CLASSIFICATION OF AUDIT
Audit may be classified and kept into two categories, mainly:
- According to organizational structure of a business; and
- From practical point of view.
According to Organizational Structure of a Business
It is rightly said that the method of maintaining accounts and their audit will largely dependent upon the organizational patterns of a business-house.
1. Statutory Audit
In case of many undertakings, audit is made compulsory under statute. It is so because these undertakings are established by statute. The audit of their accounts is termed as statutory audit. The following are the examples of such an audit:
(i) Company Audit. The audit of the accounts of joint-stock companies in India is compulsory under the Companies Act. For the first time, the Indian Companies Act, 1913 made it legally compulsory for joint-stock companies in India to get their accounts audited by an independent professional accountant, but now, the Companies Act, 2013 have made tremendous changes in the rights, duties, powers, etc., of an auditor. He should be a qualified auditor as laid down under section 141 of the said Act.
(ii) Audit of Trusts. Trusts are usually created for the benefit of the weak and helpless persons like widows. minors, etc., who are not in a position to have access to and understand the accounts of such trusts. The trustees are made responsible to look after the property and to maintain accounts. They work according to the terms and conditions of the Trust Deed, collect the income from such property and distribute it among the beneficiaries. Examples of large sums of money having been misappropriated by the trustees are not lacking in the country.
In a large number of cases, the trustees either do not maintain accounts at all or if they are forced to do so, such accounts are very often misleading.
To avoid such a situation, specific provisions are sometimes made in the Trust Deed for the appointment of auditors to check the accounts of trusts. In some of the states in India Public Trust Acts (e.g., the Bombay Public Trust Act, 1950, etc.) have been enacted which provide for compulsory audit of the accounts of trusts by qualified auditors. Audit in these cases has now assured the beneficiaries that they will no more be defrauded. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(iii) Audit of other Institutions. Then, besides joint-stock companies and trusts, there are other corporate bodies, such as electricity and gas companies, banks and insurance companies, and other corporate public bodies which have been formed under their respective statutes. They have taken powers from the relevant Acts to appoint auditors and have recognized the advantage of professional audit.
There is another set of public bodies in the name of public corporations, e.g., Reserve Bank of India, Industrial Finance Corporation, etc., which work according to the various Acts passed for the purpose. The institutions of this group also fully recognize the significance of a professional audit which is compulsory in their case too. The powers, duties and liabilities of auditors are also well-defined and fixed by the relevant statues. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Similarly, the audit of co-operative societies is conducted by the Co-operative Department of the State Government or by Registrar of Co-operative Societies as the case may be. Under section 17 of the Co-operative Societies Act, 1912, the responsibility of the State Governments regarding the audit procedure of Co-operative Institutions have been defined. The scope and nature of co-operative audit come under the purview of Statutory Audit.
2. Private Audit
The institutions which are private in character also get their accounts audited by some qualified auditors. Such an audit is not required by statute. Hence, it is known as private audit. These bodies have their own arrangements for audit and run for their own interest so that their accounts may be subject to a close scrutiny to be made by a professional accountant. There may be three types of such institutions:
(i) Audit of the Accounts of Sole Trader. The appointment of an auditor in the case of a proprietary concern rests absolutely on the proprietor. He is appointed under an agreement and hence, his duties, rights and the nature of work will depend upon the terms given in agreement. Such an auditor must get clear and unambiguous instructions in writing by his client as to what he has to do and how he has to proceed. This is necessary because auditor can be held responsible for any charge of negligence and by producing the agreement, he can protect himself against such a charge. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(ii) Audit of the Accounts of Partnership Firms. A firm is a partnership run by several partners. An audit of the accounts of such a firm is always in the interests of the partners, although it is done by the auditor appointed by the partners under mutual agreement. As such, in the case of a partnership firm, the auditor is not appointed under statute, but by agreement between the partners.
