or Embezzlement of cash: This is one of the majored frauds
in any organization it normally occurs in the cash department. This kind of fraud is either
by showing more payments less receipt. The cashier may show more expenses than
 what is actually incurred and misuse the extra cash the following are some of the
examples of Misappropriation of cash

By inflation payments: either by inflating purchase invoices or by inflating any other expenses
being paid, or by inflating wages sheets by including the names of dummy workers or using
fictitious vouchers

By suppressing receipts: this is done by

1 Cash sales being not fully accounted
2 Adjusted unauthorized rebates, allowances, discounts etc. in the customers’ accounts
3 Not accounting miscellaneous receipts, for example sale of scrap, sale of newspaper and
magazines etc.

II. Misappropriation of Goods: It refers to fraudulent application of goods by those who

handle them It can be done by recording sales of larger quantities and misappropriating
the balance or by recording purchase of large quantities receiving less quantity and then
receiving the balance amount privately Here records may be made for the goods not
purchase not issued to production department goods may be used for personal purpose
Such a fraud can be deducted by checking stock records and physical verification of
goods.

III. Manipulation of Accounts: this is finalizing accounts with the intention of misleading
others This is also known as WINDOWS DRESSING" It is very difficult to locate because
n's usually committed by higher level management such as directors The objective of
Window dressing may be to evade tax, to borrow money from bank, to increase the share
price etc. Some of the following examples of falsification of accounts are

1. Recording fictitious sales or purchases.

2. Charging more or less amount as depreciation or provisions
3. Creation and utilization of secret reserves.
4. Overvaluation or undervaluation of assets and liabilities.
5. Not recording currents year's accrued expenses etc.
6. Showing expenses of the next year in the current year's profit and loss account
THE AUDITOR SHOULD PERFORM THE FOLLOWING DUTIES IN RESPECT OF FRAUD. .

1. Examine all aspects of the finance

2. Vouch all the receipts from the counterfoils or carbon copies or cash memos, sales mart reports etc.

3. Check thoroughly the salary and wages register

4. Verify the methods of valuation of stocks

5. Checkup stock register, goods inwards notes, goods out wards books and delivery challans etc.

6. Calculate various ratios in order to detect fraudulent manipulation of accounts

7. Go through the details of unusual items

8. Probe into the details of the problems when there is a suspicion

9. Exercise reasonable skill and care while performing the duty

10. Make surprise visit to check the accounts

PREVENTION OF ERRORS AND FRAUDS

Lastly, the duty of an auditor is not only to detect errors and frauds, but also to prevent them. This is
possible with in-depth study of the internal check system, thereby the auditor puts a moral check on the
staff. The auditor can thus offer suggestions for making improvements in the internal control system

TYPE OR CLASSIFICATION OF AUDIT:

1. From the Point of Organization Structure:

Statutory Audit:
Statutory Audit is compulsory audit prescribed under statute 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
Companies- Companies Act, 1956
Banks - Banking Companies Regulation Act, 1949
Insurance Companies - Insurance Act, 1938

Government Audit
Meaning and Scope: Government audit is a control measure for public accounting of government
funds. It covers the audit of all expenditure and receipts done by the executive and audit of
commercial accounts maintained by public enterprises Public enterprises are classified under
three categories department undertaking, statutory corporations financed by government and
government companies set up under the Companies Act, 1956.
Who conducts it: In India, the Accounts and Audit Department of the Government of India,
headed by the Auditor General of India (CAG), carries the audit work. The CAG's duties have
been specified by the Comptroller and Auditor General's Act 1971.

Non-statutory audit:
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 audit Internal audit, management audit, social audit, operational
audit
FROM THE POINT OF SCOPE OF AUDITING

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.

