Pinnacle Business

School
Auditing
TYPES AND CLASSIFICATION OF AUDIT
SCOPE OF AUDIT
Scope of audit refers to th audit test and procedures which are suitable for the
prevailing circumstances.
- This is because the tests and procedures chosen are largely determined bythe
prevailing circumstances.
- Auditors therefore are allowed to determine basing on own judgment and
prevailing circumstances to design the procedure they deem appropriate.
TYPES OF AUDIT
Audit can be classified in broad categories:
a) According to terms of engagement i.e. nature of work done and the person who
appointed the auditor.
b) The method or approach adopted in carrying out the work.
-

It is important to understand the difference between the various types of audit

and work carried out during these audits.
AUDIT

Internal

External

Statutory

Non Statutory Audit

Classification according to work done

i.
Statutory audit
ii.
Private audit
iii.
Internal audit
Classification according to approach
i.
Continuous audit
ii.
Interim audit
iii.
Final audit
iv.
Balance sheet audit
Other investigative approach
i.
Management Audit
ii.
Procedurial audit
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iii.

Standard audit

Statutory Audit / Public Audit

- These are the audits that are legally requirement for all public Ltd Company.
- They are therefore carried out as the requirements of various statutes e.g.
companys Act Cap 486 which requires all public Ltd Company to have their files
subjected to an independent audit.
- The main objectives of these audits is to express an opinion as to whether the
financial statement reflect true and fair view.
- Under this audit the rights and duties of the auditor are cleanly laid by the Act
and the powers of the auditors appointment vested with the shareholders.
- The audits are called statutory because they are carried out to fulfill the legal
requirements.
Private / non statutory audit
- These audits are not governed by the companys Act or any statute thus they are
not legally required but only conducted by those companies that wish to enjoy
the benefits of an audit.
- They are performed by independent auditors not because the law requires but
because owners or members or other interested parties.
- Such audits are carried out for organizations such as NGOs, Partnerships, Clubs,
Charities and other like private companies.
- The auditors appointment is done through a private agreement/contract between
the auditor and the relevant stakeholders.
- The scope and objective of the work is determined by the agreed terms between
the auditors and the client.
- The auditors rights and duties are outlined in the contract. This is the only audit
that gives powers to management to define the scope of duties.
- The contract serves the following purposes:
i.
Defines the auditors scope of duties.
ii.
It acts as a basis of negotiating fees.
iii.
Minimizes future mis-understanding.
iv.
Provides basis of contractual obligation.
Differences between a
Statutory Audit (Public)
- Mandatory for all public Ltd
companies
- Objective is prove true and
Fairview
- Scope
of
work
and
responsibility is defined by the
statute
- Auditors are appointed by the
shareholders
- Auditors conduct purely audit
work
Internal Vs External Audit
Internal Audit
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statutory and non statutory audit

Non Statutory (Private Audit)
- Not mandatory for firm
- Objective is to ascertain profit
and detect/prevent errors and
frauds.
- Defined by the management
though the agreement terms
- Auditors are appointed by the
management through private
agreement.
- Auditors
may
offer
other
services besides auditing.

This is a recent development in the accountancy field. It is an internal function

and an element of the internal control system which is established by the
management as a department to assist in carrying out the operations efficiently.
Definition Internal audit can be defined as the process of carrying out continuous
independent appraisals on the companies activities and operations by the chief
internal auditor in order to determine for their
- Relevancy
- Validity
- Completeness
-

The audit is conducted by an employee of the company whose duties are defined
by the management.

He is appointment by the management and therefore he report to the same

management.

External Audit
- The external audit is conducted by an independent auditor normally from outside
the organization.
- The main objective of the external audit is to examine the financial statement
and express on opinion on true and Fairview to members during the AGM.
- External Audit can either be
o Statutory
o Non statutory audit
- In most cases the reports are meant for the shareholders and the auditors are
independent for the sake of interested parties.
Distinction between External and Internal Audit
Internal Audit
External Audit
Scope of work
- Defined
by
the - Defined
by
the
management
statute
Reporting
- Reports
to
the
responsibility
- Report
to
the
shareholder
management
Objective
- To prove true and
- To enhance efficiency and
Fairview
detect errors and fraud
Status
- Performed
by
- Performed
by
an
external appointed
employee of a company
independent
person
Regulation
- Not regulated by the Act - Regulated by the
but may apply auditing
companys
act,
standards and guidelines
professional ethics
Qualification
and
the
- Auditors need not be
international
qualified
but
process
auditing standards
accounting skills.
Liability
- Auditors must be
- Auditors are not liable to
practicing
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3rd parties

accountants,
registered
practicing
-

Auditors
liability
parties.

