Group 2

Sagar's

Types of Audit

INDRODUCTION

The word, audit is derived from the Latin term audire which means to hear.
In early days an Auditor used to listen to the accounts read out by the accountant in order to check them. Businessman wanted assurance that their book- keepers had accurately and properly kept the books of account. An auditor is an independent expert who examines the account of a business concern and report whether the final accounts are reliable or not. The Indian companies Act, 191 , prescribed for the first time the qualification for an auditor in India. A person passin! the examination of the "o#ernment $iploma in Accountancy conducted by the pro#incial "o#ernment %ualified to be an auditor. This is the latest de#elopment in the field of auditin!. Today computers are used not only for recordin! transactions but also for auditin!. The final accounts of a business concern are used by #arious persons such as the owners, shareholders, investors, creditors, leaders, government etc. for different purposes. All these users need to be sure that the final accounts prepared by the mana!ement are reliable. An auditor is an independent expert who examines the accounts of a business concern and reports the final accounts are reliable or not. $ifferent authorities ha#e defined Auditin! as follows&

Auditing is the process of gathering and evaluation of the economic information with the purpose of reporting on it
According to Mautz

Auditing is concerned with the verification of accounting data, with determining the accuracy and reliability of accounting statements and reports.
A.W.Hanson defined auditing as,

An Audit is an examination of accounting records to establish their reliability and the reliability of statement drawn from them.
Statement on Standard Auditing ractices !SA " # $% ICAI

Auditing is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.

Group 2

Sagar's

Types of Audit

&eatures 1. It is the systematic and scientific examination of the accounts of a business. '. It is an intelli!ent and critical examination of the accounts of a business. . It is done by an independent person or body of persons %ualified for the (ob. ). It is a #erification of result shown by profit and *oss Account and the state of affairs shown by Balance +heet. ,. It is a critical re#iew of the system of accountin! and internal control. -. It is done with the help of #ouchers, documents, information and explanations recei#ed from the authorities.

T' (S O& AUDIT

CHART SHOWIN) DI&&(R(NT C*ASS(S O& AUDIT

2

Group 2

Sagar's

Types of Audit

A. Based on Organisational Based on object E. Other Types Structure Statutory Balance Sheet Audit Audit Non-statutory Audit Private Audit Govt. Audit

B. Based on Scope

C. Based on time

D.

Continous Audit

Final Audit

Interim Audit

Sole Proprietorship

Partnership Firm

Non-profit Or anisation

Cost Audit

"ana ement Audit

Internal Audit

Complete Social Audit Audit

Partial Audit

!etailed Audit

Independent Financial Audit

Operational Audit

#a$ Audit

Special Occasional %nvironmental Propriety Audit Audit Audit Audit

Secretarial Audit

Audit in !epth

Cash Audit

A. BA+.$ /0 /1"A0I+ATI/0A* +T123T21.

Organizational Structure 3

Group 2

Sagar's
Statutory Audit Government Audit 0on-statutory 84ri#ate9 Audit
+ole Proprietorship Partnership :irm

Types of Audit

Indi#iduals and 0onprofit Or ani4ation

I. Statutory Audit:
+tatutory Audit is compulsory audit prescribed under statute i.e. law. Appointments of auditors, remo#al, remuneration, ri!hts, duties, liabilities are !o#erned as per the 4ro#isions of the respecti#e law applicable to the or!ani5ation. +cope of the audit work and all others terms are as laid down by the law. It can be conducted only by a %ualified 3hartered Accountant. +tatutory audit is conducted after preparation of final accounts. +tatutory auditor has to report whether the balance sheet and profit and loss A6c are drawn upon conformity with law and whether they show true and fair #iew. +tatutory auditor has to submit report to the shareholder. 7is remuneration is fixed by shareholder. The concerns and the correspondin! Acts are as shown in the followin! .xhibit&
EXHIBIT [1.1] STATUTORY AUDIT

No. &

+ 0 ) * , 1 (

Concern Companies Financial audit Special audit Cost audit Ban.s Insurance Companies Co-operative Societies Pu2lic Charita2le #rusts Statutory Corporations %lectricity Companies /e istered Societies #a$ Payers

Act Companies Act' &()* - S.++, - S.+--A - S.+--B Ban.in Companies /e ulation Act'&(0( Insurance Act'&(-1 /espective State Co-operative Act Indian #rust Act etc. Special Act of Parliament e. . 3ife Insurance Corporations. %lectricity Supply Act' &(01 Societies /e istration Act #a$ Audit under Income-ta$ Act

II. Government udit

Meaning and Sco+e, "o#ernment audit is a control measure for pu!lic accounting of government funds. It co#ers the audit of all expenditure and receipts done by the executi#e and audit of commercial accounts maintained by public enterprises. 4ublic enterprises are classified under three cate!ories department
4

Group 2

Sagar's

Types of Audit

undertakin!, statutory corporations financed by !o#ernment and !o#ernment companies set up under the 3ompanies Act, 19,-.

W-o conducts it, In India, the Accounts and Audit $epartment of the "o#ernment of India, headed by the uditor General of India "# G$, carries the audit wor%. The 3A";s duties ha#e been specified by the 3omptroller and Auditor "eneral;s Act, 19<1

III. Non-statutory audit:

0on-+tatutory 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 a!reement made between the auditor and proprietor. .xample& &inancial audit of the sole trader and partnership firm. =oluntary audit also co#ers non-financial audit. Internal audit, mana!ement audit, social audit, operational audit etc. ri.ate Audit 4ri#ate audit are carried out at the behest of the interested parties and not to fulfill statutory re%uirements. The terms and conditions between the client and the auditor defines the scope of latter;s work. 'ole proprietors, partnership firms, certain individuals such as rent collectors, estate managers, etc. and non(profit organi)ations such as schools, hospitals, clu!s, etc., !et the accounts audited for #arious reasons. +ome of these are to meet the re%uirements laid down by internal rules and re!ulations, to ensure reliability of financial statements and deri#e related ad#anta!es. These are listed below& #. Audit of Sma// (ntities ! ro+riet% Audit" 0)uidance Note on s+ecia/ considerations in t-e Audit of Sma// (ntities1 by the Institute of 3.A of India published in /ctober, '>> Meaning and &eatures A small entitle 8+.9 has the followin! features& a. There is a concentration of ownership and mana!ement in a small number of indi#iduals 8e.!. proprietor or partner9. b. +ource of income are few. c.Acti#ities are simple.

d. 1ecord-keepin! is simple and personali5ed. e.Internal control is limited. f. ?ana!ement may at times i!nore such internal controls. S+ecia/ &eatures of Audit
a. Audit

rocedures, The nature and extent of audit procedures and workin! papers are influenced by special features of +. described as abo#e. indicate the possibility of fraud and .rrors&
5

