Classifications of audit

Introduction

Auditing is a multi-dimensional and comprehensive technique. An effective insight into the nature
of auditing can be obtained by understanding the various types of audit, which together constitute
the auditing discipline; auditing can be classified from various viewpoints. In this chapter, the
detailed classification of audit will be discussed.

Classifications of Audit
1. External audit
2. Continuous Audit
3. Periodical Audit
4. Interim Audit
5. Occasional Audit
6. Standard Audit
7. Balance sheet Audit
8. Efficiency Audit
9. Social audit
10. Environment audit
11. Safety, Health and Environment (SHE) Audit
12. Post and Vouch Audit

What is External Audit?

External Audit is defined as the audit of the financial records of the company in which independent
auditors perform the task of examining validity of financial records of the company carefully in
order to find out if there is any misstatement in the records due to fraud, error or embezzlement
and then reporting the same to the stakeholders of the company.
An external audit is an independent examination of the financial records prepared by an
organisation. The main objective of an external audit is to verify that the accounting records for a
company provide a true and accurate picture of the organisation’s finances and that statements are
prepared in accordance to the set laws and accounting standards. External audits also add value by
identifying areas where efficiency in the business can be improved and where controls and
processes may be made more effective.

The objective of the external audit includes the determination of the completeness and accuracy of
the accounting records of the client, to ensure that the records of the clients are prepared as per the
accounting framework which applies to them and to ensure that the financial statements of the
client present the true and fair results and the financial position.
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Example of External Audit

Company XYZ ltd manufactures the garments and is listed as a publicly-traded company, i.e.,
sell their shares to the public. The company wants to know whether they are liable to get
their financial statements audited by the external auditor or not?
As per the law, all the company publicly traded businesses or the corporations which sell their
shares to the public are legally required to get their financial statements audited by the external
auditor. The objective includes the determination of the completeness and accuracy of the
accounting records of the client, to ensure that the records of the clients are prepared as per the
accounting framework and to ensure that the financial statements of the client present the true and
fair financial position. So the company will appoint the auditor who will conduct the external audit
of the company and give its audit report in writing, which will be based on the various evidence
and information gathered on the true and fair view of the financial statements provided to him to
the concerned parties.

Objectives of External Audit

• The main objective is to provide an opinion on whether the financial statements as a whole
give a true & fair view in all material respects of the state of the affairs of the company
and are free from material misstatements whether arising due to fraud or error.
• Also, the auditor needs to confirm whether the entity is presenting the financial statements
in accordance with the applicable financial reporting framework.
• For the purpose of achieving the said objectives, the auditor needs to follow audit
procedures & guidelines as provided by the governing body of the auditors.
• The external audit also ensures about the completeness, accuracy, consistency of the
financial records of the entity.
• The audit engagement letter specifies the objectives as well as the scope of the audit.
The audit engagement letter works as a contract with the client since it has clear details
about the rights & responsibilities of the auditor as well as the management, scope, timing
& extent of audit procedures, fees to be charged, etc.
• Auditor has to report a number of things as per the requirement of the statute. Hence, the
auditor also has the objective to gather evidence for the purpose of reporting.
• However, one should note the fact that the auditor is not appointed with the objective to
detect fraud within the entity. Detection of fraud is altogether a different type of assignment
& cannot be merged with the normal statutory audit. But, if during the normal course of
procedures of the audit, the auditor identifies any fraud, then he/it should report the same
to those charged with governance.

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Scope of External Audit
• The scope of the external audit includes checking the compliances of the relevant laws &
regulations governing the entity.
• The auditor needs to ensure the validity & authenticity of the financial records.
• Reporting of fraud by or on the company, if the auditor identifies during the normal
procedure of audit program.
• Early detection of errors is also included within the scope of external audit.

5 Tips To Prepare For Your External Audit

1. Understand the Standard: An audit is a report that evaluates your organization’s performance
against an external standard, so take the time to read and understand the standard you will be
compared to. This is critical to understand the approach the external auditors will take. Moreover,
it will help you to avoid taking unnecessary actions by touching on topics outside the scope of the
audit. Having that general understanding can help you manage the external audit more efficiently.
2. Identify Your Subject Matter Experts (SMEs): No one knows your internal processes better
than your own SMEs. Based on the standard you need to comply with, determine which of your
employees have the best knowledge to help the external auditor understand and evaluate your
business and information security processes. Make sure you explain the importance of the
upcoming audit to those SMEs, and present your understanding of the standard so the auditor can
lend their knowledge and experience to prioritize actions for preparation.
3. Allocate Resources to the Experts: Experts and specialists in every field usually are engaged
with their normal day-to-day activities. Auditing requires significant time, energy, and effort from
your SMEs. Make sure that all necessary resources are available so your audit team can proceed
with ease.
4. Determine Your Internal Procedures: Gather your SMEs and go through internal audit
processes relevant to the controls that will be examined during the upcoming audit. The goal is to
identify any gaps where processes don’t exist or don’t sufficiently meet the standard you’ll be
audited against. In other words, make sure that all the controls required by the standard are in place
in your business, and that corrective actions are taken where needed.
5. Gather Documentation for Your Procedures: Having all internal procedures in place is a
great starting point. External auditors, however, will ask for supporting materials as part of the
audit process. They’ll want to see policy documents, financial statements, accounting records, and
“process artifacts” (that is, evidence that your internal processes are working as intended).
Based on the business processes determined in the previous step, make a list of documents that
demonstrate the current internal control structure and review these documents. This is another form
of gap analysis to determine whether your documentation is accurate and complete.