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. Thus audit is not convenient when the audit is
legally required.
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 prone entry and ends with 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 the end with the help of available evidence. This technique of examination is
also called audit-in-depth

FROM THE POINT OF TIME

Continuous/running Audit:

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 the
accounting year itself 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

Necessity of Continuous Audit:

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 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 intern dividend is to be declared

Advantages of Continuous Audit:

A. Quick Preparation of Final accounts: Since the routine audit is done continuously, the Pinal
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 auditor’s vid regularly throughout the year, it acts chick on
the employees to keep the accounts ready and up-to-date

E. Presents Errors and Frauds: Constant checking by the auditor’s helps to detect and even
prevent errors and frauds

F. Familiarity with Client's Business: Since the auditor spends more time client's place, he
becomes familiar with all the aspects of client's business.

G. Thorough Audit: The auditor has more time at his disposal to do a 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 work can be evenly
distributed to avoid overwork after year end.

Disadvantages of Continuous Audit:

1. Expensive: Since the auditor spends more tune on the audit work, the audit fo much me. Continuous
Audit is thus expensive However, only organization should opt for a Continuous Audit

2. Audit in Installments: Since the audit work is done at intervals and not at audit may be inefficient.
The queries during the last visit may remain unsolved t is difficult at each visit to take up the work
precisely at the stage of last visit 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 done up to end of
each visit, relevant voucher numbers, totals etc. should carefully note in the Audit Note Book

3. Dislocation of client's work: If a proper audit programme is not adopted continuous audit may
disrupt the routine accounting work of the client. Either the audit staff may have to sit idle or the
accounts staff of the client may waste time for want of books of accounts Employees have to attend the
auditor for explanation. They have to keep aside their usual work to attend the auditors for explanation

4. Errors and Frauds in Books Already Checked: If an employee changes some figures in the book
already checked by the auditor during his earlier visit, it would be difficult to detect such errors and
frauds subsequently

5 Monotonous-tiresome-tedious: Continuous visits to the client's place say m the work tedious and
the wait staff loses interest from work consequently. The quality of audit suffers.
6 Absence of link: In the absence of well-planed audit work, an auditor may the thread of audit work
further, some important queries may be overlooked if proper audit notes and queries are recorded by the
audit staff during the course of the audit

7. 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 relation between them and thereby the
quality of audit may suffer

8. 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

Final/Annual/Periodical Audit:

It is also known as periodical audit. It is generally start after the completion aspect more than the depth
aspect of audit.

Final Audits have the following advantages

1. Inexpensive / Economical: Since the audit spends normal time on the 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.

2. 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.

3. Less errors and Frauds: Since the books are checked at a stretch, no employee can change any
figures in the audited books.

4. 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 -

1) Delay in Accounts: Since the routine audit done after year end, the Final accounts may be
delayed and ready long after the year end
2) 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.

3) 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.

4) 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, eg. Teeming and lading.

5) No Familiarity with Client's Business: Since the audit spends little time at the client's place, he
cannot become familiar with all the aspects of client's business. They may affect the quality of audit

6) 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

7) Uneven Work-load for Audit Staff: Audit staff is overworked immediately after year end and
comparatively less busy at other times.

Difference between Continuous & Periodical Audit

Basis Continuous Audit Periodical Audit

Conduct A continuous audit is conducted throughout the A periodical audit is conducted at the
year. end of the year.

Checking It involves detailed checking of the books of Detailed checking of each and every
account. It allows for a more thorough & transaction is not possible. Hence,
extensive examination of accounting records there is a chance that some errors may
and related documentation because the auditor be left undetected.
has more time at his disposal.

Cost It is more expensive. It is less expensive.

Errors and A continuous audit helps in the early detection Under periodical audit, early detection
fraud of errors and fraud. of errors is not possible since books are
examined only after they are
completed.

Auditor’s visits In a continuous audit, the auditor makes In a periodical audit, the auditor visits
frequent as well as surprise visits to the client’s the client just once a year and takes up
workplace. This reduces the chances of errors the audit work when all accounts are
and fraud. balanced and completed.

Audit work The audit work is carried out as and when the The audit work is started after the
 accounts are being prepared. accounts are prepared.