His rights, duties and liabilities are also defined by mutual agreement and can be subjected to modification. On the contrary, the audit of joint-stock companies is legally compulsory and the rights, duties, powers, etc., are also defined by statute and in their case, the auditor should also possess the qualifications as laid down by the Companies Act. These are the distinctions between the audit of a company and the audit of a partnership firm. The partners of a firm recognise the advantages of a scientific audit which is of much help in solving their mutual differences. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(iii) Audit of the Accounts of other Individuals and Institutions. Then, there are other individuals, e.g., rent collectors, estate managers, etc., who have large income and huge expenditure. They appoint accountants to prepare and maintain accounts. The audit of their accounts can help these individuals to rely or otherwise on their clerks. Moreover, if their accounts are properly audited by a qualified auditor, they are not liable to be harassed by the taxation authorities.
Besides these individuals, there are institutions other than a company, a firm or sole proprietorship, which are not meant for earning profits, e.g., clubs, hospitals, libraries, colleges, schools, etc. Such institutions also require the services of an auditor whose scope of work is defined by the appointment letter. They are increasingly realizing the significance of a scientific audit and hence, auditors are regularly being appointed especially in big institutions. (BCom 3rd Year Introduction to Auditing Notes Study Material)
3. Government Audit
The Government maintains a separate department in the name of Accounts and Audit Department which performs the audit of its different departments and offices. This department is headed by the Comptroller and Auditor-General of India who is assisted by different officials at various levels. (BCom 3rd Year Introduction to Auditing Notes Study Material)
The duties and liabilities of such auditors are not defined by statute. They are not public auditors and hence, cannot be appointed auditors for public concerns. They are meant for Government departments and as such, they work according to the departmental rules and instructions. (BCom 3rd Year Introduction to Auditing Notes Study Material)
The following are the objectives of the Government Audit:
- To ensure that the expenditure is incurred out of the fund which has been sanctioned by the competent authority.
- To verify that the expenditure of the Government department is sanctioned in accordance with the rules and regulations of the department concerned. (BCom 3rd Year Introduction to Auditing Notes Study Material)
- To see that the expenditure already sanctioned has been incurred by an officer or officers who are authorized to do so.
- To ensure that the payments have been made to the right persons and they are duly entered in the books on the basis of receipts received from them. (BCom 3rd Year Introduction to Auditing Notes Study Material)
- To see that the payments have been properly classified as capital and revenue.
- To see that if the payment has been made to an individual against some account under the rules and it is to be recoverable, it has been recorded in the account prescribed. (BCom 3rd Year Introduction to Auditing Notes Study Material)
- While vouching receipts, it is to be ensured that such receipts are against payments which have already been made and are recoverable as such. They are also recorded in the prescribed accounts.
- To verify the existence and valuation of stores and the stock.
- To ensure that a proper system of stock-taking has been adopted.
- To check the system of granting allowances such as travelling allowance (T.A.), daily allowance (D.A.), etc., and to ensure that they have been granted under for the purpose. (BCom 3rd Year Introduction to Auditing Notes Study Material)
- To ensure that the entire expenditure has been incurred in accordance with the general principles such as: (i) to exercise proper care to incur only so much as is necessary: (ii) to sanction the expenditure without any personal gain or motive on the part of the sanctioning authority: (iii) to utilize the public money in the public interest and not for the benefit of a person or community.
INTERNAL AUDIT
The Institute of Internal Auditors has defined internal audit as given below:
“Internal Auditing is the independent appraisal activity within an organisation for the review of the accounting, financial and other operations as a basis for protective and constructive service to the management. It is a type of control which functions by measuring and evaluating the effectiveness of other types of control. It deals primarily with accounting and financial matters but it may also properly deal with matters of an operating nature.”