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 What is an external audit professional and what do they do?

An external auditor is an independent, third party professional who performs an impartial review of
the financial records of an organisation. They are responsible for examining their client’s accounts
and financial statements, and preparing impartial reports of the findings, including any
irregularities. They will typically report to an audit committee, consisting of senior management
and provide improvement recommendations
External audits can also extend beyond financial audits - external auditors also provide assurance
in other areas of the business or help companies address specific problems in areas such as health
and safety, IT and social responsibility.

Key responsibilities

Main responsibilities include, but are not limited to:

1. Planning and implementing audit procedures
2. Attending meetings and interviewing staff to gather evidence
3. Examining accounts and financial records and other relevant documentation
4. Analyzing and assessing financial reporting, fraud or operational business risks
5. Preparing a final audit report, including making recommendations for improvements to systems
or processes
6. Discussing the conclusion and recommendations from the audit with clients.

Roles & Responsibilities of an External Audit

• The main responsibility is to verify the general ledger of the company and make all
other essential inquiries from the management of the company. It helps to determine the real
picture of the company’s market situation and the financial situation, which further provides the
basis for managerial decisions.
• Examine the validity of financial records to find out if there is any misstatement in the
company’s record because of fraud, error, or embezzlement. So, it increases the authenticity and
credibility of financial statements as the financial statements of the company.
• If there are errors in the accounting process of the company, then it may prohibit the
owner of the company is taking the decisions which are best for the company. An audit helps in
overcoming this problem to a great extent as the procedures in the audit are designed in such a way
that they help in detecting the errors in the system and the other fraudulent activity. The audits also
ensure the recording of accounting transactions as per the generally accepted accounting
principle. It helps the owner of the business to cover themselves when it comes to following the
different rules and regulations which the registered entity needs to follow.

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External Audit Process

The typical external audit process goes as follows:

Step 1: Appointment of the Auditor

• Here, the shareholders need to ensure that the person is independent from the affairs of the
company in all respects.
• A firm or an individual is recommended by the audit committee of the company on the
basis of various factors filtered by the committee.
• Such a recommendation is placed by the board of directors of the company in front of the
shareholders for their approval in the annual general meeting.
• Once the majority votes are received, the appointment is approved
Step 2: Confirmation by Auditor
• After appointment by the company, the auditor ensures his independence at his end.
• He/she checks whether the said appointment can be accepted.
• If everything is fine, he provides confirmation to the company.
• The company needs to inform the said appointment of the governing body.
Step 3: Audit Engagement
• A formal engagement contract is made between the company & the auditor.
• Such a contract enumerates the audit objectives, independence of the auditor,
responsibilities of each party, audit fees to be paid, etc. such that everything is clear
between the two parties.
• The engagement letter also ensures the scope of work to be done.
Step 4: Audit Planning & Execution
• Here the main task of the auditor starts. He needs to prepare an audit plan first, containing
the deadlines for each area & the overall deadline for completion of the audit.
• Once the plan is in place, the auditor prepares audit programs for the execution of the audit.
• He also assesses the significant risks in the financial statements of the entity, through his
normal audit procedure.
Step 5: Collection of Evidences
• As per the audit program, the auditor needs to collect evidence to support his opinion in the
audit report.
• Such evidence needs to be corroborative in nature i.e. convincing evidence.
Step 6: Audit Report
• The signing of the audit report is the last step in the external audit process.
• Here, the process for the said year gets completed in its entirety.
• Auditor gives his opinion as per his judgments about the financial statements.

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The Basics of External Audit

An External Audit is a periodic audit conducted by an independent qualified auditor with the aim
to determine whether the accounting records for a business are complete and accurate. It is also
done to ensure that the statements accurately represent the organisation’s financial position and are
prepared in accordance to the set laws.
An external auditor is an independent, third party professional who performs an impartial review of
the financial records of a certain organisation. He or she typically reports to an audit committee
composed of company executives. He is responsible for evaluating payroll, accounting, and
purchasing records. He also looks at the organisation’s loans and financial investments to identify
any irregularities. Internal and external auditors typically have the same job responsibilities;
however an internal auditor is more focused on internal control procedures and risk management.