$. &raud and (rrors , Auditor should check the followin! circumstances which

Group 2

Sagar's

Types of Audit

@hether owner needs to manipulate the accounts 8as the +. is his only source of income9. @hether personal and business transactions are mixed up. @hether ad#isor 8lawyer, etc9 are chan!ed fre%uently. @hether ad#isor starts too late or has to be finished in a hurry. @hether there are unusual material transactions around year-end. @hether there are unusual transactions with !roup concern. @hether excessi#e fees6 commission is paid. @hether there disputes about taxes. @hether accountin! records are partly missin!. @hether cash transactions are too many. @hether documents for many transactions are inade%uate. @hether many confirmations for debtors6stock ha#e not been recei#ed back. @hether owner6senior mana!er ha#e not been lea#e for lon! period. @hether workin! capital is insufficient. @hether remarks in earlier audit report are i!nored. @hether stock records are not kept.

c. Audit (.idence,

a9 Ade%uate audit e#idence may not be a#ailable. The owner may want that some transactions are not recorded at all. The internal controls, which should !enerate the documents, may be weak.

b9 Auditor should focus on cross-checkin! of data, %uantity reconciliations, analytical re#iew, external confirmations and re#iew of transactions after year-end.
d. Audit /anning, Audit of a +e may be done by a sole 3.A. 7ence, audit plannin!

will be simple.
e. Management Certificate, Auditor should obtain a written certificate from the

owner that the accountin! records6 financial statements are complete and accurate.
f.

Ana/%tica/ Re.ie2, .#aluatin! the "ross 4rofit 1atio o#er years6trade is often #ery helpful in case of a +.. entries or at least select aB lar!e sample si5e for checkin!.

g. Audit Sam+/ing, In #iew of the small si5e, it may be possible to check 1>>A

3. Audit of artners-i+ &irm

6

Group 2

Sagar's

Types of Audit

The matters which should be specially considered in the audit of accounts of a partnership firm are as under& a. A++ointment& 3onfirm that the letter of appointment, si!ned by a partner, on behalf of firm, clearly states the nature and scope of audit expected by the partners specially the limitation, if any, under which the auditor shall ha#e to function. b. artners-i+ Deed& .xamine the partnership deed si!ned by all partners and its re!istration with the re!istrar of firms. Also ascertain from the partnership deed about capital contribution, profit sharin! ratios, interest on capital contribution, powers and responsibilities of partners, etc. c. Minute 4oo5& +tudy the minute book, if any, maintained to record the policy decision taken by partners specially the minutes relatin! to authori5ation of extraordinary and capital expenditure, raisin! of loans, purchase of assets, extraordinary contracts entered into and other such matters which are not of a routine nature. d. Aut-orized 4usiness& =erify the business in which the partnership is en!a!ed is authori5ed by the partnership a!reementB or by any extension or modification thereof a!reed by the partners subse%uently. e. 4oo5s of accounts& .xamine whether books of accounts appear to be reasonable and are considered ade%uate in relation to the nature of the business of the partnership. f. Unaut-orized Acts& =erify !enerally that the interest of no partner has suffered pre(udicially by an acti#ity en!a!ed in by the partnership which it was not authori5ed to do under the partnership deed or by any #iolation of a pro#ision in the partnership a!reement.

!. Ta6es& 3onfirm that a pro#ision for the tax payable by the firm has been made in the accounts before the arri#al at the amount of profit di#isible amon! the partners. Also see that the #arious re%uirements of law especially applicable to the partnership firm like section ))8AB9 of the Income-tax Act, 19-1 ha#e been complied with. h. Di.ision of rofits& =erify that the profits and losses ha#e been di#ided amon! the partners in their a!reed profit-sharin! ratio.

7. Audit of trusts !non8+rofit organizations"

1. The audited statements can ser#e as a basis for relyin! on the persons at the helm of affairs i.e., members of !o#ernin! body or mana!in! committee. '. It helps in dealin! with third parties. . It helps in protectin! the assets and ascertainin! the liabilities.

B. BA+.$ /0 +3/4.
Based on 7 Scope

Group 2

Sagar's

Types of Audit

Co plete Audit Partial Audit Detailed Audit

I. Complete Audit:
In this type of audit, the auditor is re%uired to check each and e#ery transaction recorded in the books of accounts. 7e has to examine each and e#ery #oucher, document or correspondence relatin! to the transaction. This type of audit is not possible for lar!e si5ed or!ani5ations.

II. Partial Audit:

In 4artial audit, the auditor is not re%uired to examine all the books of accounts. /nly a part of the accounts or some transactions as desired by the clients may be scrutini5ed. Auditor has to state the area co#ered by the audit. This type of audit cannot be followed in the case of statutory audit. It may be followed in the case of statutory audit. This audit is not con#enient when the audit is le!ally re%uired.

III. Detailed Audit

2nder detailed audit, few business transactions are examined in detail by the auditor.
'picer and *egler ha#e defined it as, CAn audit which starts with books of prime entry and

ends wit the balance sheet. The checkin! se%uence is arran!ed in order of recordin! the transactions in the primary bookD. Thus, for the purpose of detailed audit certain transactions are traced throu!h #arious sta!es from be!innin! to their end with the help of a#ailable e#idence. This techni%ue of examination is also called audit-in-depth. To take an example, detailed audit of purchase of !oods for in#entory would consist of tracin! the transaction thou!h all the points of transaction cycle #i5., re%uisitionin! the !oods, orderin! the !oods re%uisitioned, recei#in! the !oods ordered and preparin! the payment #oucher.

C. 4AS(D ON TIM(
Based On Time
Co"ti"uous Audit !i"al Audit #"teri Audit 8

Group 2

Sagar's
%ala"&e s'eet Audit

Types of Audit

I. Continuous Audit:

Meaning, 3ontinuous audit is defined by R.C. Wi//iams as one where the auditor is constantly or at 8re!ular or irre!ular9 inter#als en!a!ed in checkin! the accounts durin! the period. 3ontinuous Audit means an audit at re!ular inter#als throu!hout the accountin! year. "enerally, the audit work be!ins after the accountin! year is o#er. But in case of 3ontinuous Audit, the work be!ins the accountin! year itself. :or example, if the accountin! year be!ins on 1st April '>>' and ends on 1st ?arch, '>> normally, audit work would be!in in April '>> and continue thereafter. But in case of 3ontinuous Audit the work would be!in in April '>>' itself and continue at re!ular inter#als till it is complete. Thus in 3ontinuous Audit, accountin! and auditin! work is done almost side by side. 3ontinuous Audit, howe#er, does not mean the audit work !oes on for -, days of the year. The auditor may make periodical #isits, say, e#ery two or

three months durin! the year and at the end of year we would #erify the final statement of account. Necessit% 3ontinuous Audit is necessary in the followin! casesa. @here the #olume of transaction is #ery lar!e and complex. b. where the mana!ement re%uires monthly or %uarterly audited statements of accounts or the statements of accounts are re%uired immediately after the accountin! yearB c. @here the system of internal control or internal check is weak. d. +ometimes continuous audit becomes necessary for self-sur#i#al a!ainst cutthroat business competition. e. @hen interim di#idend is to be declared.

