22 CLASSIFICATION OF AUDIT

A audit can be classified under different groups on different basis.

a Classification

Inature of
on the basis of organization: Under this category, the audit is classified on the
the organization for which the auditing work is undertaken. It includes the following
ty pes:

(1)

)
Audit required under law

(ü)
(ii)
Companiesgoverned by

Electricity
the Companies Act, 2013.
Banking Companies governed by the Banking Regulation
Supply Companies governed bythe Electrieity
Act, 1949.

Supply Act, 1948.

(iv) Co-operative Societies registered under the Co-operative Societies Aet, 1912.

(v) Public andcharitable trusts registered under various religious and endowment
(vi) Corporations set up under an Act of Parliament or State Legislative. (e.g. Life Insurance
Corporation of India)
(vii) Specified entities under various sections of Income Tax Act, 1961.

(viii) Government departments/Public utilities.

(ix) Registered clubs,societies, etc. registered under Societies Registration Act, 1960.

(2) Audit under voluntary category

(1) Proprietary concern

 32 Auditing and Assuranoe

() Parnerhip fim
() Hindu undivided family

(N) Aoeiation of persons

(N) Non-profit-secking organization.

auditis classified
(b) Under this category, the
classified on
Caxsification on the basis of function: the
group, audit is basis
functional activities of the auditor. In fact, in this of
thefollowing types:
ivovement in the work ofI audit. It includes

Exernal auditindependentfinancial audit

Internal audit.

of

(
audit
(c) Classifcation on the basis of practical approach: The classification under
this
approach to the work. Itincludes the following types:
pends onthe practical

Continuous audit

Periodical audit

Interim audit
( Partial audit

(v) Occasional audit

( ( Standard audit
Balance sheetaudit.

(d) Classification on the basis of audit dimension: Under this category, the auditis classifed on:

basis of dimension of audit activities. It includes the following types:

(i) Management audit

(ii) Cost audit

(iii) Tax audit
(iv) Human resource audit

System audit
(vi) Propriety audit

(vii) Performance or efficiency audit

(vjä) Environment audit

(ix) Socialaudit
(x) Cash transactions audit

(xi) Government audit

(xii) Secretarial audit

(xiii) Energy audit

(xiv) Operationalaudit
(xv) Other types of auditincluding
special purpose audit
putation, etc.). (e.g. ABCaudit, audit of bonus
cott
 2.4 OF FUNCTION
CLASSIFICATION ON THE BASIS
The function of capacity he
an auditordepends on the role of the auditor, ie., in which
audit work, So,
basisof function,auditing can
thebasis
on the be of the following types:

2.4.1 External Audit

External audit is This type of audit
tofulil the conducted
requirement
by anindependent external auditor.
1

the provisions of law. The qualified chartered

accountantsusualy
whoare
w cn

f
nected with the the organization can be
preparation of accounts or management of
tsto
external auditor.
apporied
The auditor who under
conducts such an audit is independent' of the enterprise pre
audit,
independent professional who does not have anysuch relationship with the enterpriseeas i.e.he2C
affect his ability might ad
to formn an objective judgement about the financial statements. The of
various
relating to the procedures of audit. rights. duties and liabilities of the auditor, their appoint
dures and presentation of renorts are provided in the concerned statute. appointment
Be

Features of external audit A

1. External audit is usually conducted by an independent qualified auditor.

2. In the normal course, this type of audit is conducted periodically.
3. The purpose of external audit is to see whether financial statements give a true and fair tie
financial position and result of the concern.
4. The external auditor can work independently and he
enjoys better status.
5. The Indian Companies Act,2013,and other statutes
provide the area of responsibilities andi
tions of the external auditors.

6. In cases, where external audit is being conducted due to legal compulsion,the auditor must ha
professional qualification.
7. This type of audit is conducted mainly for
safeguarding the interest of owners, shareholders
other parties who do not have knowledge of
day-to-day operation of the organizations.
8. The Act always provides for the
norms regarding the appointment of auditor. The auditor musti
be disqualified as per the provision of the law.
Independent financial audit is undoubtedly the most
common type of audit. It is generally conducte
ascertain whether the balance sheet and profit
and loss account give a true and fair view of the
finan
DOsition and financial
performance, respectively, of the enterprise
under audit.