The Process

1. Appointment of auditor. The process starts by appointing an independent auditor. This means
hiring someone who is not working for the organisation or the company that requires auditing.
Shareholders are usually the ones who choose and appoint auditors at the Annual General Meeting.
However, governing legislation also has the power to choose an independent auditor. Typically,
auditors will be chosen based on their reputation, qualifications, and skills.
2. Acceptance of the project. The next step of the process is the terms of engagement. In this part,
the auditor confirms that he or she has accepted the appointment. He or she will be informed of the
scope of the audit plus his or her expected responsibilities throughout the contract.
3. Audit program. This is where the actual external auditing will take place. The auditor will
collect, assess, and interpret data to gain understanding of the organisation’s activities. For each
major activity listed in the financial statements, external auditors will have to identify and assess
risks that may have significant impact on the organisation’s performance or financial position.
The external auditor will also look for any irregularities. These may include the company
manipulating its own financial performance to mislead investors, delaying the disclosure of future
financial performance, etc.
4. Evidence gathering. External auditors will obtain evidence in order to successfully satisfy the
requirements of the audit program. This may include confirming compliance with accounting
policies, examining accounting records, and verifying assets that the organisation has purchased.
5. Reporting. After a thorough investigation, the auditors will submit a financial report and state
their objective opinion. The scope of the audit and the outcome will be outlined in their report.
The findings of an external audit can strongly influence the reputation of the company. There can
be serious consequences if the conclusions about debts, assets, tax responsibilities, and payments

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do not match the organisation’s own statements. External auditors will rate the client depending on
their review. An unfavourable rating and this can influence if they can stay in business.
Why do organisations hire external auditors?
Organisations hire external auditors for one main reason: to have an objective assessment of the
organisation’s financial standing. As external auditors do not have a developed relationship with
the organisation that they are reviewing, they are not biased in any way; this means that they can
be objective throughout their audit. This translates to accurate data needed by the organisations in
assessing their progress or lack thereof.
When organisations hire external auditors they ensure, to the best of their abilities, that he or
she is not a relative or a friend of the owner, employee, or manager. Those auditors who are
reviewing publicly traded companies should not hold stock in them or have any equity stake in any
or their holdings or subsidiaries.

Limitations of External Audit

Auditors can only give reasonable assurance that the financial statements present fairly,
Inherent
in all material respects, not absolute assurance. Likewise, auditors can only assure that
Limitation
the financial statements are free material misstatements, not all misstatements.

Auditors need to use professional judgment on many areas of audit, including

determining materiality, assessing the risks, developing audit strategy, and
interpreting the audit evidence. For example, estimation is made on the useful life of
fixed assets by the client, so auditors need to use their professional judgment to
Judgmental Areas evaluate whether it is appropriate or not.
In general, auditing is not objective, hence auditors need to make judgments on many
subjective areas. As a result, it can never guarantee that auditors always make 100%
right judgment and never overlook the misstatements that could occur on financial
statements.

Auditors usually cannot perform the audit test on all transactions and balances of
client’s accounts as it would take a great deal of time and trouble to test the entire
population of transactions and balances.
Sampling Risk Hence, only a certain number of transactions and balances are selected for audit tests
based on the sampling technique that auditors use. As a result, it creates a risk that
auditors may fail to detect the material misstatements on financial statements,
which is usually referred to as sampling risk.

Auditors may fail to detect material misstatements due to fraud on financial statements
even though auditors have the responsibility to do so. This is due to fraud is an
Fraud Risk
intentional act, in which the individual or group that commits fraud would usually
try their best to hide it.

Auditors may need to rely on experts like engineers, lawyers, or actuary, etc. in order to
evaluate and estimate certain cases, events or transactions. For example, auditors have
Relying on Expert
to rely on a lawyer to evaluate the court case that the client is facing in order to make an
estimation of contingent liabilities.

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 The audit report is usually issued at a time after the balance sheet date which usually is
Not up-to-date
later than a month. As a result, the up-to-date financial position of the company and
balance sheet
the audited one might be different.
Continuous Audit

Continuous audit implies a detailed examination of all the transactions by auditor continuously
throughout the year. In other words, when the accounts of the client are checked continuously
throughout the whole year or at intervals during the financial period is called as Continuous Audit.
At the end of the financial period, the auditor checks the correctness of the financial statements and
submits a report without much loss of time.

Features (or) Characteristics

1. It involves detailed examination of all transactions by the auditor.

2. The auditor visits the business concern at frequent intervals, say, weekly or fortnightly or
monthly during the period of audit.
3. Continuous audit is done simultaneously with the preparation of accounts.
4. The auditor is constantly engaged in checking the accuracy of the accounts during the whole
accounting period.
5. At the end of the financial period, the auditor checks the correctness of the financial statements
and submits a report.

Advantages

1. Easy Detection of Errors and Frauds: The detailed checking involved in continuous Audit can
discover errors and frauds easily and quickly.
2. Quick Presentation of Accounts: Since the accounts are checked throughout the year, it is
possible to present the audited accounts to the shareholders soon after the close of the financial
year.
3. Proper Planning: The regular visits performed by the auditor makes the clerk alert in
maintaining day-to-day accounts. It also enables the auditor in timely completion of the audit
work.
4. Moral Check on the Employees: As the auditor pays surprise visits to the business in
continuous audit, it has a considerable moral check on the clerks as they are not aware when the
auditor comes.
5. Detailed Examination: As the auditor visits his clients at regular intervals throughout the year,
a detailed and exhaustive checking of accounts is possible.