Ad.antages of Continuous Audit a. 9uic5 re+aration of &ina/ accounts, +ince, the routine audit is done continuouslyB the :inal Accounts can be prepared immediately after the year end. b. (ar/% Di.idends to S-are-o/ders, The shareholders would be happy as they recei#e di#idends soon after the end of the financial year. The 3ompany can prepare interim accounts and pay e#en interim di#idends to the shareholders. c. U+8to8date Accounts for 4an5s:In.estors, The up-to-date final accounts are useful to banks and in#estors for takin! decisions re!ardin! loans and in#estment. d. C-ec5 on (m+/o%ees, +ince the auditors #isit re!ularly throu!hout the year, it acts as check on the employees to keep the accounts ready and up-to-date.
$

Group 2

Sagar's

Types of Audit

e.

re.ents (rrors and &rauds, 3onstant checkin! by the auditors helps to detect and e#en pre#ent errors and frauds.

f. &ami/iarit% 2it- C/ient;s 4usiness, +ince the auditor spends more time at the client;s place, he becomes familiar with all the aspects of client;s business. !. T-oroug- Audit, The auditor has more time at his disposal to do a throu!h checkin! of all transactions. This reduces the risk of missin! any material items. h. Uti/ization of Audit Staff, Audit +taff can be kept busy throu!hout the year. Audit work can be e#enly distributed to a#oid o#erwork after year end.

Disad.antages of Continuous Audit, a. (6+ensi.e& +ince the auditor spends more time on the audit work, the audit fees are much more. 3ontinuous Audit is thus expensi#e. 7owe#er, only a lar!e or!ani5ation should opt for a 3ontinuous Audit. b. Audit in Insta//ments& +ince the audit work is done at inter#als and not at one !o, audit may be inefficient. The %ueries durin! the last #isit may remain unsol#ed. It is difficult at each #isit to take up the work precisely at the sta!e of last #isit. To o#ercome this disad#anta!e, audit should be well-planned. All %ueries should be noted in the Audit 0ote Book and cleared before takin! up fresh work. The work done up to end of each #isit, rele#ant #oucher numbers, totals etc. should be carefully noted in the Audit 0ote Book. c. Dis/ocation of c/ient;s 2or5, If a proper audit pro!ramme is not adopted, continuous audit may disrupt the routine accountin! work of the client. .ither the audit staff may ha#e to sit idle or the accounts staff of the client may waste time for want of books of accounts. .mployees ha#e to attend the auditor for explanation. They ha#e to keep aside their usual work to attend the auditors for explanation. d. (rrors and &rauds in 4oo5s A/read% C-ec5ed & If an employee chan!es some fi!ures in the books already checked by the auditor durin! his earlier #isits, it would be difficult to detect such errors and frauds subse%uently. e. Monotonous8 tiresome8tedious, 3ontinuous #isits to the client;s place may make the work tedious and the audit staff loses interest from work conse%uently. The %uality of audit suffers. f. A$sence of /in5, In the absence of well-planned audit work, an auditor may miss the thread of audit work. :urther, some important %ueries may be o#erlooked if no proper audit notes and %ueries are recorded by the audit staff durin! the course of the audit. !. Conf/ict $et2een audit and accounts staff, The members of audit and accounts staff come in close contact and sometimes it may result in spoilin! the healthy relations between them and thereby the %uality of audit may suffer. h. De+endence of t-e accounts staff on t-e auditor, The accounts staff may depend on the audit staff. They may re%uire the help of auditor for e#en small errors which they can disco#er or a#oid by takin! proper care.
1(

Group 2

Sagar's

Types of Audit

recautions a. Strict instructions, +trict instructions should be !i#en to client;s staff not to alter the audited fi!ures. ?istakes, if any, should be rectified by passin! rectification (ournal entries and not by alteration of fi!ures. b. Audit +rogramme, 4roper audit pro!ramme should be prepared by the auditor, so that the time of accounts and audit staff is not wasted. c. S+ecia/ tic5s, +pecial ticks should be used for unaudited altered fi!ures. Auditor should write in the mar!in the actual fi!ures audited with his audit pencil. d. Audit notes, the auditor should keep exhausti#e audit notes. The %ueries and their explanation by the client should be properly recorded. e. C-ec5ing t-e /edger, 3heckin! the impersonal led!er should be done only after the close of the accountin! year. f. Sur+rise .isits, +urprise #isits should be made in addition to the re!ular #isits. !. Rotation, There should be reasonable rotation of audit staff and their duties so that they may not lose interest in their work. h. 4etter contro/ and su+er.ision, There should be better control and super#ision o#er the audit staff. All the important fi!ures in the balance sheet should be noted in the audit diary and they should be rechecked at the time of subse%uent #isits. i. Rectification entr%, Any alteration should be done by means of a rectification entry in the (ournal. (. Secret tic5, The auditor should put a secret tick a!ainst any fi!ure already altered.

II. Final Audit

It is also known as periodical audit. It is !enerally start after the completion aspect more than the depth aspect of audit. The dan!er of alteration of fi!ures or manipulation of accounts is totally absent. "enerally, it starts after the close of the financial period. There is #ery little impact on pre#ention of errors and frauds by way of moral checks. It is best suited for small and medium si5ed business. It sa#es in terms of time, ener!y and money.

&ina/ Audits -a.e t-e fo//o2ing ad.antages < a. Ine6+ensi.e& +ince the audit spends normal time on the audit work, the audit fees are also normal. :inal Audit is thus inexpensi#e. .#en a small or!ani5ation 8a sole trader or a firm9 can opt for a :inal Audit to obtain the ad#anta!es of an independent financial audit.

11

Group 2

Sagar's

Types of Audit

b. Audit at a Stretc-& +ince the audit work is done at a stretch, without any !aps, audit is carried out efficiently. All %ueries are sol#ed immediately. The work is done continuously and not in installments. The audit plannin! and pro!ramme are simple c. *ess errors and &rauds& +ince the books are checked at a stretch, no employee can chan!e any fi!ures in the audited books. d. Do not Disru+t Accounts Wor5& The accounts staff is not disturbed anytime durin! the accountin! year. There is no need for the accountants to attend to audit work e#ery now and then.