By virtue of the organizational pattern, some business institutions appoint auditors who are made responsible to have a constant and regular review of their accounts. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Such a cadre of auditors is of a permanent nature and helps a lot in the detection and prevention of errors and fraud. It is true that the scope and objective of internal audit are likely to vary from business to business depending upon the different nature of the organization. Thus, internal audit is an integral part of internal control. (BCom Introduction to Auditing Notes Study Material)
It is now mandatory for all listed companies and some class of unlisted and private companies to appoint internal auditors. (Section 138 and rules made under it of Companies Act, 2013.) (BCom 3rd Year Introduction to Auditing Notes Study Material)
Such auditors are known as internal auditors who, besides checking the accounts, are required to report also as to how the system of accounting can be improved and the system of the internal check be made economical and efficient. Such auditors cannot be appointed as public auditors or external auditors and hence, are expected to know the minor details of accounting pattern adopted in the business. They are not required to submit their reports in the manner in which external auditors do.
In short, internal audit is the examination of books of accounts which is conducted by the salaried officials of a business known as internal auditors throughout the year. The scope of internal audit is a bit different.
It is more closely related to managerial functions than to accounting duties. When an outside auditor would ensure after scrutiny of accounts that such records are correct and are being maintained in conformity with the relevant law, an internal auditor, besides doing so, would see that the work of the business is going on smoothly, efficiently and economically. Internal audit is, thus, an independent appraisal of activity within an organization for reviewing the accounting, financial and other operations. It renders a productive and constructive service to management. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Characteristics of Internal Audit
- The system of internal audit has got an independent status in the organization. The system, therefore, maintains its independent position.
- Internal audit is totally free from the managerial or executive functions. However, it may help in formulating executive decisions without actually taking part in such decisions. (BCom 3rd Year Introduction to Auditing Notes Study Material)
- It maintains its regular watch and constant review over the accounting and financial matters. Thus, it can make investigations into any phase of activities of the organization. (BCom 3rd Year Introduction to Auditing Notes Study Material)
- Internal audit is a system of audit by the internal auditor who is an employee of the organization. But he does not work under any sort of managerial pressure. However, he must have a clear understanding of the duties assigned to him.
Different kinds of Audit from Practical Point of View
Under this head, we can keep all those forms in which audit is often conducted practically by the business houses.
1. Continuous Audit
“A continuous audit is one where the auditor’s staff is occupied continuously on the accounts the whole year round, or where the auditor attends at intervals, fixed or otherwise, during the currency of the financial year, and performs an interim audit; such audits are adopted where the work involved is considerable, and have many points in favour, although they are subject to certain disadvantages.” –Spicer and Pegler
Thus, a continuous audit is an audit which involves the conducting of audit of accounts throughout the year at regular intervals, fixed or otherwise, say, one month or more months. The accounts in such a case are subjected to audit as and when they are prepared.
An auditor in continuous audit pays visits at regular or irregular intervals all the year round and examines the accounts. Such an audit is necessary only for big business houses and not for small ones where accounts can be audited at the close of the financial year when they are ready. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Continuous audit is applicable in case of the following business-houses:
(i) Where final accounts are prepared just after the close of the financial year, as in the case of a bank.
(ii) Where the transactions are many in number and it is thought necessary to get them audited at regular intervals.
(iii) Where the system of internal check in operation is not satisfactory.
(iv) Where the statements of accounts are prepared after every month or quarter to be presented to the management.
(v) Where sales affected are very large.
Advantages
(1) As the auditor visits his clients after a month or so but at regular intervals, a detailed, close and exhaustive checking can be possible.
(2) The detailed checking involved in continuous audit can discover errors and fraud easily and quickly. If the accounts were checked after the year by the auditor, it was easy to locate an error and more so, the clerks could get more opportunities to defraud account in that case.
(3) Since the accounts are checked throughout the year, it becomes easily possible to present the final audited accounts to the shareholders soon after the close of the financial year. Thus, the work of the auditor becomes more efficient.
(4) The regular visits performed by the auditor make the clerks alert to maintain the accounts up-to-date. The accounts thus maintained are also accurately prepared by them. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(5) As the auditor pays surprise visits to the business in continuous audit, it has a considerable moral check on them as these clerks are not aware when the auditor will come. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(6) The auditor comes more and more in touch with the business affair’s technical details. Hence, he can advance valuable suggestions to his clients for me the working of the business and the system of maintaining accounts.