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6. Preparation of Interim Accounts: Continuous audit helps in quick preparation of interim
accounts and helps the board of directors to declare interim dividend.
7. Valuable Suggestions: Regular visit of an auditor helps the auditor to understand the technical
issues of business. This enables the auditor to make suggestions for the improvement of business.
Disadvantages

1. Possibility of Alteration: Records and figures in the books of accounts which have already
been checked by the auditor may be altered after the audit is over.
2. Dislocation of Client’s Work: The frequent visit made by the auditor may dislocate the work of
his client and cause inconvenience to them.
3. No Continuity in Work: In continuous audit, the auditor conducts audit work at intervals.
Hence he loses continuity and fails to seek clarifications of the queries arising in the previous visit.
4. Creation of Unhealthy Relationship: The frequent visits of the auditor may establish
unhealthy relationship between him and the clerks.
5. Expensive: It is a very expensive form of audit.

Periodical (or) Final (or) Complete Audit

Annual or Periodical audit is conducted after closing the books of accounts and preparing the
financial statements. In such a case, the auditor visits the clients only once in a year and checks the
accounts in one visit. The auditor makes a detailed or random check of the transaction which has
taken place in the books of accounts and examines the correctness and fairness of the financial
statements. This type of audit is free from the defects of continuous audit and carries other

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advantages with it, but detailed checking is not possible. Hence, errors and frauds cannot be
detected easily and quickly.

Features (or) Characteristics

1. Periodical audit work is done and completed in a continuous session.

2. The auditor visits the clients only once in a year and checks the accounts in one visit.

3. Auditor makes a detailed or random check of the transactions and examines the correctness and
fairness of the financial statements.

4. Detailed checking is not possible and hence errors and frauds cannot be detected easily and
quickly.

5. Periodical audit is suitable in case of small business concerns where there are only limited
transactions.

Advantages

1. No Inconvenience and Dislocation in Work: The work of audit does not present any
inconvenience and dislocation in the work of the concern as the auditor comes only once in a year.
2. Less Expensive: Periodical audit is less expensive and more useful for small business concern
than continuous audit.
3. Quick Finalisation of Accounts: In periodical audit, the work of the auditor can be finished
quickly and within a reasonable time. The auditor ensures quick completion of work in one session
due to continuity.
4. No Chance of Collusion: In periodical audit there is no undue collusion between the auditor
and the clerk as in the case of continuous audit.
5. No Chance of Tampering Books: The possibility of tampering with the books of accounts
during the audit is reduced as the audit work starts only after the books are closed.

6. Time Effectiveness: The auditor uses statistical sampling methods and techniques which lead to
time effectiveness.

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Disadvantages

1. Detailed Checking not Possible: In periodical audit, detailed checking of accounts is not
possible and hence there are chances of errors and frauds which remain undetected.

2. Delayed Presentation of Audited Financial Statements: The work of an auditor starts only
after the close of the financial period, therefore there is undue delay in finalising the financial
statements and in preparing the audit report.

3. Difficulty in Fixing Responsibility: Another major drawback is that all the errors and frauds
are found at the end of the accounting year, which makes it very difficult to fix responsibility for
defalcations.

4. No Moral Check on Clients Staff: There is no sense of moral check on the employees in
clients organisation as the auditor visits the company only after the end of the financial period.

5. Unsuitable: For big concerns, periodical audit is rarely practicable and it is not much popular
for them.

Interim Audit
Interim audit is an audit which is conducted in between two annual audits to find out interim
profits to enable the company to declare an interim dividend. It involves complete and detailed

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examination of transactions and review of records and accounts upto the date of interim audit. It is
an audit which is conducted in between two balance sheet audits. It is conducted for a specific
period with an object of declaring interim dividend or to determine value of shares at a certain date

Features (or) Characteristics

1. It is an audit which is conducted in between two annual audits i.e., audit for a period of six
months or half yearly audit.
2. It involves complete and detailed examination of transactions and accounts upto the date of
interim audit.
3. It is conducted for a specific period with an object of declaring interim dividend or to determine
value of shares at a certain date.
4. The objective of conducting interim audit is to know the reliability and accuracy of financial
statements of a business for a part of the year.

Advantages

1. Quick Detection of Errors and Frauds: Errors and frauds can be detected quickly and easily.
2. Helps in making Improvement: It helps the management to assess the financial position of
business for a part of the year. Any deficiency noticed during first part of the year can be rectified
during later part of the accounting year.
3. Helps in Publication of Interim Results: Interim audit helps in finalisation of interim results
for the purpose of declaring interim dividend.
4. Early Completion of Annual Audit: It helps the auditor to complete the annual audit within a
short period and submit the report as early as possible.
5. Review Internal Control System: It enables the external auditor to review the internal control
system in detail as to their effectiveness and continuity.
6. Moral Check on Clients Staff: It helps in exercising moral check on the staff of the client.

Disadvantages

Increase in Work load of Audit Staff: Interim audit involves finalisation of accounting
statements for some specific period of time which increases the work load of audit staff.

