Chapter 2

Field and Types of

Audit

Field of Auditing
Internal Audit
Frequent

or ongoing audit conducted by

a firm's own (as opposed to independent)
accountants to:
1. Monitor operating results
2. Verify financial records
3. Evaluate internal controls
4. Assist with increasing efficiency and
effectiveness of operations
5. To detect fraud.

Cont..
Internal

audit can identify control

problems, and aims at correcting
lapses before they are discovered
during an external audit.
Although the internal auditors are
the firm's employees, they normally
do not audit themselves or their own
departments, but entrust it usually
to independent auditors.

External Audit
Periodic

or specific purpose audit conducted by

external (independent) qualified accountant(s).
Its objective is to determine, among other things,
whether
1. the accounting records are accurate and
complete
2. prepared in accordance with the provisions of
GAAP
3. the financial statements prepared from the
accounts present fairly the organization's
financial position
4. the results of its financial operations.

Cont.
An

external audit is a review of the financial

statements or reports of an entity, usually a
government or business, by someone not
affiliated with the company or agency.
External audits play a major role in the
financial oversight of businesses and
governments because they are conducted
by outside individuals and therefore provide
an unbiased opinion.

Cont.
External

audits are commonly

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

Time Frame
External

audits are typically conducted once a

year at the end of the company's or
government's fiscal year. They are performed
after the entity's in-house bookkeepers prepare
a year-end financial report, which is one of the
documents verified in an external audit.
Companies and governments will typically issue
quarterly financial reports throughout; however,
these are usually by internal accountants and
bookkeepers, and have not been externally
reviewed for accuracy.

Significance
Because

external audits are performed by thirdparty accountants, they represent an unbiased

view of an entity's financial standing. For
governments, this independent review will ensure
taxpayers that budgeted funds are being
appropriately spent and the revenues are not
being under- or over-projected.
In the private sector, external audits are valuable
to stockholders as they provide an independent
assessment of the company's financial holdings
and can be used to determine investment levels
in the business.

Types of Audit
According

to nature of work audit

may be classified as:
1. Final or completed audit
2. Continuous or running audit
3. Interim audit

Final Audit
A

final audit is a type of audit which

is started after the close of the
accounting year of a business and it
is carried out until completion.
This is the most satisfactory form of
audit from auditors point of view
and therefore the most common.
The auditor is placed in possession
of the full facts relating to the year
under review and he can pursue the

Advantages of Final
Audit
1. Alteration Chances Limited
In the other types of audit the
alteration is possible in the audit. But
in the final audit the alteration of any
type is not possible after the audit.
2. Checking of Complete Record
In the final audit there is complete
checking of the books of accounting.
He can decide either to check cent
percent or by sampling.

Cont..
3. Advantage for the Shareholders

Final audit serves the shareholders by

giving them the most reliable financial
information for the investment purpose.
4. Advantage for the Owner
Sometimes the business is so large that
even one owner doesnt know the real
position about the business. So final
audit throws light on the business
position and provides him satisfaction.

Cont..
5. Convenient or Suitable
Final audit is very suitable for the auditor
and client staff. It saves both the parties
from continuous disturbance.
6. Saving of Time
In the continuous audit the work of audit
is continuous through out the year. It
takes a lot of time. But as compare to it
final audit takes a very short time. So, in
the final audit the time is saved.

Cont..
7. Legal Demand
Final audit is also helpful in checking either
the management has fulfilled the legal
requirements or not. The management is
bound to fulfill the legal requirement.
8. Economical
Final audit is beneficial for the client. It is not
a regular burden on him, because it is
conducted only once in a year at the end of
the accounting period. So, it gives the
maximum benefit with minimum cost.

Cont..
9. Improves the Efficiency
In this audit the performance of the staff
improves due to finding out the weak
points of the employees by the auditor
by overcome these weakness the staff
can improve his efficiency.
10. Submission of Audit Report
About the fairness and correctness of
accounts final report is very important
for the good will of the company.