(7) In big business-houses where monthly statements are prepared a management is not smooth, continuous audit has proved to be very useful.
(8) In continuous audit, an auditor can perform his duties with ease. He can plan his work well and proceed with confidence. Thus, he can be in a position to relieve himself of a great undue burden which would otherwise have fallen upon him at the close of the financial year.
Disadvantages
(1) Records and figures in the books of account which have already been checked by the auditor may be altered after the audit is over. This is often done by a dishonest clerk to defraud the accounts. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(2) The frequent visits made by the auditor may dislocate the work of his client and cause inconvenience to him.
(3) For continuous audit, the auditor has to come at regular intervals to check the accounts, and hence, the link between the past and present work cannot be maintained. Consequently, the thread of work is very likely to be lost.
(4) The frequent visits of the auditor may establish some unhealthy relationship between him and the clerks and there are chances of mitigating moral check upon them. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(5) It is a very expensive form of audit.
(6) Under it, the work of the auditor becomes mechanical and his frequent visits may also cause boredom to him.
Precautions to Guard Against its Disadvantages
(1) The auditor should also issue clear instructions to the effect that the audited figures should not be changed without bringing it to his notice. If some alteration is necessary, it should be done by passing rectification entries in the journal.
(2) The auditor should try to check the accounts of similar nature in one and continuous sitting as far as possible and note important totals and balances in his diary. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(3) The auditor should prepare an exhaustive programme to prevent any loopholes.
(4) The explanations of important questions which he finds unsatisfactory should be noted in his note book.
(5) He should have a glance over the past work and alterations, if any, before he begins his work.
(6) The fraud in personal accounts can easily be made by passing false or fictitious entries in the impersonal accounts. Hence, the checking of impersonal accounts may be postponed till the time of final audit. The auditor may confine his work for the present to the vouching of cash transactions, subsidiary books, etc. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(7) The auditor should not try to make changes in the duties of his assistants as far as possible. This reduces the chances of inconvenience and disturbance in the work. (BCom 3rd Year Introduction to Auditing Notes Study Material)
2. Annual or Periodical or Final or Completed Audit
Annual or periodical audit is done at the close of the financial or trading period when final accounts are prepared. In such a case, the auditor visits his client only once a year and checks the accounts in one visit till he is not in a position to c pertaining to the whole of the period.
Such a form of audit is very much convenient and useful for business-houses are small. For big ones, continuous audit is more useful because the work in them is voluminous and hence final accounts cannot be prepared at the financial year.
Besides, there is a lot of difference between the two. The main distinction between continuous audit and final audit is that the work under audit in the former case does not cover the full verification of assets and liabilities. This work is done only at the end of the year when the Balance Sheet is prepared and the continuous audit is merged into the final audit. Other items may, however, be verified from time to time during course of the year. (BCom 3rd Year Introduction to Auditing Notes Study Material)
This type of audit is free from the defects of continuous audit and carries other advantages with it, though, of course, detailed checking is not possible in it. Hence, errors and fraud cannot be detected easily, quickly and completely.
Briefly, the following are the advantages and disadvantages of this type of audit:
Advantages- (1) The work of audit does not present any inconvenience and dislocation in the work of the concern as the auditor comes only once a year.
(2) Periodical audit is less expensive and more useful for a small business concern than continuous audit.
(3) In periodical audit, the work of the auditor can be finished quickly and within reasonable time.
(4) The work does not become mechanical and the link in work can properly be maintained.
(5) In periodical audit, undue collusion cannot be established between the auditor and the clerks.
(6) Lastly, such an audit can easily be carried out with a simplified time-table for all the staff.
Disadvantages-(1) In periodical audit, detailed checking of accounts is not possible.
(2) The chances of errors and fraud in accounts do exist.
(3) In periodical audit, there is usually delay in getting the auditor’s report and, hence, it brings some disturbance in the management of a concern as the Shareholders’ Meeting may be delayed. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(4) For big concerns, periodical audit is rarely practicable and it is not much popular for them.