Possibility of Alteration of Accounts: An inherent danger of interim audit is alteration of

figures that are already checked and finalised.
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 Erosion of Capital: Wrong assessment of profit may lead to erosion of capital through
interim dividend.

Occasional Audit

Occassional audit is conducted as a special event, normally in those organisations when routine
audit are not taken place. For example, audit conducted in a partnership firm on admission or on
retirement of a partner. Occasional audit is also performed when Government orders for a special
audit to investigate into certain matters.

Standard Audit

Standard Audit refers to detailed checking and analysis of certain transactions only and the
remaining transactions are subjected to sample checking provided there is a good and effective
system of internal check in operation. In other words, it is a sample checking after a satisfactory
and detailed checking of some of the items.

It is defined as, “ a complete check and analysis of certain items and contingent upon effective
check, an appropriate test check on remaining items, the whole of the work being in accordance
with general audit standards quite adequate to justify an unqualified person.”

Balance Sheet Audit

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The term “Balance sheet Audit” is an American contribution. It is more popular in U.S.A. It is very
rarely used in India and other countries. In balance sheet audit, the auditor verifies the balance
sheet items such as capital, liabilities, reserves and provisions, assets and other items given in
the balance sheet. The auditor checks only those documents, which are related to the items given
in the balance sheet and does not review other items which are not connected with the Balance
Sheet.

Although, Balance Sheet Audit concentrates on the items of Balance Sheet, it does not exclude
audit of other business operations. As the balance of Profit and Loss Account itself is part of the
Balance Sheet, it will invariably include the examination of the items recorded in the Profit and
Loss Account. It is similar to an annual audit. In India, no distinction is made between Balance
Sheet Audit and Annual Audit.

In this audit, a backward process is followed to audit the balance sheet. First the item is located in
Balance Sheet, and then it is located in the original records for the purpose of verification. This
audit is based on the assumption that there exists a reliable system of internal control. It presumes
that auditor is highly skilled and experienced.

Efficiency Audit

Efficiency Audit means verification of the degree of efficiency or competence with which the
operations and performance of an enterprise are carried on.
Such audit is aided by an effective system of cost accounting supported by proper maintenance of
cost records. For this reason the Companies Act makes it obligatory on the part of a company
belonging to a class of companies engaged in production, processing, manufacturing or mining
activities to maintain proper books of account containing prescribed particulars of raw materials,
labour and any other item of cost, if so required by the Central Government.

Well-maintained cost accounting records are helpful for efficiency audit by serving the
following purposes, viz., to:

(a) Furnish accurate cost of jobs, processes, materials, labour, finished products, work-in-progress;
(b) Compare present cost with past experience;
(c) Make accurate periodical financial statements for information and guidance of management;
(d) Help fixation of finished products’ prices by furnishing all relevant data;
(e) Determine evaluation of production process and find out what are profitable or non-profitable
items and their exact cost;
(f) Help in distributing overhead cost;
(g) Help in planning operations and controlling cost; and
(h) Determine efficiency of operation based on data as to cost volume of production.
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Efficiency audit may be said to be a variant or extension of and complementary to performance
audit.

Social Audit

“Social Audit” may be defined as a kind of audit aimed at verifying and reporting on
the extent of fulfillment by an organisation as an organ of society of its obligations
to the society in different directions.
In other words, the object of social audit is a social object of finding out what
contributions an enterprise which has diverse obligations to the society makes, and
what it takes from others, and also ensuring that social or public interest is sub-
served. Such audit has to be carried on by independent persons.
While no standard or widely accepted procedure for social audit has yet been
devised the following principal factors have emerged as vital components of a
special system for assessing social performance of organisations covering benefits
and costs to society by reference to both quantum and money value of their various
actions and operations:
(a) Contribution to national economic growth through expansion, employment
generation, wider ownership pattern etc.
(b) Relations with people including cordial industrial relations, training and
employment in general and, in’ particular, of handicapped, backward and minority
people, employee welfare.
(c) Product relations including quantity, quality, safety and prices of products
supplied or services rendered.
(d) Environmental relations including improvement of or detriment to environment
or ecology, control of environmental pollution of different kinds.
(e) Quality of life including social, family and community welfare schemes,
employees’ self-reliance and self-dignity schemes like cooperatives of different
kinds, promotion of education, community development, rural upliftment including
adoption of villages, upkeep of gardens and parks, etc.
(f) Social or national development e.g., promotion of sports, music and games, art
and culture, etc.

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To enable assessment of money value of social contributions of an enterprise, spe-
cially designed accounting systems have been or are being evolved to show various
social costs and benefits in monetary terms of social performances as stated above.
Benefits and costs to employees, community, general public are ascertained and
social balance sheet is prepared comprising contributions by public (equity) and
employees on the one hand and social investments and assets, human assets, on the
other. Social audit would involve checking of the said social accounts and social
performances as stated in the directors’ reports or in other documents.
Social audit would enable business managers to keep in mind their social ob-
ligations. This would help in improving the image of an enterprise as a socially
responsible one; boosting employees’ morale and consumer and public acceptance
and finally reaching the long term enterprise objectives.
Some companies, instead of going for social audit, include social achievements in
the annual reports.