Convenience It is most convenient for big enterprises. It is most convenient for small
businesses.

Time required Continuously done Smaller

Delay in With the books of account being audited The audited accounts may not be
dividend throughout the year, finalization of accounts can available immediately after the end of
declaration be made on time, i.e., just at the year-end. the fiscal year. It may result in a delay
in the declaration of dividends and the
conduct of AGM.

Performed by The firm’s internal audit team or with the aid of External auditors
technology

Dependence on All transactions and events can be examined in There is more dependence on the
Management detail without placing excessive reliance on cooperation of management.
information supplied by management.

Interim Audit:

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.

When Interim Audit is 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. 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.

Advantages of Interim Audit

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 already done, the Final Accounts can
be prepared immediately after the year end.

d) Up-to-date Accounts for Banks/Investors: The up-to-date interim accounts are useful to banks and
investors for taking decisions regarding loans and investment

e) Check on employees: Interim audit acts as check on the employees to keep the accounts ready and
up-to-date

f) Prevents errors and frauds: Checking by the auditors for the purpose of interim audit helps to detect
and even prevent errors and frauds

g) Thorough Final audit : The auditor has more time at his disposal at the time of final audit, which
reduces the risk of missing any material items

h) Utilization of Audit staff: audit staff can be utilized in a better manner. Interim audit is done when
the audit staff is relatively free

Disadvantages and Precautions:

A. Expensive: Since the auditor does two audits in one year, the audit fees are more to that extent,
Interim Audit is thus expensive.

B. Audit in Installments: since the audit work is done at two stages (interim and final) and not at one
go, audit may be inefficient. It is difficult at the time of final audit to take up the work precisely at the
stare where it was left at the time of 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 coordinated with the client to avoid disruption in routine accounts work.
The client should appoint an employee especially to co-ordinate with and attend to the auditors.

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
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 –

1) 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

2) The volume of transaction is so large that an in-depth checking is impossible. A detailed vouch-and-
post audit is not possible if the final accounts are to be ready in time

3) The concern has its own internal audit department. The statutory auditor, therefore, need no duplicate
this work

4) The accounts staff is highly qualified, the management is professional and accounts are computerized

From the Point of Object:

Cost Audit: It is a type of audit which involves verification of cost records maintained by the
organization.

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

Internal Audit: 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
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.

Other Types of audit:

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

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

Operational/Performance 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

1. To improve the profitability

2. To guide the management in achievement of organizational objectives.
3. To examine the efficiency of the management in conducting various operations
4. To evaluate the management policies and procedures
5. To advice the management on business operations

FACTORS TO BE CONSIDERED ON A NEW AUDIT:

The following are the important points to considered by the auditor before commencing a new audit

1) To know about the scope of duties: the auditor should get written and detailed instructions from
the client regarding the scope of work as in the case of sole proprietorship firms.
2) Nature of the business:- the auditor should make himself fully familiar with the basic nature of the
business. In case, if the business is of technical nature, the auditor should be clear with the technical
nature of the transactions. This knowledge will help the auditor to do the work efficiently.

3) Knowledge about the accounting system: - knowledge about the accounting system is very
important for the smooth conduct of the audit. If it is repeat audit, the auditor should obtain the
previous year's audited annual accounts, a complete list of all the books of accounts in use and
auditor's report if any

4) Knowledge about the internal control and internal audit: the auditor should examine in detail, the
system of internal check and internal audit if any, because only on the basis of the reliability and
efficiency of these control measures the auditor can decide about the sample verification or detailed
checking

5) Study of the important documents: the auditor should study the memorandum of association,
articles of association, reports of directors and shareholder’s meetings, prospectus, the underwriting
agreement etc., in case of a joint stock company. Similarly partnership deed and the trust deed will
give the important information about the partnership firms and trusts.