&ina/ Audit -as t-e fo//o2ing disad.antages < a. De/a% in fina/ Accounts& +ince the routine audit is done after a year end, the :inal accounts may be delayed and ready lon! after the year end. b. *ate Di.idends to S-are-o/ders & The shareholders would be unhappy as they recei#e di#idends lon! after the end of the financial year. It would be difficult for a 3ompany to prepare interim accounts and pay interim di#idends to the shareholders durin! the financial year. c. Sta/e Accounts for 4an5s:In.estors& The final accounts are a#ailable lon! after the end of the accountin! year. +uch stale accounts are not useful to banks and in#estors fro takin! decisions re!ardin! loans and in#estment. d. No Mora/ c-ec5 on (m+/o%ees& +ince the auditors #isit only at the end of the year, dishonest employee ha#e a chance to commit frauds durin! the year and clean up the accounts (ust before the auditors arri#e, e.!. teemin! and ladin!. e. No &ami/iarit% 2it- C/ient;s 4usiness& +ince 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 %uality of audit. f. Sam+/e C-ec5& +ince the auditor has to complete the audit in a short time, he has to resort to sample checkin!. The increases the risk of missin! material items. !. Une.en Wor58/oad for Audit Staff& Audit staff is o#erworked immediately after year end and comparati#ely less busy at other times.

III. Interim Audit:

Meaning,
12

Group 2

Sagar's

Types of 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 accountin! year. :or example, an audit of accounts prepared for the period of six months from 1st April to >th +eptember, would be Interim Audit.

W-en Conducted, Interim Audit is conducted in the followin! cases E a. 9uarter/% Resu/ts& 4ublic *imited 3ompanies listed on the stock exchan!e has to declare their %uarterly results. It is preferable, thou!h not compulsory, to declare such results on the basis of interim audit. b. Interim Di.idends& Interim audit is also ad#isable when a company intends to pay interim di#idends. Interim audit would ensure that there are enou!h profits to (ustify payment of interim di#idends. c. Sa/e of 4usiness& 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, #aluation of !oodwill etc. d. C-anges in &irm& In case of a proprietor, interim audit may be conducted when the business is proposed to be sold, to fix the purchase consideration. e. C-anges in &irm& 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, #aluation of !oodwill etc.

Ho2 Conducted, An interim audit should be done as if it is the final audit for the concerned period. Thus, it would in#ol#e not only #ouchin! but also #erification of assets and liabilities, #aluation of closin! stock, computation of depreciation, confirmation from parties and so on. /nce an interim audit is done, at the time of the final audit, the auditor has to concentrate only on the remainin! period. Thus, interim audit helps in timely completion of final audit. The auditor at the time of final audit, howe#er, should ensure that there are no alterations in the books pre#iously checked by him. 7e should carefully compare the final accounts with the interim accounts to find out if they are consistent.

Ad.antages Interim audit is similar to 3ontinuous Audit and en(oys similar ad#anta!es& a. 9uarter/% Resu/ts& A public limited company listed on the stock exchan!e can comply with the statutory pro#ision of declarin! %uarterly results. b. Interim Di.idends to S-are-o/ders& The shareholders would be happy as the 3ompany can pay interim di#idends to the shareholders. c. 9uic5 re+aration of &ina/ Accounts& +ince the interim audit is already done, the :inal Accounts can be prepared immediately after the year end.
13

Group 2

Sagar's

Types of Audit

d. U+8to8date Accounts for 4an5s:In.estors& The up-to-date interim accounts are useful to banks and in#estors for takin! decisions re!ardin! loans and in#estment. e. C-ec5 on em+/o%ees& Interim audit acts as check on the employees to keep the accounts ready and up-to-date. f. re.ents errors and frauds& 3heckin! by the auditors for the purpose of interim audit helps to detect and e#en pre#ent errors and frauds.

!. T-oroug- &ina/ audit& The auditor has more time at his disposal at the time of final audit, which reduces the risk of missin! any material items. h. Uti/ization of Audit staff& audit staff can be utili5ed in a better manner. Interim audit is done when the audit staff is relati#ely free.

Disad.antages and recautions, a. (6+ensi.e& +ince the auditor does two audits in one year, the audit fees are more to that extent. Interim Audit is thus expensi#e. b. Audit in Insta//ments& since the audit work is done at two sta!es 8interim and final9 and not at one !o, audit may be inefficient. It is difficult at the time of final audit to take up the work precisely at the sta!e where it was left at the time of interim audit. To o#ercome this, audit should be well-planned. The work done up to end of the interim audit, rele#ant #oucher numbers, totals, etc. should be carefully noted in the Audit 0ote book. c. Disru+ts Accounts Wor5& Interim audit disrupts the work of accounts staff. To a#oid this ad#anta!e, the audit pro!ramme should be co-ordinated with the client to a#oid disruption in routine accounts work. The client should appoint an employee specially to co-ordinate with and attend to the auditors.

I+. Balance Sheet Audit: Balance +heet Audit is an American terms which means #erification of the items appearin! in the balance sheet. It includes #erification and #aluation of assets and liabilities appearin! in Balance +heet. 4rofit and loss account is not !i#en much importance in this type of audit. In balance sheet audit, the auditors assume that there is a reliable system of internal check and internal audit. Balance sheet is also referred as F*imited Audit;. +uch a type of audit is used where the si5e of the type of audit is used where the si5e of the company is #ery lar!e. 2nder balance sheet audit accounts are #erified and tests are imposed only on those items in 4rofit and *oss A6c which are directly related to assets such as depreciation, repairs, bad debts etc.

A++/ica$i/it%, Balance sheet Audits are not conducted in all cases. +uch Audits are conducted in case of #ery lar!e or!ani5ation banks, etc. in the followin! circumstances E a. T-e Interna/ Contro/ S%stem is .er% strong. The controls ha#e been de#eloped and tested o#er the years. The controls are capable of detectin! and pre#entin! errors and frauds.
14

Group 2

Sagar's

Types of Audit

b. T-e .o/ume of transaction is so /arge that an in-dept checkin! is impossible. A detailed #ouch-and-post audit is not possible if the final accounts arte to be ready in time. c. T-e concern -as its o2n interna/ audit de+artment. The statutory auditor, therefore, need no duplicate this work. d. The accounts staff is hi!hly %ualified, the mana!ement is professional and accounts are computeri5ed.

Met-od, Balance +heet Audit is conducted in the followin! manner E 1. Re.ie2 of Interna/ Contro/s& The auditor must e#aluate the system of internal controls in the followin! respects E a. W-et-er t-e interna/ contro/s are effecti.e& If the internal controls are effecti#e, auditor can concentrate on material items instead of checkin! arithmetical accuracy of #ouchers and books. 7e should study the internal control system with the help of %uestionnaires, manuals, or!ani5ation charts and flow charts. b. W-et-er t-e interna/ contro/s are in o+eration & 7e should carry out tests to ascertain that the controls are actually in operation. Based on his e#aluation of the internal controls, the auditor should plan his audit pro!ramme.

'.