(5) Under this audit, the auditor has to rely on the management in most of the cases and as such, there are chances of being misrepresented by the management. The auditor cannot avoid the management totally.
3. Balance Sheet Audit
As is apparent from the name itself, in Balance Sheet audit, the auditor checks capital, reserves, assets, liabilities, etc., given in the Balance Sheet. He checks only those documents which are related to the items given in the Balance Sheet. Such an audit 15 not conducted to check Profit & Loss Account and similar other transactions. The work of the auditor is confined to the Balance Sheet alone. In India, no distinction is made between annual audit and Balance Sheet audit. (BCom 3rd Year Introduction to Auditing Notes Study Material)
The Balance Sheet audit is quite satisfactory for small or medium-sized business. But for big concerns having mechanized book-keeping records, such an audit would be not only unsatisfactory but in many cases totally impracticable. There would have b a large volume of transactions involving exhaustive summaries made before the to eventually reaches the final account.
It is to be noted that every transaction has an effect on the Balance Sheet and so of them affect both the Profit & Loss Account and the Balance Sheet. For example, purchase of goods on credit will increase the liability to creditors, increase the stock will be shown in the Trading Account as an increase in purchases and closing so Similarly, purchase of plant will increase Plant and Machinery and reduce cash at thus affecting only the Balance Sheet. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Hence, an auditor by comparing the items Balance Sheet with those shown in the previous year can prove the accuracy of the Profit & Loss Account. (BCom 3rd Year Introduction to Auditing Notes Study Material)
4. Cash Audit
In cash audit, the auditor is concerned with the checking of cash transactions. He has to audit entries pertaining to cash receipts and payments with the help of relevant vouchers. Since his work is done under such restrictions and limitations, he submits his report accordingly. He can mention the fact in his report. (BCom 3rd Year Introduction to Auditing Notes Study Material)
5. Cost Audit
“By the term ‘Cost Audit’ is meant the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.” -Smith and Day
“Cost Audit is the verification of the correctness of the cost accounts and of the adherence to the cost accounting plan.” -R.W. Dobson
From these definitions, it would be seen that cost audit is performed in some special circumstances but the purpose behind such an audit is to verify the cost accounts so as to ensure how far cost accounting plans have been adhered to. The Companies Act, 2013 has made provisions to perform cost audit of certain categories of companies under section 148. A detailed description of cost audit has been made in a separate chapter of this book. (BCom 3rd Year Introduction to Auditing Notes Study Material)
6. Complete Audit
When an auditor is appointed to check each and every transaction, total, balance, book of accounts with the help of the relevant vouchers, documents, correspondence, etc., it is said to be complete audit. Under complete audit, nothing is to be left from checking by an auditor. But complete audit is neither practicable nor feasible. (BCom 3rd Year Introduction to Auditing Notes Study Material)
7. Partial Audit
In the case of complete audit, all the records and books of accounts are subjected to audit by the auditor but when audit is conducted on some of the records and books of a part or whole of the period, it is called partial audit. Partial audit may relate to some part of the work for some or whole of the trading period. Partial audit is not practicable again. (BCom 3rd Year Introduction to Auditing Notes Study Material)
8. Detailed Audit
It is a bit different from complete audit. When in complete audit, all the books and records are completely checked, detailed audit involves detailed and thorough scrutiny, but not ‘complete’. Detailed work is thorough, of course, but not complete in the strict sense of the term. Hence, detailed audit is somewhat limited, but complete audit entails an exhaustive scrutiny into the accounts. Detailed checking may be done through applying test-checking. (BCom 3rd Year Introduction to Auditing Notes Study Material)
9. Interim Audit
An annual audit is one which is conducted at the close of the financial year and an interim audit is that kind of audit which is conducted for a part of the accounting year with some interim purpose. Such an interim purpose may be, for example, declaration of an interim dividend by a joint-stock company. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Interim audit involves a complete audit of the accounts prepared and closed for a part of the year to the date of a set of interim accounts. e.g., quarterly or half-yearly accounts. (BCom 3rd Year Introduction to Auditing Notes Study Material)
It is thus conducted between the two periodical audits.