6) Organizational structure: The organizational structure of the business unit is to be studied in

detail. The organizational chart is helpful to know about the authority and responsibility of deferent
individuals

7) Information about the principal officials: the auditor should obtain the names and designations of
the principal officers of the firm and if possible should meet them in person

8) Change of auditors: where an auditor so appointed in the place of another auditor the new auditor
so appointed has to about the reasons as to the change of auditor.

9) Previous year's audited balance sheet: the auditor should obtain the previous year's audited
balance sheet if any and should see that the accounts during the current year have been opened
with those balances that appeared in the previous balance sheet.

10.To know about the policy of the board of directors: - the auditor should try to be familiar with the
policy of the board of directors in delegating the authority to the management and study the
efficiency of the management in controlling the staff
PREPARATION BY THE AUDITOR BEFORE BEGINNING THE AUDIT WORK:

Division of work
Audit programme
Audit files
Audit note book Audit working papers

DIVISION OF WORK:
The auditor cannot handle the entire work by himself, so the work is divided among his staff
considering of senior and junior audit clerks.
AUDIT PROGRAMME:
An audit programme is defined as "a detailed plan of the auditing work to be performed, specifying
the procedure to be followed in verification of each item in the financial statements, and giving the
estimated time required". Hence an audit programme is a statement giving instructions and guidance
to the audit staff as to the audit procedure. It arranges and distributes the work among the audit staff
Features of audit programme:
1. It is always in writing and drawn by the auditor.
2. It contains full details and procedures of the work to be conducted during audit
3. It contains the distribution of work of the audit staff
4. It states the responsibilities of the client's staff
5. It must be flexible
Types or methods of audit programme;
1. Complete Programme: - Complete programme is on the file Completed items are ticked off by the
particular assistant. Assistant knows what he has to do He also knows that by which date each item
is to be completed.
2. Individual Programme:-According to the nature of the business auditor prepares the programme
for each assistant in such cases
3 No Any Advance Programme: In this case auditor never prepares the program in advance but
according the progress of the work he allows to go.
Advantages of audit programme
1. Supervision of Work: The auditor can judge the efficiency of his audit team by holding of an audit
programme. He is in a position to know the progress of the work He can see at any time that what
part of the work has been completed and what remains to be done.
2. Distribution of Work: Audit programme is very useful in distributing the audit work properly
among the members f the audit team according to their talent
3. Uniformity of Work: - Audit programme helps in settling all the things in advance, so the
uniformity of work can be achieved
4. Basic Instrument for Training:- Audit programme is very useful for the new auditor. It provides
training and guidance to him. So it is rightly called the basic instrument for training
5. Legal Evidence: - Audit programme is a legal evidence of work done by every assistant of the
audit team. It can be presented in the court of law if any client is taken against the auditor for
negligence.
6. Fixation of Responsibility: If any error or fraud remains undetected the responsibility of
negligence will fall on the particular assistant who has performed that job.
7. Several Audits may be controlled: The auditor controls the audit of various companies at the
same time In the absence of audit programme he cannot supervise them effectively
8. Easy Transfer:- If one assistant is unable to continue the work given to him, it can be given to
another person. Audit programme guides him that what is done and what is remaining
9. Final Review: Before signing the report, final review is made and for this purpose also auditing
programme is very useful
10. Useful for Future as a reference: On completion of an audit, it serves the purpose of audit
record which may be useful for future reference
Disadvantages of audit programme
1) Not Comprehensive:- Auditors may have covered the whole field but it cannot be said with
certainty that all the necessary work have been done
2) Rigidness: Audit programme looses its flexibility. While each business has separate problems.
So audit programane cannot be laid down for each type of business
3) No Initiative: It kills the initiative of capable persons assistant cannot suggest any improvement in
the plan.
4) Too Mechanical:- Such audit programme is mechanical that ignores many other aspects like
internal control.
5) Not Suitable for Small Audit: It has been proved that audit programme is not suitable for sail
audits

AUDIT NOTE BOOK:

An audit note book is one of the most important documents maintained by the auditor. It is defined
as a record used mainly in recording audit, containing data on work done and comments made.
Audit Note book contains information regarding the day to day work performed by the audit staff,
notes about errors, explanations required etc. the auditor can use it as an authentic evidence in the
court if there is any case against him.
Contents of Audit Note Book;
1. Nature of business and important documents such as MOA, AOA, Partnership deed
2. List of books of accounts.
3. List of officials, their duties and responsibilities.
 4. Copy of the audit programme
5. Information on missing receipts, vouchers etc.
6. Details of errors discovered
7. Explanations sought from the officials.
8. Points to be included in the audit report
An audit note book should be preserved by the auditor as it contains valuable information in
respect of the work done by its staff Special matters to be recorded in the audit note book
1. Queries not cleared, ie missing receipts and vouchers etc.
2. Details of mistakes and errors discovered
3. The points raised during the course of audit, to which the attention of the auditor must be drawn,
ie, failure of the company to comply with the provisions of the Companies Act or of the Memorandum
of Association and other legal requirements
4. Extracts from minutes books and contracts and other correspondence with various government
agencies, financial institutions, debtors, creditors etc.
5. The points to be incorporate in the audit report
6. The points which needs further explanation and clarification e.g. a change in the basis of valuation
of finished stocks or in the computation of depreciation, etc.
7. Date of commencement and completion of the audit.

Objectives of audit note book

1. To know about the nature of business
2. Detection and prevention of frauds and errors effectively.
3. To make the future audit work easier.
4. To know the facts where clarification and explanation are essential.
5. To check the list of debtors and creditors.
6. To prevent as a proof by the auditor to clearance over the cases.

Advantage of audit note book:

1. Audit Report:-The audit notebook is helpful to prepare audit report. The auditor can record the
weakness of accounting records. The queries not properly answered are started in the audit report
when the auditor is satisfied he can submit a clear report.
2. Staff Honesty: The audit notebook is used to determine the integrity and honesty of audit clerks.
The moral and ethical value can be examined through audit work. When a person completes his
work in time. Time period auditor can appreciate him. If there is pending work after the expiry of time
period, he can be held responsible for it. The audit staff be m has work
3. Helpful for Memory: - The audit notebook is help to keep things fresh in memory The auditor can
read the book on daily basis He can note the weakness on fingertips. The auditor can retain the data
in his memory for a longer period of time He can ask the management to clear the doubtful points
before preparing audit report
4. Reference: The audit notebook is useful for reference. In future it can provide information to the
audit stall. The past data gives an insight into business matters. The auditor can note the changes
he can form an opinion about the changes in the nature and are of the business.
5. New Auditor: The audit notebook is used by new auditor. They can see the weakness of previous
years. The old weak points may not be repeated this year.
6. Court Cases: The audit notebook helpful to defend an auditor in court cases. The people can go
to cost of law in order to fix liability for negligence of duty. The audit notebook is a written proof of
work performed to an auditor
Disadvantage of audit note book
1. It develops a fault finding attitude in the minds of audit staff
2. It places too much reliance on the staff of the client for its preparation
3. Very often, audit note book creates misunderstanding between the clients start and the audit staff.
4. If prepared negligently by the auditors as an evidence in the court of law

AUDIT WORKING PAPERS:

Audit working papers are those papers which contain essential facts about accounts, which are
being audited. It's defined as the file of analysis, summaries, comments and correspondence build
up by the auditor during the course of audit. The institute of chartered accountants of India states
that "an auditor is expected to maintain evidence of work done by him and his staff. The auditor
maintains papers as supporting evidence to the audit work.
Amold W. Johnson defines audit working papers as "audit working papers are the written private
materials which an auditor prepares for each audit. They describe the accounting information, which
he has received from his client, the methods of examination used, his conclusions and financial
statement"
Contents of audit working papers:
1. The schedule of debtors, creditors, fixed assets, investments and liabilities
2. Certificates regarding quality of stock in trade and its valuation.
3. Important extracts from the minute book
4. Rough trial balance, trading and profit and loss account and balance sheet of concern.
5. Duly completed audit work programme with initials of the audit staff who have done that work.
6. Complete details of the quires and explanations obtained from the client's staff
Essentials or Advantages of good working papers
1) Elements of completeness: working paper should be complete, consistent and accurate,
covering all the significant and relevant data Moreover it should be properly organized and accurate
in its presentation
2) Element of clarity:- the working papers should clearly specify the type of verification and
investigation procedures used to collect the information, so that even a person not familiar with the
work may understand the same
3) Standardized form and good quality papers: the working paper should be Standardized form
and good quality papers because it is subject to frequent handling
4) Space for remarks:- there should be enough space in the working papers to write the or initials of
the person who have reviewed or cross checked the work and also to write the source from which
the data is obtained
5) Proper filling:- the working papers should be arranged according to various headings and sub-
headings indicating the name of the department to which the data belong, and the data on which
audit examination was carried out.
Ownership of working papers:
The auditor who collects information through working papers for his audit work. Usually claims that
he is the owner of the working papers. On the other hand the company claims that the auditor was
appointed by and he only acts as its agent. Hence, all the documents that the auditor had collected
should belong to the company several cases have been referred to the courts regarding the
ownership in one of the cases it was decided that the working papers belong to the auditor because
he was an independent professional and not an agent of the client. In another case also, it was held
that the working papers belong to the auditor

AUDIT FILES:
An audit files is often engaged in a number of audits simultaneously, he usually keeps the record of
each audit in a separate file for ready reference. Such a file is called audit file
Types of Audit Files:
1. Permanent file: - it contains those working papa, which are useful for conducting the examination
year after year. It contains information about client, which will not change from year to year
It contains the following documents
a) Client's name, address, telephone number etc.
b) History and the nature of the client's business place of business and its products.
c) Constitution of the client's business,
d) A list of important books and documents maintained by the business
e) A complete list of organization chart, work flowchart and the list of senior officials with their
specimen signature
f) A copy of previous years audited final accounts along with the audit notes and auditors reports.
g) Records of all documents or information
h) Special financial arrangements and other significant contracts

2. Current files:
It contains only those details, which have a bearing on the current audit

a) A copy of the audit programme and audit tests performed

b) Queries caused during the audit and the relevant comments obtained
c) A copy of mail balance
d) A copy of final accounts under review
e) Bank reconciliation statements
f) Certificate from client confirming
g) Tax, gratuity and bonus computation sheets.
h) A complete list of missing vouchers.

Advantages of audit files:

1) It helpful in the preparation of audit plan that is helpful for the subsequent audit engagements.
2) The auditor uses this file for forming an opinion about the matters to be included in the audit
report.
3) It acts as a ready reference for the auditor and it supplies all the relevant information about the
audit
4) Audit file helps the auditor to give necessary information to the management.
5) It maximises efficiency in auditing procedures.

TEST CHECKING OR SELECTIVE VERIFICATION

Test checking is sample checking. The whole data must not be examined. The audit staffs can
statistical technique to check the facts and figures. A certain percentage of transaction can be
selected for through examination. The remaining transactions are supposed as checked.

Definition

According to Professor Meigs, "Test Checking means to select or examine a representative

sample from a large number of similar items
 Essentials of Test Checking

1) Sample: The sample items selected from whole data must be representative. The selection
can be made by any method. The entire data must be presented in the form of sample

2) Last Month: The last month of the accounting year is most important. The items appearing in
the last month must be given maximum importance at the time of selecting the sample.

3) First Month: - The first month of accounting year provides essentials information. The
transactions recorded in the first month must be assigned high weight age in order to select the
sample

4) Surprise Testing: - The auditors include the element of surprise in selection of test. The
accounting staff must be unaware of test checking so that he should not make arrangement for
test checking

5) Checking Method: The auditor can change his method of selecting the sample. At one time he
can one use alternate method. The selection method must be charged in time to time.

