Hi, Today we talk about Classification of Audit According to The Circumstances. Auditing is a broad discipline. The entire process of auditing depends upon the kind of audit required in particular circumstances. Therefore, it is logical to discuss various kinds of audits before outlining the precise procedure for any audit. For this purpose, an audit examination can broadly be classified into the following three bases:
Classification of Audit According to The Circumstances
- Classification on the basis of the organizational structure
- Classification on the basis of the timing and scope of audit procedures
- Classification on the basis of specific objectives
Classification on the basis of the organizational structure
This type of classification is based on the organizational structure of business undertaking under audit. A business undertaking may be owned, managed and controlled by a government or private individuals, and may be operated in a corporate form or non-corporate form. The types of audits to be conducted for various organizations, therefore, should fall under the following categories.
Any audit carried on as per the requirement of the law is called as a statutory audit.
- Joint stock companies have to get their accounts audited as per the provision of the Company’s Act of 1984.
- Cooperative societies conduct an audit as per the provision of Cooperative Society’s Act 1925.
- Banking companies conduct an audit as per the provision of Banking Ordinance 1962.
- Insurance companies conduct audit as per the provision of Insurance Act 1938 and Insurance Ordinance 2000.
The private audit is one that is not mandatory under any statute or law. It is undertaken by the enterprises in view of the several benefits resulting from it.
- Audit for a sole proprietorship
- Audit for partnership
The government offices, departments, and undertakings also subject to independent financial audit. Usually, a statutory auditor appointed by the government on the advice of the auditor general of Pakistan.
With respect to the timing and scope of audit procedures
Under the classification, important types of audit are as follows:
Periodical/ Annual/Final Audit: it is a kind of audit where the auditor verifies the account at the end of the financial year. He starts the audit work after the closure of financial year. This is a common audit and is mostly used by small organizations.
Interim audit: it’s an audit conducted in the middle of the accounting year before the accounts are closed. In other words, any audit conducted between two financial audits is known as an interim audit. The objective is to get periodical results, to declare an interim dividend.
Partial Audit: when an auditor is asked to audit only a part of the accounting system. It’s called partial audit. E.g.: he may be asked to audit only the payment side of the cash book.
Balance sheet audit: it’s a kind of partial audit and is concerned with the verification of only those items appearing on the Balance Sheet. It is more popular in the USA. In fact, while verifying BS items the auditor verifies/ checks all related items/accounts.
Continuous audit: a continuous audit is one in which the auditor visits his client’s office at regular intervals throughout the year to verify the account. The objective of CA may be-
- To get final account audited immediately after the closure of accounting year.
- When the business is very large.
- The internal control system is not effective.
- Regular final accounts are required.
- Errors and frauds are discovered and rectified quickly.
- The chances of fraud are reduced.
- The workers will be careful in their work.
- Continuous audit acts as a valuable morale check on the staff.
- Final audit becomes easier and faster.
- If the company wants to declare interim dividend it’s easier to prepare interim account.
- It increases the efficiency and accuracy of the accounts.
- After the auditor’s visit is over, the alternative may be made.
- It affects the regular work.
- It’s not suitable for small organizations.
- The auditor may lose the line of work if he does not complete his work in a visit.
Precautions to be taken for continuous audit:
- He should record important balances totals etc. and verify the same on his next visit.
- Strict instructions should be given prohibiting the alteration of figures after checked by the auditor.
- For each visit, special ticks should be used.
- It’s always better to verify the nominal account at the end of the year.
- He should ensure that normal working is not affected.
- As far as possible, he should pay surprise visits.
On the basis of specific objectives
These types of audits are classified on the basis of specific objectives.
Cost audit: cost audit is defined as the verification of cost accounting records. It gets as an effective managerial tool for the detection of errors and frauds in cost accounting records. However, the companies act implies the central government to order cost audit in case of specifies companies.
Management audit: Management audit may be defined as a comprehensive examination of an organizational structure of a company, institution/government and its plans and objectives it means of operations and use of human and physical facilities. The main objective of management audit is to see how far the objectives of management are fulfilled. It aims to ascertain whether sound management prevails throughout the organization and evaluates its efficiency in the system of its operation.
Social Audit: Social auditing is a process that enables an organization to assess and demonstrate its social, economic, and environmental benefits and limitations. Social audit attempts to assess the social performance of an enterprise.
Environmental Audit: Environmental audit, as the term indicates, is a process to examine the effects—good or bad—of the operations of an enterprise on the environment.
Human Resource (HR) Audit: A human resource audit reviews an organization’s policies, procedures, and practices concerning human resource. Its purpose is to examine the technical and practical dimensions of the HR function and to create a comprehensive system that adds values to the organization.