Environmental Audit

All industries in India which need consent or authorisation under the Air, Water and Environment
Protection Acts, are required to effect environmental audit for every year ending 31st March,
effective from 1993.
Every such industry must submit to the concerned Pollution Control Board within 15th May of
every year an Environment Audit Report in the form prescribed under Rule 14 of the Environment
Protection Rules as amended from time to time.
The report should specify the amount of pollutants and wastes hazardous as well as solid and
indicate disposal practices adopted for both, wastes generated from process, pollution control and
quantity reduced or reutilised, impact of pollution control, measures on conservation of national
resources, cost of production, investment proposals for environmental protection and abatement of
pollution, quantities of wastes utilised for processing, cooling and domestic purposes, and
consumption of raw materials per unit of production as compared to previous year.

Safety, Health and Environment (SHE) Audits

SHE audit may be said to be an expansion or extension of environmental audit. The word audit has
been increasingly used to cover non- financial areas like safety of consumers and the public, health
of employees and others over the last three decades or so the world over led by USA and followed
by other countries including India.

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This has been necessitated by growing hazards of illness and injuries caused by accidents due to
rapid industrialisation, deforestation, pollution, greenhouse effect and natural calamities. Apart
from aforesaid hazards, there are also risks of damage to expensive plant and machinery and loss
of economical viability of an enterprise.
Therefore, in many countries, legislations require and good corporate governance ensures
satisfactory safety, health and environmental protection measures by industry and the state. SHE
audit is concerned with verification of the efficacy of such measures.
Safety audit:

Safety audit may be defined as a system of critically examining and analysing every aspect of a
safety system e.g., management policy, plant and process designs, layout and construction,
operating procedures, emergency plans, personal protection systems, accident prevention and
management procedures. Such audit which is conducted by properly qualified persons like safety
experts aims to focus on vulnerability or weaknesses of safety measures.

Health audit:

Health audit means systematic and critical verification of and reporting on strengths and
weaknesses of all aspects related to management of health of employees or of the public.

Environmental audit:

Environmental audit for industrial or commercial establishments refers to checking of the

effectiveness or otherwise of systems or measures adopted for prevention or minimisation of soil,
air and water pollution. The object of such audit is to ensure fulfilment by an undertaking of
obligations relating to protection of environment legal or otherwise.
SHE auditors may be internal i.e. in- house personnel, or external, i.e., outside professionals or
consultants.
SHE audit reports highlighting strengths and weaknesses/vulnerability of the various
systems/measures for protection against risks of safety, health and pollution and suggestion on
appropriate follow-up actions are to be submitted periodically to the management. SHE audit is
mostly adopted by large public sector undertakings.

Post and Vouch Audit

Post and Vouch audit refers to verification of all transactions from book of original entry and its
posting in the ledger. The auditor uses different ticks for each aspect of examination like posting,

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totalling, balancing etc. In conduct of this audit, the auditor verifies the effectiveness of internal
control system, if satisfied will resort to test checking of various types of transactions.

This type of audit is suitable for small business organisations and is not advisable for business
concerns with large volume of transactions. Practically, this system of audit is no longer conducted
due to vast increase in business transactions or due to introduction of merchandised system of
accounting or when there is a good system of internal check in operation.

Differences Between Continuous Audit and Annual Audit

Differences Between Continuous Audit and Interim Audit

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Audit of Accounts of Sole Proprietor

Sole Proprietor or trader is a person who solely owns, manages and controls a business.
Sole proprietor decides upon auditing the accounts and decides upon the scope of audit and
appointment of auditor. There is no legal compulsion for audit of accounts of a sole proprietor but
usually business concerns get audited especially when the volume of transaction is large. Before
conduct of audit, the auditor should obtain an agreement from the proprietor stating the scope,
conduct and any specific instructions of audit. The rights and duties of an auditor will depend upon
the terms of agreement with the client. In future when the auditor is charged for negligence, he can
protect himself by producing the agreement of audit.

Advantages

The sole proprietor gets several benefits from audited accounts; some of them are as follows:

1. Accuracy of Accounts: Audited accounts reveal the truthness and correctness of transactions
and provide an assurance that accounts are properly maintained.

2. Detection and Prevention of Errors and Frauds: It helps in detecting and preventing errors
and frauds in the books of accounts.

3. Provides Assurance of Proper Accounting: The trader is assured that his incomes are
properly accounted and expenditures are properly vouched.

4. Discovery of Defalcations: He is also assured of not being defrauded by any of his employees
or agents, as the defalcations are discovered by the auditor.
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5. Helps in Comparing Accounts: The presentation of accounts on a uniform basis helps
comparison of various classes of expenditure from year to year. In case the expenditure crosses the
budgeted targets, causes for the same may be ascertained and remedial measures may be taken.

6. Relied by Statutory Authorities: The audited accounts are the reliable document of sole
proprietor for income tax and wealth tax purposes.

