1. Annual or Periodical or Final or Completed Audit:
Annual or periodical audit is done at the close of the financial or trading period when final accounts are prepared. In such a case, the auditor visits his client only once a year and checks the accounts in one visit till he is not in a position to cover the accounts pertaining to the whole of the period.
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Such a form of audit is very much convenient and useful for business houses which are small. For big ones, continuous audit is more useful because the work involved in them is voluminous and hence final accounts cannot be prepared at the close of the financial year. Besides, there is a lot of difference between the two.
The main distinction between continuous audit and final audit is that the work under audit in the former case does not cover the full verification of assets and liabilities. This work is done only at the end of the year when the Balance Sheet is prepared and the continuous audit is merged into the final audit. Other items may, however, be verified from time to time during the course of the year.
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This type of audit is free from the defects of continuous audit and carries other advantages with it, though, of course, detailed checking is not possible in it. Hence, errors and fraud cannot be detected easily, quickly and completely.
Briefly, the following are the advantages and disadvantages of this type of audit:
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Advantages:
1. The work of audit does not present any inconvenience and dislocation in the work of the concern as the auditor comes only once a year.
2. Periodical audit is less expensive and more useful for a small business concern than continuous audit.
3. In periodical audit, the work of the auditor can be finished quickly and within a reasonable time.
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4. The work does not become mechanical and the link in work can properly be maintained.
5. In periodical audit, undue collusion cannot be established between the auditor and the clerks.
6. Lastly, such an audit can easily be carried out with a simplified time-table for all the staff.
Disadvantages:
1. In periodical audit, detailed checking of accounts is not possible.
2. The chances of errors and fraud in accounts do exist.
3. In periodical audit, there is usually delay in getting the auditor’s report and, hence, it brings some disturbance in the management of a concern as the Shareholders’ Meeting may be delayed.
4. For big concerns, periodical audit is rarely practicable and it is not much popular for them.
5. Under this audit, the auditor has to rely on the management in most of the cases and as such, there are chances of being misrepresented by the management. The auditor cannot avoid the management totally.
2. Balance Sheet Audit:
As is apparent from the name itself, in Balance Sheet audit, the auditor checks capital reserves, assets, liabilities, etc., given in the Balance Sheet. He checks only those documents which are related to the items given in the Balance Sheet.
Such an audit is not conducted to check Profit and Loss Account and similar other transactions. The work of the auditor is confined to the Balance Sheet alone. In India, no distinction is made between annual audit and Balance Sheet audit.
The Balance Sheet audit is quite satisfactory for small or medium-sized business. But for big concerns having mechanized book-keeping records, such an audit would be not only unsatisfactory but in many cases totally impracticable.
There would have been a large volume of transactions involving exhaustive summaries made before the total eventually reaches the final account.
It is to be noted that every transaction has an effect on the Balance Sheet and some of them affect both the Profit and Loss Account and the Balance Sheet. For example, the purchase of goods on credit will increase the liability to creditors, increases the stock and will be shown in the Trading Account as an increase in purchase and closing stock.
Similarly, purchase of plant will increase Plant and Machinery and reduce cash at Bank, thus affecting only the Balance Sheet. Hence, an auditor, by comparing the items in the Balance Sheet with those shown in the previous year, proves the accuracy of the Profit and Loss Account.
3. Cash Audit:
In cash audit, the auditor is concerned with the checking of cash transactions. He has to audit entries pertaining to cash receipts and payments with the help of relevant vouchers. Since his work is done under such restrictions and limitations, he submits his report accordingly. He can mention the fact in his report.
4. Cost Audit:
“By the term ‘Cost Audit’ is meant the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.”
“Cost Audit is the verification of the correctness of the cost accounts and of the adherence to the cost accounting plan.”
From these definitions, it would be seen that cost audit is performed m some special circumstances but the purpose behind such an audit is to verify the cost accounts so as to ensure how far cost accounting plans have been adhered to.
The Companies (Amendment) Act, 1965 has made provisions to perform cost audit of certain categories of companies under sections 209 and 233. A detailed description of cost audit has been made in a separate chapter of this book.
5. Complete Audit:
When an auditor is appointed to check each and every transaction, total, balance, book of accounts with the help of the relevant vouchers, documents, correspondence, etc., it is said to be complete audit. Under complete audit, nothing is to be left from checking by an auditor. But complete audit is neither practicable nor feasible.