=erification of Items in t-e &ina/ Accounts & 7e should #erify the ma(or items of assets and liabilities and income and expenditure appearin! in the :inal Accounts 8Balance +heet and 4rofit and *oss9 in the followin! manner a. =erification& 7e should carry out physical #erification of ma(or items of assets and liabilities on sample basis. b. Ins+ection& 7e should inspect documents of title etc. in respect of ma(or items on sample basis to #erify whether such transactions actually occurred, and whether such transactions are recorded in the books for the ri!ht amount. c. =ouc-ing& 7e should #ouch only the ma(or transactions on sample basis to ascertain whether such transactions are actually occurred by the concernB and whether such transactions are recorded in the books for the ri!ht amount. d. =a/uation& 7e should satisfy himself that the assets and liabilities are properly #alued. e. resentations and Disc/osure& 7e should check whether the assets, liabilities, income and expenses are presented and disclosed in the :inal Accounts properly, accordin! to the reco!ni5ed accountin! policies and the re%uirements of law. . S+ecific Items, The auditor should pay special attention to the followin! specific items in the :inal Accounts E a. =erify fixed assets, in#estment physicallyB b. 3heck the addition to and deduction from fixed assets and in#estmentsB
15

Group 2

Sagar's

Types of Audit

c. 3heck the amount of depreciation char!edB d. 3heck the accounts of ma(or debtors and creditors and obtain confirmations and statement of accountsB e. =erify cash and stocks physicallyB f. 3heck #aluation of stocksB !. Ascertain amount of bad or doubtful debtsB h. 3heck estimates of contin!ent liabilities. >. O.era// C-ec5ing of &ina/ Accounts !Ana/%tica/ Re.ie2", a. 3ompare the amount of each item for the pre#ious year with that of the current year. In#esti!ate the reasons for abnormal #ariations.

b. 3heck ma(or rates e.!. 3urrent 1atio, $ebt .%uity 1atio, "ross 4rofit 1atio, /peratin! 1atio, .xpenses 1atio, +tock Turno#er, 0et 4rofit 1atio, 1eturn on 3apital .mployed and $ebtors Turno#er etc. c. 3heck %uantitati#e ratios 8input-output ratios9, ?aterial 3onsumption ratio and %uantity reconciliations. d. 3heck all unusual or non-recurrin! transactions. e. 3heck statement of +ources and application of :unds and 3ash :low +tatement. f. 3heck the ?inute Books.

rocedure to conduct 4a/ance S-eet Audit, 1. Before commencin! the audit see that the system of internal control is effecti#e and %ualified staff is appointed. '. .xamine the minute book and consider those items which ha#e bearin! on final Accounts. . 3ompare the 4rofits and *oss Accounts and Balance +heet of the current year with that of the pre#ious year and find out any material difference. ). 3ompare the increase and decrease in each item appearin! in 4rofit and *oss Account and Balance +heet. ,. In#esti!ate into the causes of any #ariations in !ross profit and consider the #aluation of stock. -. .xamine reconciliation of material consumed and stock. <. .xamine the details of material consumed and find out its ratio to production. G. :ind out whether there is any chan!e in depreciation and see its effects on 4rofit and *oss Account and Balance +heet. 9. In#esti!ate into the items of non-recurrin! nature and see that 4rofit or *oss on sale of fixed asset is properly ascertained.
16

Group 2

Sagar's

Types of Audit

1>. "et the details of asset and liabilities as on the date of Balance +heet. 11. =erify the statement of fixed asset additions made and destructions made. Also #erify chan!es if any. 1'. 4ay attention to the #aluation of the fixed assets. 1 . 3onsider the details of current assets and en%uire into the #ariations in current assets. 1). 3onsider, in detail, any substantial chan!es in items of Balance +heet from the normal fi!ure.

1,. =erify the assets and properties held and liabilities arisin!. 1-. +ee that ade%uate pro#ision is made for all the known liabilities. 1<. Ascertain any capital commitment. 1G. +crutini5e contin!ent liabilities. 19. +ee that ade%uate pro#ision is made for actual liability. '>. 3ollect a list of contin!ent liabilities from the officer of the company. '1. +ee the resolutions re!ardin! transfers. ''. /btain a copy of all suits field by the company a!ainst the company. ' . .#aluate the system of internal control and see how far it is effecti#e. '). +ee whether the presentation of financial statements is done properly as per the pro#isions of law. ',. 3heck the +tatements of +ources and Application of funds.

osition of auditor, In Balance sheet, the auditor checks the items appearin! in Balance +heet. 7e does not follow the normal procedure of audit In Balance sheet, the auditor checks the items appearin! in Balance +heet. 7e does not follow the normal procedure of audit. 7e does not check all the transactions taken place. 26+ ''< 8 9 the auditor is re%uired to state in his report, Cwhether the Balance +heet and 4rofit an *oss Account dealt with by the report are in a!reement with the books of accounts and returns.D 0ow the %uestion arises as to when the auditor can say so when he does not check all transactions. It may be informed that he has not done his duty honestly. 7owe#er, the law does not prescribe any procedure to conduct the audit. If the auditor is satisfied with the books of accounts, he may say so. Accordin! to ?r. Irish, The Australian Accountant, Balance +heet audit is an American Term which con#eys two thin!s& i. ii. It means limited audit since it is confined to the items connected with balance +heet. In such audit test are imposed on internal control. The test includes scrutiny of records, comparison of income and expenses, in#esti!ation of material information and analysis of appropriations.
17

Group 2

Sagar's

Types of Audit

Suita$i/it%, Balance +heet audit is suitable under the followin! circumstances& 1. @here the #olume of transaction is #ery lar!e. '. @here the system of internal check6internal control is #ery effecti#e.

. @here %ualified accounts are employed to record the transactions. ). @here mechani5ed system of accountin! is in operation.

D. 4AS(D ON O4?(CT
Based on Object
#"depe"de"t !i"a"&ial Audit Cost Audit )a"age e"t Audit #"ter"al Audit So&ial Audit

I. Special Audit:
3entral "o#ernment has power to order a special audit of the accounts of a company for a specific period. This is under +ection ' A of the companies Act, 19,-. +pecial audit is ordered without pro#idin! an opportunity to the company, where the central !o#ernment is of the opinion. a. @hen affairs of any company are not mana!ed as per the sound business principles. b. @hen company is bein! mana!ed in a manner which is likely to cause serious in(ury or dama!e to the interest of trade or industry. c. @hen financial position of a company is such as to endan!er its sol#ency. +pecial audit can be entrusted by the central !o#ernment to the company;s auditor himself or to any other chartered accountant. Auditor;s remuneration will be fixed by the 3entral "o#ernment and pad by the company Auditor submits his report to the central !o#ernment. /n the basis of his report the 3entral "o#ernment may take ade%uate actions. +uch auditor has the same ri!hts, duties, powers and liabilities as the statutory auditor of the company. The special auditor will ha#e the same powers and duties as pro#ided 26s ''<. The report will include all matters re%uired to be included in an auditor;s report. The report will also include statements on any other matter as may be directed by the 3entral "o#ernment.