Cont
11. Planned Work
The final audit has minimum time. So, the work
of audit is completed under planning. An audit
program is maintained which provides the
schedule of the working of the audit staff and
the principal auditor can control the audit work.
12. Guidance
The auditor not only provides the true and fair
information but also guide the management
how can they improve their accounting
systems.

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

Disadvantages of Final
Audit
1.

2.

3.

Shortage of Time
The auditor has many clients and their financial year
ends on the same date. So it becomes very difficult
for the auditor to finish the work in time. It is a
disadvantages of final audit.
Delay in Report
The decisions of the business are made on the basis
of the audit report. But this report is made one or
two months late. So there is also delay in the
making of important decisions.
Complete Checking Not Possible
It is very difficult for the auditor to check complete
records of the organization.

Continuous or Running
Audit
Examination

and verification of a firm's

financial transactions and their
supporting documents, carried out daily or on
fixed interval basis. Continuous-audit is
performed usually by the firm's internal
auditors to eliminate the year-end workload.
This audit is possible in following cases:
1. In the businesses with numerous transactions
2. In a business with a large turnover or there is
necessity of considerable detailed checking.

Cont
3. In establishments where the final
accounts and balance sheets are
required soon after the close of the
accounting period like banks.
4. In the concerned where there is an
inadequate or no system of internal
check or internal control.
5. In concerned where monthly profits and
loss and balance sheets and other
interim accounts are regularly required.

Advantages of
continuous audit
1.

2.

3.

Early discovery of errors and frauds is possible

as the auditor checks the records at periodical
interval.
Close and extensive examination of each
transaction can be carried out, as the number
of transactions to be checked will be small.
Quick presentation of financial statements to
shareholders is facilitated, as the auditor would
require to examine the financial statements
only at the close of the year, due to detail
checking which had already been done.

Cont
4. Maintenance of up to date accounts
and observing accuracy is forced as
the client staff knows that the
auditor may any time demand up to
date books.
5. Declaration of interim dividend
with confidence can be made by the
directors as audited interim accounts
show profit actually earned.

Disadvantages of Continuous
Audit
1.

Alteration of Figures
The 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.

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

3.

Inconvenience
In this audit, the auditor visits the clients office at
regular intervals to check the accounts and records
these frequent visits made by the auditor may disturb
the client staff.

Interim Audit
Interim

audit is the audit which is

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

Cont
Interim

audit is an audit conducted during the

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

Cont
An

interim audit is a type of auditing strategy

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

Cont.
Like

any type of auditing task, an

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

Cont

Continuous audit and an interim

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

Cont
In

contrast, an interim audit normally covers a

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

Cont
Typically,

an interim audit does not result in the

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

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

Cont
4. Completion Of Final Audits :If interim audit is countered then final audit
can be completed very soon and easily.
5. Suggestions Implementation :In case of interim audit auditor's
suggestions can be quickly implemented.
6. Convenient
Interim audit is very convenient for the
management because they invite the audit
staff when their business activity is low.

Cont
7. Interim Dividend
The management can easily prepare
the accounts for proposed interim
dividend. Interim audit is very useful to
declare this dividend.
8. Case Of New Partner
In a business when new partner enters,
interim audit determines correct
position of assets and liabilities..

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

Disadvantages of
interim audit
Burden Of Work
Audit staff will have also to prepare
the audit notes when they will finish
the interim audit. So the burden of
work increases in this way.
2. More Expensive
This type of audit increases the
expenses of business because it is
not compulsory by law.
1.

Cont
3. Changing In Figures
A dishonest official may change the
figures of accounts which is already
audited by the auditor. So there are
chances of fraud in such type of audit.
4. Not Useful For Third Party
It has no use for third party because this
audit is used only to improve the
efficiency and effectiveness of the
accounting system.