6) Every Type of Transaction: - The auditor must select every type of transaction in test
checking. There is a need to include each type of dealing in the sample.

7) Every Employee: The auditor can select the work of every employee. The test checking can
be used to examine the work of all employees in the organization.

8) Throughout the Year: -The test checking can be applied to all items appearing in the books
throughout the year. The recurring items are most suitable for test checking

9) Cash Book: The cash book entries must not be used for test checking. There is a need of
cent percent checking of all cash items appearing in cashbook. The control over cash is essential
for efficient business working.

Advantages of Test Checking

1) Time saving: -The benefit of test checking is available in the shape of time saving. A simple
of items is checked and remaining items are treated as checked. In this way there is saving in
time.

2) Less Labour: - The test checking is useful for saving in labour. A lot of work requires many
clerks for completing the audit. But to checking is used to test few items so there is less labour
work

3) Accurate Books: The test checking is useful to note the accuracy of accounting books and
other record. There is a demand of error free books. The test checking is a step in the right
direction to prove accuracy

4) Staff Efficiency: The efficiency of accounting staff improves due to test checking The
weakness of employee is reported to management. The employees try to improve their work by
overcoming their deficiencies
 5) Timely Report: - The benefit of test checking is that timely report can be submitted to the
management. The large number of figures can be checked in short period of time so there is no
delay

6) Many Audits:- Test Checking is useful to complete many audits in one year. It saves sufficient
time, which can be used to check the books of new clients. The auditor is able to raise more
income

7) Special Attention: The auditor can pay special attention to important matters. Test Checking
reduces the labour work on the part of audit staff. There is sufficient time period to settle the
important matters

Disadvantages of Test Checking

1) Errors: The element of test checking is that errors are not disclosed by it. In the presence of
error true and fair view is not possible No doubt the location of errors is the duty of
management but it effects the audit work.
2) Frauds: The demerit of test checking is that planned frauds may not be disclosed. The fraud
discovers is the responsibility of management. The audited accounts cannot show true and fair
view when fraud exists in books.
3) Responsibility: The element of test checking is that auditor cannot shift his. Responsibility of
management. The errors of fraud can be discovered through cent percent checking. So auditor is
responsible for test checking
4) Report: The auditor report may fail to disclose true and fair view of business matters. After
test the auditor signs checking the auditor report. The auditor is responsible for audit report
based on test checking