18

Group 2

Sagar's

Types of Audit

II. Cost Audit:

It is a type of audit which in#ol#es #erification of cost records maintained by the or!ani5ation. 26s ' 8B9 of the 3ompanies Act 19,- the 3entral "o#ernment may direct an audit of cost records by a person who is %ualified. Appointment of auditor is done by the board of directors sub(ect to the appro#al of the 3entral "o#ernment. The auditor reports to the !o#ernment, the copy of the report sent to the company. 3ost audit is prescribed for certain types of industries with a #iew to achie#e the followin! ob(ects& a. b. c. d. e.

to !rant the price concession of the companyB to fix up sellin! priceB to safe!uard interest of customersB to consider the %uestion of protection to be !ranted to the companyB to ascertain the causes of loss suffered by the company.

Sco+e, 3ost audit refers to audit of records relatin! to utili5ation of materials, labor and other items of cost as may be prescribed by the 3entral "o#ernment. 3ost audit shall be in addition to financial auditin! conducted 26s ''). The procedure is similar to that of financial audit.

9ua/ifications, The cost auditor shall be either a cost accountant within the meanin! of the cost and works accountant Act, 19,9 or any 3hartered Accountant within the meanin! of the 3hartered Accountants Act, 19)9 or other person possessin! prescribed %ualifications. A person not %ualified to be appointed as auditor of a company under section ''- cannot act as its cost auditor. A++ointment, A cost auditor is to be appointed by the Board of $irectors with prior appro#al of the 3entral "o#ernment.

III. Management Audit:

?ana!ement audit in#ol#es examines of the plans, policies, procedure, method and strate!ies and e#aluates the performance of mana!ement with a #iew to impro#e or!ani5ational effecti#eness. It does not look into the past, present but also in the future. Accordin! to *eslie 1. 7oward, ?ana!ement Audit is an in#esti!ation of a business from the hi!hest le#el downward in order to ascertain whether sound mana!ement pre#ails throu!h out thus facilitatin! the most effecti#e relationship with the outside world and the most efficient or!ani5ation and smooth runnin! of internal or!ani5ation.

1$

Group 2

Sagar's

Types of Audit

Sco+e, The scope of mana!ement audit is %uite comprehensi#e. It in#ol#es critical re#iew of all aspects and processes of mana!ement. It also includes the ob(ecti#es, the plans, the or!ani5ation structure control and any other specific function assi!ned by mana!ement from time to time. It includes the appraisal of the decisions taken by the top mana!ement in achie#ement of or!ani5ational ob(ecti#es. It re#ol#es around the followin! factors6 steps& a. b. c. d. e. f. !. h. Identify the ob(ecti#es of the or!ani5ation. Break the o#erall ob(ecti#e into tar!ets and plans. 1e#iew the or!ani5ational structure. .xamine the performance of each functional area. 3heck that dele!ated authorities are not exceeded. Audit the inte!rity of the information system. Assess the efficiency with the resources are utili5ed. +u!!est a realistic course of action on the basis of the examination.

Ad.antages a. ?ana!ement audit helps to establish a system of incenti#es and rewards for the mana!ers on the basis of performance. b. It helps in takin! decisions re!ardin! takeo#er of a sick unit. It can indicate whether the mana!ement was responsible for the sickness. c. It can help an in#estor or lender to decide about in#estin! in a company or ad#ancin! a loan to a company. d. It helps the forei!n collaborators in studyin! the performance of the local mana!ement.

Criticisms, a. It is re!arded as a #a!ue concept and ser#es no ma(or purpose. b. It is easy to re#iew and critici5e past actions, when all the information is a#ailable. The man!er has to take %uick decisions on the basis of whate#er information is a#ailable. ?ana!ement audit, critics say, is nothin! but postmortem which may discoura!e mana!ers.

I+. Internal Audit:

M(ANIN)

rof. Meigs, Internal Auditin! is a continuous, critical re#iew of financial and other operatin! acti#ities by a staff of auditors, functionin! as full time salaried employees.
2(

Group 2

Sagar's

Types of Audit

SA @ issued by the Institute of 3hartered Accountants of India 8I3AI9 defines Internal Audit as follows& Internal Audit is separate component of Internal 3ontrol established to determine whether other internal 3ontrols are well desi!ned and properly operated.

)uidance Note $% ICAI, Internal Audit is an independent appraisal acti#ity within an enterprise for the re#iew of accountin!, financial and other operation and controls as a basis for ser#ice to mana!ement. It in#ol#es a speciali5ed application of the techni%ues of auditin!. Thus E a. Internal Auditin! is normally done by the employees of the concern. b. It is part of the system of internal controls. c. It is a critical re#iew of other internal controls i.e. of 8i9 accountin! controls and 8ii9 operational controls. d. The re#iew is done by normal auditin! techni%ues such as #ouchin!, #erification etc.

Sco+e And O$Aecti.es, #. Re.ie2 of Accounting S%stem and Interna/ Contro/s, ?ana!ement is responsible for establishin! a reliable accountin! system and internal controls. ?ana!ement in turn expects the Internal Auditor to re#iew the accountin! system and Internal 3ontrols, check that they are effecti#e and su!!est impro#ements.
3. (6amination of Accounting Contro/s , Internal Auditor has to re#iew the

operation of Accountin! 3ontrols to see that E

a. All transactions are duly authori5ed. $. All transactions are properly recorded. c. All transactions are recorded promptly as soon as they occur. d. The accountin! policies adopted by the mana!ement are implemented. e. The assets of the concern are safe!uarded. f.

.rrors and frauds are pre#ented and detected.

g. The books of accounts are complete and accurate. -. The final accounts are reliable and ready in time.

7. (6amination of O+erationa/ Contro/s, Internal Auditor must re#iew the workin! of the /perational 3ontrols to see that the mana!ement policies in respect of the operation and administration of the concern are implemented. This ensures that the business is conducted in an orderly and efficient manner. Thus Internal Auditor should re#iew Huality 3ontrol, Bud!etary 3ontrols, Internal 3heck etc. The Internal Auditor has to ensure that the resources 8assets9 of the concern are used efficiently and economically. >. -%sica/ =erification, Internal Auditor should physically #erify the assets of the concern such as fixed assets, cash, in#entory etc.