Its Advantages:
(i) With the interim audit, it becomes easy to complete the annual audit soon.
(ii) Errors and fraud can be more quickly detected.
(iii) Since the interim audit is performed during the course of a year it helps in exercising moral check on the staff of the client.
(iv) This audit is helpful when the publication of interim figures becomes necessary.
Its Disadvantages:
(i) There is an inherent danger of altering figures in the accounts already checked.
(ii) Interim audit involves additional work.
(iii) The audit staff becomes engaged in more work and strain as they have to prepare notes after the end of the interim audit.
10. Management Audit
Some of the authors have synonymously used the terms, Management Audit’ and ‘Efficiency Audit’. However, it can be said that the management audit is an audit conducted to examine all aspects of management in a business. Improvement in efficiency and maximum utilization of resources of a business are the tools for its success.
In this age of cut-throat competition, every businessman wants to attain good success in his business career for which he is, at all times, eager to know how he can be successful and for that what changes should be made.
Thus, the management audit includes the examination of every activity of a business, i.e., plans, objectives, means of operation, utilization of physical resources, organizational pattern, co-ordination of various activities at all levels and control of the entire business.
The management auditor has to evaluate the overall performance which includes account books too and he has to submit a report stating whether the pre-determined targets and objectives have been achieved or not. As an outsider, he looks to the affairs of the business from an impartial, unbiased and objective point of view. The management audit is, however, a voluntary form of audit and is related to the process of management. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Thus, management audit is an action over and above the statutory audit. The statutory auditor of a company can easily undertake its management audit as he is well familiar with the affairs of the company. He can, therefore, examine the effectiveness and efficiency of the working of the company from the viewpoint of managerial performance.
The provision for social audit under the Manufacturing and other Companies (Auditor’s Report) Order, 1975 and now under the Manufacturing and other Companies (Auditor’s Report) Order, 1988 replacing the previous order of 1975 is a step in the direction of management audit. (BCom 3rd Year Introduction to Auditing Notes Study Material)
The obvious advantages of this audit are given below:
(i) It helps the management to run the business more effectively and economically as this type of audit can bring lacunae and defects in its working to light. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(ii) Decisions can be taken by the management quickly and effectively.
(iii) This type of audit is connected with every aspect of working of a business and hence, it helps in improving the performance at all levels.
(iv) The management audit is directly concerned with the business which is outcome of improved efficiency affected and increased by introducing management audit. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(v) The employees become more alert and active and their morale is toned up.
Its disadvantages are as under:
(i) It is a costly affair and is never suitable for small business concerns.
(ii) The management audit techniques as suggested by the management auditor are applied and used with a view to increasing profitability of a business. If it does not increase, such an audit becomes a sheer waste and nothing more.
(iii) The management auditor is expected to work at the ‘Will’ of the management.” If he does not, the management would like to get rid of him. (BCom 3rd Year Introduction to Auditing Notes Study Material)
11. Propriety Audit and Performance Audit
While the propriety audit is confined to examine the validity of appropriations or is concerned with verifying that there is no leakage of revenue and wastage of funds knowingly or unknowingly in disregard to any legal requirement or financial or economic consideration, the performance audit is a procedure for analysing the profits and losses of economic activities carried on by the business enterprise, examining the relationship between production and sales and discovering the avenues for maximizing profits.