7. Helps in Settlement of Claims: Audited accounts may also facilitate the settlement of various
kinds of claims.

8. Moral Check on Employees: It enables to have a moral check among employees especially
among dishonest staffs.

Audit of Accounts of Partnership Firm

The Indian Partnership Act, 1932 does not require audit of a partnership firm. It is only optional
and upto the interests of the partners. Considering the benefits of audit many firms get their
accounts audited by a qualified auditor. The scope and conduct of audit and rights and duties of the
auditors are determined on the basis of the agreement between the firm and auditor. While
conducting audit of partnership firm the auditor must refer to the Deed of partnership.

Advantages

The following are some of the benefits in auditing the accounts of a partnership firm:

1. Proper Maintenance of Accounts: When accounts are audited, it provides an assurance that
the books of accounts are maintained properly and financial statements give a true and fair view of
state of affairs of the business.
2. Detection of Errors and Frauds: An audited accounts helps in quick and easy detection of
errors and frauds.
3. Easy Settlement of Accounts: Audited accounts ensure easy settlement of accounts and
valuation of goodwill on admission retirement, or death of a partner. Audit of accounts is advisable
to avoid any financial dispute among the partners.
4. Grant of Easy Loans and Advances: Firm can obtain easy loans and advances from various
financial institutions based on audited accounts.
5. Taxation Purpose: The firm can use audited accounts for the purpose of taxation or for
improvements in operations.

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Audit of Accounts of Joint Stock Company

Companies formed and registered under the Companies Act, 1956 have to compulsorily audit its
books of accounts as the owners (shareholders) and the management of the company is different.
The company auditor’s rights, duties, appointment, remuneration etc. are governed by the
provisions of the Companies Act. This type of audit is called as Statutory Audit and the person
who conducts the audit is called as Statutory Auditor.

The main objective of external or statutory audit is to examine the accuracy that the financial
statements reflect a true and fair view of the state of affairs of the business. In other words, the
company auditor has to verify that the books of accounts and certify that the books of accounts and
financial statements exhibit a true and fair view of the state of affairs of the business concern in the
form of a report to the shareholders of the company.

Characteristics (or) Features

1. The main objective of external or statutory audit is to examine the accuracy that the financial
statements reflect a true and fair view of the state of affairs of the business.
2. The scope of work is determined by the Companies Act and the auditor possesses an
independent status and the management has no control over the auditor.
3. Auditor should be a qualified Chartered Accountant as laid down in the provisions of the
Companies Act.
4. Statutory auditor is appointed and removed by the shareholders of the company.
5. The powers and duties of statutory audit are determined by the Companies Act.
6. Statutory or Company auditor is liable both to shareholders and to the third parties.
7. After audit of accounts of a company, auditor has to submit a audit report to the shareholders at
annual general meeting in prescribed format.
8. Company or statutory auditor is responsible to shareholders and acts as a watch-dog for the
shareholders.

Advantages

The following are the advantages of auditing the accounts of a Joint Stock Company.

1. Verification of Accuracy of Books of Accounts: Audit of accounts helps to verify the

correctness of the financial transaction and accuracy of books of accounts.
2. Detection and Prevention of Errors and Frauds: Audit helps in detecting and preventing both
errors and frauds and also exhibits a true and fair view of state of affairs of the company to the
shareholders who are the owners of the company.
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3. Moral Check on the Management: Audit of accounts enables to have a moral check on the
management in order to protect the interest of the shareholders.
4. Safeguards Interest of Shareholders: When accounts are audited by an independent and a
qualified auditor, the interest of the shareholders and third parties are protected and safeguarded
against any frauds committed by the directors, promoters or managers.
5. Valuable Suggestions: Besides the above advantages, auditor who is in touch with the company
operations can provide valuable suggestions.

Preliminaries Before Conduct of Audit

A company is an artificial judicial person and has separate legal entity. The share holders of the
company are interested to know the financial position of the company. Hence, the audit of books
of accounts for the limited company is compulsory. The auditor has to produce a report on the
books examined by him and express a true and fair view of the profit and loss account prepared by
the client. Before commencing the audit work, the auditor has to undertake certain preliminary
steps. They are:
1. Examining the validity of his appointment
2. Inspection of Documents, Contracts and Registers
3. Other Information.

1. Examining the Validity of his Appointment

The auditor has to check that his appointment has been made as per the provisions of Companies
Act. He has to ensure that his appointment has been validly made based on the different provisions
for the appointment of auditor under Companies Act. The following are the various circumstances
of appointment of auditor:

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· Where he is appointed as first auditor, get a copy of the resolution by the directors about his
appointment;
· Where he is appointed in the place of retiring auditor, he should enquire from the retiring
auditor in writing, whether due notice was given to him and also the circumstances under which he
retired, and also if the retiring auditor has any objection to his accepting the appointment. Failure
on the part the auditor shall be treated as a breach of professional ethics.
· Where his appointment is made by the shareholders in annual general meeting, he should
procure a copy of the shareholders resolution regarding his appointment, and inform the Registrar
within 30 days whether he is accepting the appointment.
· Where he is appointed in a casual vacancy, by the directors, he should obtain a copy of the
director’s resolution to this effect.