B. Re/%ing U+on Interna/ Audit,

21

Group 2

Sagar's

Types of Audit

Same Audit Tec-niCues, $espite the abo#e difference between the Internal Audit and the external or statutory audit, Internal Audit is %uite useful to the statutory auditor. The techni%ues of auditin! used by both are same. Both audits co#er the same area of work. (.a/uation, +A4 < recommends that .xternal auditor should study and e#aluate the Internal Auditin!. (.a/uation in.o/.es, 8 a. "eneral .#aluation of the Internal Audit department as such andB b. .#aluation of the specific internal audit work done by the Internal Audit department.

)enera/ (.a/uation, This in#ol#es the followin! aspectsa. Organizationa/ Status, The external auditor should ascertain the or!ani5ational status of Internal Auditor, i.e. @hether Internal Auditor reports to the directors or to any lower le#el of mana!ement. @hether any restrictions are imposed by the mana!ement on the work of Internal Auditor. @hether the Internal Auditor is free to communicate fully with the external auditor

$. Sco+e of 2or5 D &o//o28u+, 0ext, the external auditor should ascertain the scope of work !i#en to the Internal Auditor. 7e should find out to what extent he mana!ement accepts and acts on the reports and recommendation of the Internal Auditor. c. 9ua/ified Staff, The external auditor should ascertain whether the Internal Audit staff is competent i.e. %ualified and experienced.

E. (.a/uation of S+ecified Interna/ Audit Wor5, The external auditor should study the copies of all Internal Audit reports. 7e should carefully study the reports toa. 3heck the scope of work and the internal audit pro!ramme. b. 3heck that work was planned, super#ised and re#iewed properly. c. 3heck that sufficient e#idence was obtained. d. 3heck that the Internal Audit report is proper and complete. e. 3heck the follow-up action taken on the report. @. Co8ordination, The external auditor and internal auditor should work in a coordinated manner. They should re!ularly meet durin! the year. The Internal Audit work should be planned in consultation with the external auditor. F. Re/ia$i/it% and Sam+/e C-ec5ing, +uch e#aluation helps the external auditor to (ud!e the reliability of Internal Audit work. It helps him to decide the
22

Group 2

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Types of Audit

extent of sample checkin! to be done in statutory audit. It helps him to decide what to check, when and how much. G. Res+onsi$i/it%, 7owe#er, finally the statutory auditor is entirely responsible for his audit work. 7is responsibility is in no way reduced because he has relied upon the Internal Audit. #H. Re+orting, +tatutory auditor has to report under the companies, Act 8?A/3A1/ 19GG9, in case of specified companies, whether the company, has an internal audit system commensurate with its si5e and nature of business.

. Social Audit
+ocial Audit is a recent de#elopment in the field of auditin!. It is based on the modern concept of social responsibility of business. +ocial audit examines to what extent the business is dischar!in! its social responsibilities. It examines the contribution of the concern to the society at lar!e. It re#iews and e#aluates the performance of the concern in the followin! areas of social welfare and awareness. 1. 3ontribution to natural economic !rowth throu!h expansion, employment !eneration etc. '. @elfare of .mployees e.!. trainin! to employees, employment to handicapped or backward people, pro#ision of education, housin! and health facilities to employees and their families. . 4roduct relations includin! %uantity, %uality and price of product supplied.

). 3are for en#ironment e.!. shiftin! to industrially unde#eloped re!ions, control of pollution. ,. Huality of life includin! social and family welfare schemes, employees self reliance schemes, adoption of #illa!es, upkeep of !ardens and parks. -. +ocial or national de#elopment i.e. promotion of sports, music, !ames, art and culture, social audit enables the mana!ers to keep in mind their social obli!ations. This would help to impro#e the ima!e of the or!ani5ation. (. OTH(R T' (S

Other #ypes
+pecial Audit
*&&asio"al Audit Se&retarial Audit Audit i" Dept' Cas' Audit 23

Group 2

Sagar's
*peratio"al Audit Ta+ Audit ,"-iro" e"tal Audit Propriety Audit

Types of Audit

I. Independent Financial Audit

Independent financial audit is conducted for the purpose of ascertainin! whether the balance sheet and profit and loss account of a business !i#e a true and fair #iew of the operations and workin! results of a business respecti#ely. It is conducted by professionally %ualified auditors for clients who may be sole proprietors, partners, #arious indi#iduals, members of non-profit or!ani5ations and shareholders. Independent financial audit has been made compulsory for many entities established under respecti#e Acts. The auditor is re%uired to submit his report to the client which is a useful document for third parties as well.

II. !ccasional Audit:

This audit is carried out accordin! 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 le!ally not compulsory. The auditor will conduct the audit accordin! to the terms and reference. 7is report will mention the terms of reference as per the letter he has recei#ed.

III. Secretarial Audit

Concept: A company secretary ensures that the workin! of the company is in accordance with the pro#isions of the 3ompanies Act, 19,- and other applicable laws. The secretarial audit is conducted to ensure that full and ade%uate compliance to #arious le!al re%uirements has been established while implementin! the decisions taken by the mana!ement and any inad#ertent non-compliance is brou!ht to li!ht and if possible, is set ri!ht.

Duties To Be Discharged By The Company Secretary ,8 The whole-time company secretary conducts secretarial audit to dischar!e #arious statutory duties for company Act, 19,- has laid down #arious statutory duties for company secretaries such as filin! of statutory declaration with the re!istrar of companies as to compliance in respect of incorporation, !i#in! notice to the re!istrar of an increase in share capital, authentication of balance sheet and profit and loss account, filin! of certificate as to compliance of re%uirements of +chedule IIII, etc. 2nder the listin! a!reement clause )<8a9, e#ery listed company is re%uired to appoint a company secretary who would act as a compliance officer and would be
24

Group 2

Sagar's

Types of Audit

responsible for monitorin! the share transfer process and act as a liaise with in#estors and #arious authorities such as +.BI, etc. Statutory Status:The companies Act has made secretarial audit compulsory for companies ha#in! paid-up share capital of rupees fifty lakhs or more and for companies ha#in! paid-up share capital of rupees ten lakhs or more but less than rupees fifty lakhs. The companies fallin! in the first cate!ory ha#e to mandatory appointed a %ualified wholetime secretary who ensures compliance with statutory re%uirements. +ection G A of the companies Act, lays down that companies with paid-up capital of rupees ten lakhs or more but less than rupees fifty lakhs are re%uired to en!a!e the ser#ices of a secretary in whole-time practice and obtain a Fsecretarial compliance certificate; fro him as to ensure compliance with the

pro#isions of the Act. Thus, secretarial audit in the form of submission of a compliance certificate has been made mandatory by the 3ompanies Act, '>>> for such companies. IV. Audit in Depth: Taylor and 4erry define auditin! in depth as it implies the examination of the system applied within a business entailin! the tracin! of certain transactions from their ori!in to their conclusion in#esti!atin! at each sta!e the records created and their appropriate authori5ation. CIt is a method accordin! to which a few selected transactions are sub(ect to a thorou!h scrutiny in formin! an opinion as re!ards the accuracy of the data so scrutini5edD. 2nder this type of audit, the auditor examines thorou!hly selected transactions ri!ht from their ori!in to the conclusions. All records and documents pertainin! to the transactions are checked in detail. The basic purpose of this type of audit is to see whether the system of internal check or control system is effecti#e. This type of audit enables the auditor to su!!est to the mana!ement a better procedure for recordin! the transactions to a#oid any loop holes for committin! frauds. :or example, the item sales will be examines as follows& 1. '. . ). ,. -. <. G. 9. 1>. 11. /rder from the customer. Acceptance of the order. Intimation to the dispatch section to send !oods. "ate 4ass. 3hallans outward duly acknowled!ed by the recipients. "oods outward 1e!ister. +tock 1e!ister. 3opy of In#oice. 3ash Book. Bank 4ass Book. 3ustomer;s *ed!er.
25