Under propriety audit, it is to be seen that the contracts entered into by the concern are in its best interest and there is a proper check to ensure that the assets are safe. Thus, it is a form of higher audit. Both the propriety and performance audits are the inter-related aspects of management audit. The management of a company is expected to guarantee the propriety and validity of all the transactions and the propriety auditor has to certify them. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Similarly, the performance auditor has to evaluate the performance of a concern. Thus, both the audits are meant to cover examination of propriety aspects of transactions as well as the review of operational aspects of a company. In a way, they are over and above the regular audit conducted as per the requirements of the company legislation. (BCom 3rd Year Introduction to Auditing Notes Study Material)
12. Operational Audit
The idea of operational audit is of recent origin and has become a matter of wide concern with the expansion of industrial and economic activities. The operational audit is desired to aim at improving the profitability of an industrial enterprise and also at achieving the other organisational objectives, social and otherwise. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Usually, such an audit is conducted by internal auditors but when external auditors carry it out, it is in the form of management consultancy services. The operational audit is in a way over and above financial audit and has sole purpose of improving future business operations carried out by the management. (BCom 3rd Year Introduction to Auditing Notes Study Material)
13. Environmental Audit
The topic of ‘environmental audit’ is new and is in a very nebulous state. It covers a wide range of services, methodologies, assessments, investigations, results, etc. and as such, if encompasses a multidisciplinary approach. The Canadian Institute of Chartered Accountants observes:
“The C. A. profession faces an unprecedented opportunity and challenge to respond to significant emerging needs and expectations arising from concerns to protect the environment for future generations. The profession has much to contribute in shaping future mechanisms for environmental accountability more than it sometimes realizes: more than other may have previously recognized.”
The concept of industrialization has been universally accepted as an indicator of development and consequently it is gradually becoming a part of industrial management to monitor air, water, noise and biological environment and to design pollution control equipment, to manage handling of hazardous wastes, etc. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Companies can no longer afford to bye-pass environmental laws and regulations. The pressure brought about by increasing public opinion on the board of directors of companies has compelled them to manage the business in accordance with eco-friendly requirements but also to mandatorily report to the shareholders on the subject. (BCom 3rd Year Introduction to Auditing Notes Study Material)
The Environment (Protection) Act, 1986 in India was enacted to stipulate control of pollution at source. The Pollution Control Boards have laid down certain norms for handling hazardous wastes, emissions from factories etc. before granting licenses to factories. Industries are required to conform to the standards prescribed. Besides this, The Factories Act, 1948 provides for personnel monitoring against occupational hazards. (BCom 3rd Year Introduction to Auditing Notes Study Material)
The environmental audit is aimed at maintaining proper standards for controlling pollution, for handling hazardous wastes in factories and reporting to the shareholders and proprietors of business in the matter. As is well remarked, it is essential to have ‘green auditing’ for the ‘greening of the business’. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Distinction between Continuous Audit and Interim Audit
(1) In the case of continuous audit, the work of audit is carried on for the whole financial year according to the convenience of the auditor, while in the interim audit, the audit work is done only up to a certain date.
(2) In the case of continuous audit, verification of assets and liabilities is done at the close of the financial year, while in the case of interim audit, such a work is done at the time of audit. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(3) The preparation of trial balance is not necessary at intervals when continuous audit is done, but in the case of interim audit, the trial balance has to be prepared. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(4) The auditor reports at the close of the financial year in the case of continuous audit, but in the case of interim audit, such a report is to be submitted by the auditor at the time of audit. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(5) The continuous audit is expensive while interim audit is less expensive.
(6) The continuous audit causes inconvenience to the staff of the client while interim audit does not.
Distinction between Interim Audit and Internal Audit
(1) Interim audit is done at any time during the course of the financial year, while internal audit is a part of the normal administrative routine.
(2) In the case of interim audit, the auditor is an outsider, but internal auditors are the officials of the concern itself.
(3) Interim audit is meant to check the accounts when accounts are prepared for the part of the financial year as it has some interim purpose. Internal audit is a constant review of the accounts which is carried on throughout the year.
(4) In interim audit, the work of audit is on a certain date in a year, but internal audit, being a system of the accounting procedure, goes on continuously throughout the life time of a concern. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(5) In the case of interim audit, the auditor has to submit his report, but such a question of reporting does not arise in the case of internal audit. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(6) Interim audit is always subjected to need, i.e., it is conducted whenever there is some interim purpose to be fulfilled, while internal audit is a part of the organizational and administrative procedure of a concern. (BCom 3rd Year Introduction to Auditing Notes Study Material)
BCom 3rd Year Introduction to Auditing Notes Study Material
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