ROUTINE CHECKING:
Routine checking is the regular monitoring of business accounts, books and ledgers to determine how
the business is functioning and to detect any errors that may have occurred, either accidentally or
fraudulently.
Essentials of Routine Checking
1. Sub-Cast:- Sub-Cast is a part of routine checking. Sub-total is possible in accounts matters. The sub-
cast must be correct.
2. Casts: - Cast is part of routing checking. Total in journal and ledger accounts should be examined for
accurate results.
3.Carry Forward: -Carry forward is a part of routing checking. The balance of one page can be
transferred to the next page.
4. Posting: -Posting is a part of routing checking. The entries are posted in to the ledger accounts
Posting must be property examined.
5. Balancing: - Balancing is a part of routing checking. Taking the difference of debit and credit in the
accounts is called balancing.
6. Carry Down:- The amounts in an account can be transferred to next page. The carry down is a part
of routing checking
7. Transfer: Transfer is part of routing checking. The amount is one accounts can be transferred to
another account
Advantages of Routine Checking
1. Accuracy: The benefit of routine checking is that there is accuracy of accounting books and records.
The sub-total, casts and carry forward posting, balancing and transfer are stated as correct.
2. Frauds: Routine checking is useful to checking fraud in the books of accounts. The responsibility lies
on the head of management for location of fraud. The management can use this tool to meet its duty.
3. Positive Verification: - Routine checking helps to verify positive made in the ledger. The correct
posting can provide true and fair view of financial statements. The management can verify posting
through it.
4. No Change in Figures: - Routine checking is useful to eliminate the alteration of figures. The
management can meet its obligation with the help of routine checking. The employees cannot alter
figures.
5 Final Checking: The benefit of routine checking is that final checking work is reduced. The final
checking become early as major work has already been completed through routine checking
Disadvantages of Routine Checking
1. No Care:- The work of routine checking is given to junior employee. They do not consider it as
important matter. Therefore the expected result cannot be produced for audit purpose.
2. Fraud: -The element of routine checking is that planned frauds are not disclosed. The responsibility of
fraud lies on head of management. The audited accounts may fail to provide true and fair view
3. Error: The demerit of routine checking is that errors of principle are not disclosed The responsibility or
error can be placed on the bead of management. The audited accounts may fail to provide true and fair
view.
4. Monotony: The work is routine checking is boring and time consuming. The clerks go on checking
the totals, and sub-totals and balances It does not improve the performance of employee rather it brings
monetary
AUDIT IN DEPTH
Audit in depth means the examination of the selected items in depth or in detail from the origin of the
transactions to their conclusion
Advantages of audit in depth
1) I gives auditor an overall picture of the procedures that are being followed in the business
2) It contributes to the success of test checking
3) It exercises a moral check or pressure on the staff of the client
4) It helps in detecting the well-designed frauds
5) It saves the time and energy of the auditor and enables him to devote more time and energy to more
important matters
 AUDIT ENGAGEMENT

An audit engagement is an independent and systematic examination of a company’s financial

records, systems, and controls by a qualified professional known as an auditor. The purpose of it
is to provide an independent assessment of the financial position and performance of the
organization being audited.

Procedures

The procedure of an audit engagement generally involves the following steps:

1. Planning: The auditor will first understand the company’s business, risks, and objectives under
audit engagement planning. They will also assess the materiality of the financial statements and
identify areas that require special attention during the audit.
2. Risk Assessment: The auditor will assess the risks associated with the company’s financial
statements, including fraud risks and other potential misstatements.
3. Testing: The auditor will conduct testing of the company’s financial records, transactions, and
systems to ensure that they are accurate, complete, and in compliance with relevant accounting
standards and regulations. This may involve gathering evidence through various methods, such
as sampling and analytical procedures.
4. Evaluation of Internal Controls: The auditor will evaluate the company’s internal controls and
risk management processes to ensure they effectively prevent financial misstatements or losses.
5. Communication: Throughout the process, the auditor will communicate with the company’s
management and other stakeholders to provide updates and discuss any findings or concerns.
6. Reporting: At the end of it, the auditor will prepare a written report that includes their opinion
on the accuracy and completeness of the company’s financial statements and any significant
findings or recommendations for improvement. The information will be distributed to the
company’s management and stakeholders, including shareholders and regulatory bodies.

Types

There are several types of audit engagements, each with its specific objective and scope.

1. Financial Statement Audit: It focuses on the company’s financial statements. The auditor will
examine the accuracy and completeness of the financial statements and ensure that they are
prepared in compliance with applicable accounting standards and regulations.
2. Compliance Audit: A compliance audit verifies whether the company follows specific laws,
regulations, or contractual obligations. It ensures that the company complies with legal and
regulatory requirements and can include areas such as tax compliance, environmental
compliance, or data privacy compliance.
3. Operational Audit: An operational audit is focused on reviewing the efficiency and
effectiveness of the company’s operations, processes, and procedures. It may include inventory
management, procurement processes, and employee productivity.
4. Information Systems Audit: It examines the company’s information systems to ensure they are
secure, reliable, and compliant with relevant regulations. The auditor will assess the integrity of
the company’s data.
5. Internal Audit: An internal audit is conducted by a company’s internal audit department or by
an external auditor on behalf of the company. An internal audit aims to assess the effectiveness
of the company’s internal controls and risk management processes and provide
recommendations for improvement.