Group 2

Sagar's

Types of Audit

The principal of Caudit in depthD is applicable in the case of lar!e-si5ed companies. It is not suitable to small si5ed companies as they do not ha#e internal check system. All the transactions of small firms are re%uired to be checked. The auditor should resort to in depth audit only when he is satisfied with the efficacy of the internal check system which is in operation. The extent of efficiency of internal check system will decide the extent to which the auditor should apply the techni%ue of Cin-depth auditD. 7e should select those transactions which are material in relation to the affairs of the company.

!n depth audit is bene"icial to the auditor as "ollo#s:

a.It will enable the auditor to satisfy himself as to the efficiency or otherwise of the internal check system. b. It will ac%uaint the auditor as to how far the procedure for receipt and payment of cash purchase and sale of the !oods as prescribed by the company has been properly followed or not. c.The auditor will be able to find out the weak points of the existin! procedures for makin! entries in the books of accounts. d. The auditor can su!!est a better procedure to the mana!ement for recordin! transactions so as to a#oid any frauds. V. Cash Audit: It is a partial audit and not a complete audit. In this type of audit, the auditor examines only the cash transactions. 7e examines cash receipts and cash payments. The receipts and payments may be capital or re#enue in nature. 3ash transactions are checked with the help of receipts and #ouchers and other e#idences. VI. Operational Audit: /perational audit is conducted to see that the business operations are impro#ed in future. /perational audit !oes beyond financial audit. It is conducted for the followin! purposes& To impro#e the profitability. To !uide the mana!ement in achie#ement of or!ani5ational ob(ecti#es. To examine the efficiency of the mana!ement in conductin! #arious operations. To e#aluate the mana!ement policies and procedures. To ad#ice the mana!ement on business operations.

VII. Tax Audit: +tatutory audits as well as the cost audit are taken up as result of specific pro#isions contained in the companies Act, 19,-. 7owe#er, a new concept of tax audit has been e#ol#ed lately under the Income Tax Act, 19-1. In India, the Indian Income Tax Act, 19-1, pro#ides for compulsory audit of accounts of certain assesses whose turno#er or receipts exceed the specified limit. The Income Tax Act has pro#ided for rules and re!ulations re!ardin! tax audit. The tax audit can be undertaken by the practicin! member of the institute of 3ost and @orks Accountants of India.
26

Group 2

Sagar's

Types of Audit

There are no specific rules laid down by the 3hartered Accountants Act, 19)9. :rom time to time, the institute of 3hartered Accountants of India issues certain !uidelines re!ardin! conduct of Tax Audit. The ob(ecti#e of such audit is to

assist the tax authorities in determination of correct tax liability. The tax auditor has to report about the transactions which ha#e an effect on fixation of tax liability. Com+u/sor% Ta6 Audit .:s >>A4 2nder the abo#e section, tax audit is compulsory for a person carryin! on any business or profession if& a. In the case of business whose total sales turno#er or !ross receipts exceed 1s.)>,>>,>>> in the pre#ious year, and b. In the case of a profession, if the !ross professional receipts; in the pre#ious year exceed 1s.1>,>>,>>>. c. In the case of an assessee co#ered under sections ))A$, ))A., ))BB or ))BBB. The audit report in prescribes form should be obtained from the auditor and filed with the 1eturn of Income. The tax auditor cannot accept more than > tax audit assi!nments in a financial year.

III. "n#ironmental Audit:

In recent times, new type of audit has emer!ed which is known as .n#ironmental Audit. The ob(ecti#e of such an audit is to examine the effect of the acti#ities of an or!ani5ation on en#ironment. .n#ironment audit is a mana!ement tool comprisin! a systematic, periodic and ob(ecti#e e#aluation of how well or!ani5ation, mana!ement and e%uipment are performin! to safe!uard the en#ironment. It is concerned with assessin! whether the company policies meet re!ulatory re%uirements as percei#ed by the mana!ement. .n#ironmental factors play a #ery important role in e#aluation of future performance and cash flows of companies. .n#ironmental factors affect assets and liabilities of as or!ani5ation. The effect of en#ironmental factors can be assessed with the help of .n#ironmental Audit. In India the "o#t. has prescribed F.n#ironment Audit 1eport; termed as F.n#ironment statement; under the pro#isions o9f the .n#ironment 84rotection9 Act, 19G-. .#ery industry has to submit this statement to the +tate 4ollution Board e#ery year by >th +eptember. The en#ironmental audit re%uires the auditor to ha#e suitable technical %ualifications, knowled!e of en#ironmental laws and re!ulations sand ability to assess the impact of en#ironmental factors on financial performance of the company. The en#ironmental audit is conducted, !enerally, by small teams numberin! three or four persons because a professional accountant or any one person cannot ha#e #aried knowled!e re%uired for it.

27

Group 2

Sagar's

Types of Audit

I$. Propriety Audit:

In the words of Johler, C4ropriety means that which meets the tests of public interest, commonly accepted customs and standards of conductD. Applied to audit, propriety audit can be defined as Can examination of actions and decisions to find out whether they are in public interest and meet the standards of proper conductD. Thus under propriety audit, the auditor not only examine the transactions from the books of accounts with the help of #ouchers and documents, but he #erifies also as to how far transactions effected from the decisions or actions are proper or reasonable. The propriety audit is concerned with examinin! that there is no leaka!e of re#enue or wasta!e of funds by mistake or fraud. It is concerned with ascertainin! appropriateness from le!al, financial or economic point of #iew. 4ropriety audit is a #ery important part of the "o#ernment audit. In India, the 3A" is expected to examine propriety of expenditure and has to ensure that& 1. The authority sanctionin! the expenditure does not !et the benefit directly or indirectlyB '. The person who is spendin! has exercised the same prudence, as he would ha#e exercised while spendin! for himselfB . 4ublic money is not utili5ed for the benefit of a person or a !roup of persons. ). 4ublic money is utili5ed for the purpose for which it is to be spent.

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