6. Partial Audit:
In the case of complete audit, all the records and books of accounts are subjected to audit by the auditor but when audit is conducted on some of the records and books of a part or whole of the period, it is called partial audit. Partial audit may relate to some part of the work for some or whole of the trading period. Partial audit is not practicable again.
7. Detailed Audit:
It is a bit different from complete audit. When in complete audit, all the books and records are completely checked, detailed audit involves detailed and thorough scrutiny, but not ‘complete’.
Detailed work is thorough, of course, but not complete in the strict sense of the term. Hence, detailed audit is somewhat limited, but complete audit entails an exhaustive scrutiny into the accounts. Detailed checking may be done through applying test-checking.
8. Interim Audit:
An annual audit is one which is conducted at the close of the financial year and an interim audit is that kind of audit which is conducted for a part of the accounting year with some interim purpose.
Such an interim purpose may be, for example, declaration of an interim dividend by a joint-stock company. Interim audit involves a complete audit of the accounts prepared and closed for a part of the year to the date of a set of interim accounts, e.g., quarterly or half-yearly accounts. It is thus conducted between the two periodical audits.
It’s Advantages:
(i) With the interim audit, it becomes easy to complete the annual audit soon.
(ii) Errors and fraud can be more quickly detected.
(iii) Since the interim audit is performed during the course of a year, it helps in exercising moral check on the staff of the client.
(iv) This audit is helpful when the publication of interim figures becomes necessary.
9. Management Audit:
Some of the authors have synonymously used the terms, ‘Management Audit’ and ‘Efficiency Audit’. It can be said that the management audit is an audit conducted to examine all aspects of management in a business. Improvement in efficiency and maximum utilization or resources of a business is the tools for its success.
In this age of cut-throat competition, every businessman wants to attain good success in his business career for which he is, at all times, eager to know how he can be successful and for that, what changes should be made.
Thus, the management audit includes the examination of every activity of a business, i.e., plans, objectives, means of operation, utilization of physical resources, organizational pattern, co-ordination of various activities at all levels and control of the entire business.
The management auditor has to evaluate the overall performance which includes account books too and he has to submit a report stating whether the predetermined targets and objectives have been achieved or not.
As an outsider, he looks to the affairs of the business from an impartial, unbiased and objective point of view. The management audit is, however, a voluntary form of audit and is related to the process of management.
The obvious advantages of this audit are given below:
(i) It helps the management to run the business more effectively and economically as this type of audit can bring lacunae and defects in its working to light.
(ii) Decisions can be taken by the management quickly and effectively.
(iii) This type of audit is connected with every aspect of working of a business and hence, it helps in improving the performance at all levels.
(iv) The management audit is directly concerned with the business which is the outcome of improved efficiency affected and increased by introducing the management audit.
(v) The employees become more alert and active and their morale is toned up.
Its disadvantages are as under:
(i) It is a costly affair and is never suitable for small business concerns.
(ii) The management audit techniques as suggested by the management auditor are applied and used with a view to increasing profitability of a business. If it does not increase, such an audit becomes a sheer waste and nothing more.
(iii) The management auditor is expected to work at the ‘will’ of the management. If he does not, the management would like to get rid of him.
10. Propriety Audit and Performance Audit:
While the propriety audit is confined to examine the validity of appropriations or is concerned with verifying that there is no leakage of revenue and wastage of funds knowingly or unknowingly in disregard to any legal requirement or financial or economic consideration, the performance audit is a procedure for analysing the profits and losses or economic activities carried on by the business enterprise, examining the relationship between production and sales and discovering the revenues for maximizing profits.
Under propriety audit, it is to be seen that the contracts entered into by the concern are in its best interest and there is a proper check to ensure that the assets are safe. Thus, it is a form of higher audit.
Both the propriety and performance audits are the inter-related aspects of management audit. The management of a company is expected to guarantee the propriety and validity of all the transactions and the propriety auditor has to certify them.
Similarly, the performance auditor has to evaluate the performance of a concern. Thus, both the audits are meant to cover examination of propriety aspects of a company. In a way, they are over and above the regular audit conducted as per the requirements of the company legislation.