An audit is a systematic and independent examination of books, accounts, statutory records, documents, and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law.
Types of Audits
Statutory or Compulsory Audits
Statutory or Compulsory Audits refers to the audits of those organizations, whose audit is compulsory, under the laws applicable in that country. Under Statutory Audit the rules relating to the scope of the audit, auditor’s qualifications, his rights, duties, and responsibilities, etc. are determined by the law, which can be increased by an agreement between the employer of the organization and the auditor, but cannot be decreased in any situation.
The following organizations mainly come under Statutory or Compulsory Audits
- Joint Stock Companies
- Public Trusts
- Reserve Bank and other nationalized banks
- Various Corporations, like Life Insurance Corporation Financial Corporations, etc.
- Government Committees
- Stock Brokers
- Sole Proprietorship and Partnership firms whose Sales exceeding Rs. 20 lakhs or Receipts exceeding Rs. 10 lakhs.
Voluntary or Private Audits
This is the opposite of a Compulsory or Statutory Audit. In this, if the employer wants, then only he can get his accounts audited as per his free will. In this way, there are some private organizations which get their accounts audited privately, as per their free will, these are
- Sole Proprietor business
- Audits of Partnership firms
- Other persons like – doctors, lawyers, etc.
All these are not compulsorily bound by the law to get their accounts audited.
The Central and State governments have established a separate department for investigation of their accounts which is called: Department of Comptroller Auditor General. This department investigates and audits the accounts of government and government companies. Its highest official is the Comptroller and Auditor General, and this department presents its report before the government.
When an audit has to be performed in the middle of the year for some special objectives, it is called an Interim or Middle Audit. For example, audits performed in the middle of the year for declaring interim dividends, etc.
Periodical, Annual, and Final Audits
Such an audit is done at the end of the year when all the books of accounts are closed, and final
accounts are prepared. In this audit, the auditor checks the accounts of the organization only once during the year. This is also called Periodical, Annual, Final Audits, and also known as Balance Sheet Audits.
In big business enterprises, when some trustworthy, experienced, and honest persons of the organization under the guidance of an officer check the accounts of the enterprise, such kind of audits are called Internal Audit, and the officers who perform this are called Internal Auditors. The internal auditor works as a policeman. As, in the presence of a policeman the ill elements are gripped with fear, similarly, in the presence of an internal auditor the employees of the organization remain alert and do not try to commit fraud or mistakes. In addition, the internal auditor also checks, whether the organization is following the rules framed for it in all matters or not. He also gives valuable suggestions to the management of the organization in view of making necessary improvements in the rules and regulations and making other arrangements more effective. By knowing the practical importance of ‘Internal Audit’, today usually all big companies make arrangements for internal audit in their offices. It is worth mentioning that Internal Check is not the same as Internal Auditing.
When any business organization or partnership firm appoints an auditor only to check its cash transactions, such kinds of audits are called Cash Audits. While preparing his report, the auditor must mention. in such kind of audits, that it is only a Cash Audits.
Under this system, the auditor performs audit all throughout the year at definite and indefinite intervals. Usually, under this system, the day on which the auditor and his audit staff visit the businessman, they check the accounts up to that date and comes back after some days and start from where they had left last time, up to that day. This sequence of checking goes on during the whole year and at the end of the year audit of only a small period remains, which he completes after the end of the year.
According to W.W. Bigg
Continuous Audits are that in which the audit staff is continuously busy the year round in checking of accounts.
In the following organizations, Continuous Audit is more useful and necessary
- Where immediately at the end of the year Balance Sheet and Profit and Loss Account are needed, Like – Banks, Insurance Companies, etc.
- Where business transactions and contracts are in large quantity and it is necessary to check these transactions continuously.
- Where the system of ‘Internal Check’ is not applicable and if it is applicable, it is unsatisfactory.
- Where possibilities of irregularities and frauds are more and detailed investigation of accounts is necessary.
- Where several times during the year, timely preparation of reports and accounts is compulsory, like – various branch offices that have to send various accounts and statements to their head offices several times during the year.
- In big-sized companies, like Electricity company, Gas company, Petrol company, etc., where for completion of audit the auditor requires several months.
In this kind of audits, some items are checked in detail in full and other items are checked lightly at a glance only. According to Prof. Ronald A. Irish, “Whenever some chosen specific items have to be fully and deeply audited and the balance has to be seen in overview, this kind of audit is called Standard Audit.
In ordinary language, Management Audits are a voluntary system of the appraisal and evaluation of the — efficiency of the management, to run an organization. Under this, the auditor has to examine all activities concerning each area of the administration of the organization and give his report on the extent of success of the management in achieving its predetermined objectives, and how its efficiency can be enhanced further.
Cost Audit refers to the investigation of the cost accounts and certifying them. Under cost audit, it is observed, whether or not the institution has prepared its cost accounts, according to the nature of activities carried on by it. Through cost audit, cost control and quality control both also becomes possible. , In the words of Prof. Smith and Day,
Cost Audit refers to the detailed investigation of the cost accounting system and procedure by which its fairness can be proved, and achievement of the objectives of cost accounting may be assured.
The evaluation of the social responsibilities of an industry, company, or firm is defined as Social Audit. In practice, it can be called the appraisal of the activities of the social responsibilities of an organization. Every industry runs in the society, for the society, thus the aim of any industry is not only to earn maximum profits, but it has some responsibilities towards the society in which it exists. Through this type of audit, the auditor examines as to what extent the industry is carrying out its responsibilities.