2. Inspection of Documents, Contracts and Registers

He should obtain a certified list of all the books used in the company and examine the records,
documents and registers with reference to the following:

(A) Memorandum of Association: The Memorandum of Association is the basic document of the
company.
It authorizes a company to engage in specific activities. Therefore, it is necessary for the auditor to
examine the scope and powers of the company. The auditor should have a complete study of
Memorandum of Association in the following aspects:
· Whether the transactions carried by the company is subject to the clauses in the Memorandum
of Association, if not the transactions of the company become ultravires.
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· The auditor has to check the share capital issued is within the authorized capital.
· He should scrutinize the object clause and borrowing powers of the company.
· He has to check other provisions, which are likely to affect the accounts of the company.

(b) Articles of Association: The Articles of Association deals with rules and regulations of the
internal management of the company. The auditor has to examine the following particulars in the
Articles of Association:
· Issue, allotment and forfeiture of shares and declaration of dividend.
· Appointment and removal of directors and officers of the company and the provisions relating
thereto.
· Provisions regarding meeting and voting rights of share holders.
· Borrowing powers of company.
· Payment of interest on capital, under writing commission and brokerage.
· The auditor has to make thorough study of the Articles of Association and he has to apply his
skill and knowledge on various transactions of the company.

(c) Prospectus: A Prospectus is an invitation to the public to subscribe for shares and debentures
of the company. It holds all the rules and regulations for the issue of shares. Normally all the
matters which are in the articles of association are also found in the prospectus. The auditor should
make a detail study in the following matters:
· He should verify the name, addresses, remuneration of directors and other statutory officers
whose particulars are specified in the prospectus.
· He should see that all the statements made in the prospectus are true.
· He should examine in the prospectus that the amount payable at the time of allotment and call.
· He has to examine that any material contract made by the company within two years from the
date of issue of prospectus.

(d) List of Books: Auditor should ask the company to submit a list of all the books of accounts,
statistical and statutory books maintained by the company. Important books are kept at the
Registered Office of the company.

(e) Contracts: The auditor has to check the date of agreement or contracts made by the company
with other parties, like, vendors, underwriters, promoters or brokers etc. Further, the auditor should
verify whether the agreements are made by the authorized person of the company. He should see
that entries relating to contracts are recorded correctly.

(f) Minutes Book: Every company has to maintain a book in order to record the proceedings in the
general meetings, meetings of board of directors and committee of the board. They are in the form
of a bound note book. The auditor has to verify that the chairman has certified the minutes book
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with date and signature. The audit of the Minutes Book helps the auditor in vouching various
transactions e.g., adoption of the annual accounts, calls on shares, directors fees and expenses,
appointment of first auditor and his remuneration and authorization of capital expenditure etc.

(g) Certificate of Incorporation: Certificate of Incorporation is an important document which

brings the company into legal existence.
The auditor has to check that all legal official procedures have been fulfilled subject to the
provisions of the Companies Act.

(h) Certificate of Commencement of Business: A public company has to get Certificate of

Commencement of business before it commences its business. The auditor should examine the
Certificate of Commencement of business in case of a public company.

(i) Previous Year Balance Sheet, Profit and Loss Account and Audit Report: The auditor has
to verify the last year Balance Sheet and ensure that the balances are correctly recorded in the
current books. He has to check the minutes book of the share holders about the adoption of the
accounts. Moreover, he has to get the copies of last year’s Profit and Loss Account and Balance
Sheet which is required for conduct of his audit work. He should ensure that the objections or
qualifications raised in the previous audit report have been duly met by the company. He should
examine the Directors report to the members containing the recommendations of the Directors in
respect of the appropriations of profits made last year.

3. Other Information

(a) System of Accounting: The auditor has to study the accounting system followed in the
company and has to observe the inefficiencies.
(b) List of Officers: The auditor has to obtain the list of officers in the company with their
specimen signature.
(c) Evaluation of Internal Check and Control System: The auditor has to obtain detailed
information about the internal check and internal control system in the company. This will enable
him to identify the defects in the accounting system. Further, he has to verify the
recommendations, if any, made in the last year audit report.

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Audit of Trusts

Trusts are formed under the Indian Trusts Act for charitable and religious purposes. Trustee is a
person who manages trust property and executes the business of the trust. His duty is to work for
the benefit of beneficiary and distribute income of the trust to the beneficiaries. The operations of
trusts are governed by a Trust Deed. Very commonly it is found that beneficiaries are being
defrauded by the trustee. Hence audit of trust accounts helps to protect the beneficiaries against
unscrupulous trustees. The provisions of the Public Trust Act and Trust Deed provide that accounts
of trusts should be audited by a qualified auditor.

It is the duty of the auditor to verify the transactions and books of accounts of trusts and certify the
truthness and fairness of the working of the trusts. When trusts are audited by a qualified auditor, it
will help both the trustees as well as the beneficiaries. Trustees will be benefited because there will
be no unnecessary criticisms against them. The beneficiaries will also be benefited because they
will be assured that the accounts have been properly maintained and that there has been no
misappropriation of trust money or fraud.

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