to

and
owe
3rd

Continuous Audit
- This is defined as a detailed examination of the clients financial statement
through out the financial period.
- It means that the auditor will visit the client entity on a regular basis throughout
the period and on every visit.
o He will examine the books of accounts
o Agree the accounts with books of accounts
o Detect and prevent error and frauds
o Evaluate to system of controls
- The audit is conducted at predetermined intervals whereby the work done is
spread over the audit visits throughout the financial period.
Work Done
- Obtaining understanding of the client business.
- Identifying any changes in the client business.
- Budgeting the staffing requirements.
- Evaluating and review of the clients system of control.
- Carrying substantive and compliance tests
- Carrying out ltd analytical review on the files.
- Forming on opinion on files true and fair view.
Ideal Circumstances for the Audit
- Large organizations with large volumes of transactions
- Banking industries that requires regular monthly statement
- Businesses with reporting deadlines e.g. multinationals
- Businesses with weak internal control
- Businesses that wishes to produce final reports immediately after the balance
sheet date
Advantages of a Continuous Audit
1. Management is motivated to keep books up to data.
2. Errors and frauds one detected at early stages and prevented.
3. Enables the auditors to understand the clients business more better and thus
more efficiency.
4. It facilitates the completion of the final audit since most of the work has been
done.
5. It boosts or strengthens the clients internal control system.
6. It has a moral boost on the client staff and thus minimizes chances of errors
and frauds
7. Provides interim statement which can be used to compute interim dividends.
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Disadvantages of a continuous audit

1. It is tedious and boring to audit staff due to too much note taking.
2. It is expensive for an average business due to the amount of time spent.
3. It disrupts and dislocates the clients work due to number of visits made.
4. Auditors independence may be compromised by the continuous presence in
the entity.
5. The already audited figures could be altered by the client staff.
6. Client staff could develop a tendency of relying on audit staff to solve their
accounting problem.
7. Questions raised by the auditor may remain outstanding for long and may
never be answered.
Safeguard to Problems above
1. The audit manager should discuss with the management and develop a time
table which should be communicated to the staff.
2. The audit senior should plan the work in such a manner that a specific portion
of the work is done on every time
3. The audit senior should instruct his staff not to assist the client staff to solve
their accounting problems
4. The audit senior should warn the client staff not to alter the already audited
figures.
5. Auditors to advice the clients to undertake the audit only if it is necessary.
6. auditors to take note of questions raised to ensure they are answered.
INTERIM AUDIT
- An interim Audit refers to that audit carried out midway /along the financial
period i.e. during the financial year or in between the financial period. It is then
carried out for about 2 3 months non stop until completion, where the auditor
issues an interim report.
- The main purpose of the audit is to ascertain the interim profits inorder to
compute the interim dividends due to the shareholders e.g. an interim audit to
cover activities of the 1st quarter of the year may be conducted.
- It therefore tends to minimize work done for the final audit.
- An interim audit does not yield formal reports but they yield to informal
recommendations that helps the company to prepare for the final reports.
Work done during Interim Audit
- Obtaining understanding of the nature of the business
- Evaluating significant changes in the client business
- Ascertaining, recording and testing the client controls
- Substantive testing
- Vouching and verification
- Planning and substantive procedures for final audit
- Reporting to management on significant weaknesses in the internal controls
Ideal Conditions
- Companies empowered by articles to pay interim dividends
- Where client has tight reporting deadlines
- Where companies want to monitor their performance incase of those operating in
volatile environments
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Companies requested by shareholders to produce interim statements for them to

monitor.
Companies that wants to benefit with audit discounts associated with off busy
seasons.

Advantages
- Errors and frauds are detected early and prevented
- Provides interim statements for computing interim dividends.
- Facilities completion of final audits since most of the work has been done.
- Enables auditors to obtain a good understanding of the client and thus identifying
areas that need attention
- Helps to determine the appropriate procedures for the final audit
- Useful in preparation of interim report which is useful in managerial decision
making.
- Less disruptive than the client work.
Disadvantages
- Only ideal for firms that wishes to pay interim dividends
- May be expensive for average business
- Over-dependence on the audit staff by client staff
- Errors/frauds may be detected at a later stage such that it may be difficult to
connect them
- The already audited figures may be altered by client staff
Solutions
- Instructions by audit senior on client staff not to alter the audited figures
- Audit staff should be warned not to assist client work
- Auditors to advise client to put up strong internal controls.
- Auditors to take note of questions raised and ensure they are answered.
Final Audits
- This is the types of Audit conducted towards the balance sheet date or
sometimes after the balance sheet date when all the accounts have been closed
down.
- The main objective of the audit is for the auditor to write a report on true and
Fairview to members during the annual general meeting
- A final audit could be conducted in 2 ways
i.
As a continuation of interim audit for large organizations
ii.
For small audit where it is carried out in a single session.
Work done during Final Audit
- Planning for the audit
- Obtaining information about client business
- Evaluating the clients internal controls
- Analytical review procedures
- Compliance and substantive tests
- Vouching and verification
- Confirming balances from 3rd parties
- Reporting the findings.
Advantages
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1.
2.
3.
4.
5.
6.
7.

Facilitates the completion and signing of the audit report

Eliminates tedious work associated with continuous audit
More evidence is available to support audit conclusions
It is less disruptive and less costly
It enables the companies to publish their annual accounts
Provides a basis of determining the companies corporate taxes payable
eliminates chances of alteration of figures because the books have already
been closed down.

Disadvantages
1. Errors and frauds may be detected when it is too late to be corrected.
2. Due to time constraint auditors may not be able to check all the entries
leaving some errors and frauds undetected.
3. It is not practical where the volume of transaction is very large.
4. The financial period for most clients ends at the same time and this may make
it difficult to serve all the clients.
5. It may cause a delay of the presentation of the report as well as filling tax
returns.
BALANCE SHEET AUDIT
This is defined as that type of audit that is conducted by the auditor right from the
balance sheet backwards to the source documents.
- It means that the auditor will commence the work by validating and
substantiating the balances of the balance sheet items such as
o Assets
o Liabilities
o Commitments
o Contigencies
o Reserves
o Provisions
- The main aim is to verify on the ascertions such as
o Disclosures
o Ownership
o Valuations
o Existence
- This audit falls under partial audit and aims as proving time and fair view.
Ideal Where
- The level of accuracy of accounts is high with low chances of errors and frauds
- In a computerized environment
- Under special audit assignment
Advantages
- Simple to understand and explain to the staff
- Less expensive to the clients
- Enables auditors to achieve the major audit objective i.e. true and fair view
- Facilitates completion of the final audit
- Helps auditors to detect errors and frauds in assets and liabilities which are
material.
- Helps to safeguard the companys assets.
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Disadvantages
- Falls under partial audit and could thus give a biased
- Errors and frauds committed outside the balance report sheet may not be
detected.
- It ignores the Profit and Loss items which enables the users to assess ability to
generate income of the company.
- It is sensitive and thus difficult to delegate
- Its only ideal in computerized environment
Other Investigative Approaches
1. Management Audit
- This is that type of that aims at detecting potential managerial problems in the
organization that affects its performance
- The audit aims at investigating the entire companys management and whether
they are running the organization to the best interest of shareholders.
- The audit investigates aspects of the management such as
i.
Management efficiency to run the business in a viable manner.
ii.
The appropriate structure of the management
iii.
The integrity of the management
iv.
The competence of the management
v.
Honesty of management in recording
vi.
Possibility of engagement in fraudulent practices
Ideal Conditions
- Businesses with dynamic operations e.g. banks
- Businesses in politically volatile environments e.g. parastatal
- Companies with high technologies e.g. mobile phones
- Companies with many subsidiaries
Advantages
- Improves the quality of the management by providing useful recommendations
- Helps to highlight poor management practices
- Reveals management weaknesses in decision making
- Reveals management failure to operate a viable company due to lack of financial
controls.
- Reveals the efficiency of the budgeting system and how it affects the company.
- Reveals that there are few errors and frauds and this reduces the audit tests.
- Identify areas not properly managed and corrective actions taken.
Disadvantages
- It may demoralize the staff if not well done
- Some aspects of the management are difficult to measure e.g. efficiency. This
leads to a biased report
- Efficiency of the management may at time be dependent on factors beyond their
control
- It may be expensive where the company has many subsidiaries
- Some of the questions may be embarrassing especially if personal.
Procedural Audit
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This audit involves examination of the companys procedures which have been
laid down to govern the companies activities and policies.
Those could be the control procedures surrounding the entries and the guiding
policies
The audit aims at establishing
o The nature of the procedures
o Whether they are consistently followed
o Laid down guidelines and procedures
o Whether changes are well implemented
o Any obsolete procedures
o Management attitude towards such procedures

Advantages
1. Reveals any inefficient procedures
2. Identifies strength and weaknesses in the ICs
3. Creates harmony and coordination of companies decision making process.
4. Identifies any bureaucracies
Disadvantages
1. Expensive where many procedures are involved
2. Sometimes the auditors may not understand the technical procedures
3. It is limited where the ICs is weak
4. It involves duplication of efforts since the same procedures are checked during
final audit.
5. tedious and time consuming to check all the procedures
Where ideal
- Companies with many procedures which affect each other
- Companies with technical operations that needs constant updating
- Companies operating in dynamic environment
Standard audit
- This audit aims at evaluating the nature of standards that are applied by the
company
- In the preparation and presentation of the financial statements
- The audit establishes
i.
The nature of the standards applied
ii.
Whether the standard applied are in accordance with the generally
accepted accounting principles.

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