2.4.2 Internal Audit

Internal audit is conducted
by specially assigned staff
within the organization. It thro
which a is an audit
thorough examinationof the accounting
transactions as well as the system according to
 lypes of Audit

have been recorded is

thesetransactions conducted, The internal audit is undertaken verify the accu- to
authenticity of the financial
and accounting and statistical records presented to the management. As
racy
on Auditing-610 (SA-610: Using
per Standards the work of aninternal auditor),the scope and objec-
internal audit vary widely and are
tives of dependent upon the size and structure of the entity and the
requirements
of its management.
The importance of internal audit has been well acknowledged in
Companies (Auditor Report)
2015 pursuant to which auditor of a
Order.
company isrequiredto comment on the fact that the internal
on dit system of the company is commensurate with the
nature and size of the company's operations.
However, the Order did not mandate that an internal audit should be conducted by the
internal auditor
E the company. The Order acknowledged
that an internal auditcan be conducted by an individual who
is not in appointment by the company.

The 2013 Act now moves a step forward and mandates the appointment of an
internal auditor who
chall either be a chartered accountant or a cost
accountant,or such other professional as may be decided
the Board to conduct internal audit
of the functions and activities of the
company.
Section138(1) of the Companies Act, 2013, states that such class or
classes of companies as may be
Drescribed shall be required to appointan internal auditor, who shall either be a
chartered accountant or

a cost accountant,or such other professionalas may be decided by the Board to conduct internal audit
of the functions and activities of the company.
Section 138(2) of the Companies Act, 2013,states that the Central
Government may, by rules, pre

)
seribe the manner and the intervals in which the internal audit shall be conducted and

Board.

According to Rule 13 of the Companies (Accounts) Rules, 2014:

The following class of companies shallbe

internal auditors,

Every
namely:
reported tothe

required to appoint an internal auditoror a fîm of

)
(a) listed company;
(b) Every unlisted public company having

Paid up share capital of 50crore rupees or more during the preceding financial year; or

()Turnover of 200crore rupees or more during the preceding financial year; or

(iii) Outstanding loans or borrowings from banks or public financial institutions exceeding
100crore rupees or more at any point of time during the preceding financial year; or

(iv) Outstanding depositsof 25 crore rupees or more at any point of time during the preced
ing financial year; and
(c) Every private company having
()Turnover of 200 crore rupees or more during the preceding financial year; or

()Outstanding loans or borrOWings from banksor public financial institutions exceeding

100 crore rupees or more at any point of time during the preceding financial year.

It is provided that an company covered under any of the above criteria shall comply with
existing the

)
requirementsof Section 138 and this rule within six months of commencement of such section.

ExplanationFor the purposes of this rule

The internal auditor may or may not be an employee of the company:
(i) The term 'Chartered Accountant' shall mean a Chartered Accountant whether engaged in

practice or not.
2)The AuditCommittee of the company orthe Board shall, inconsultation with the internal auditor,

formulatethe scope, functioning,periodicity and methodology for conducting the internal audit.
 Features of internal audit
1. The internal audit system is considered to
be aa part of the management control systenm and
merely as an assistant thereto.

2.Intermal audit often differs in its scopeand emphasis, more managerial than accounmne
it is

3. The nature andextent of checking also dependson the size and type of the businessorganizati
4. It not onlyembracesthe operational audit
of in the organization but;
various operational activities
includes the audit of management itself.

3. The function of internal audit can be considered as an integralpart of the internal control systey
6. Internal audit is continuous in nature. The work of internal auditor starts after the transactions a
completed.

7. Generally the internal audit is conducted bythe permanent staff

of the organization. Sometimes ou
side agencies may be asked to conduct
internal audit.
8. The existence of internal audit is a
help to the external auditor.
25CLASSIFICATION ON THE BASIS OF PRACTICAL APPROACH
On the basis of requirements of audit, the approach to auditing may differ. So, on the basis of practical

approach for conducting the audit work, the audit canbe classified under the following types:

2.5.1Continuous Audit
A continuous audit or a detailed audit is an audit, which involves a detailed examination of the books of
accounts at regular intervals, of say, one month or three months. The auditor visits his clients at regular
or iregular and checks each and every
intervals time during the financial year
of
sheet, Iransactiom.
of the year,
he checks the profit and loss account and the balance At
where the auditor or his
According to R. C, Williams,"A continuous audit one is staff
s
the auditor(or
engaged in checking the accounts period or where his cmH
during the whole statt
atte
regular or irregular intervals during
the period.

Applicability
Continuous audit is
applicable tothefollowing circumstances:
1. of the financial year.
Where it is desired to present the the close
accounts just after
2. Where the volume of
transactions is very large.
3. Where periodical statements are required to the management.
to be presented

Advantages
Easy and checking just after the completion
1. quick discovery of errors: the auditor starts
As of

transaction, it becomes easier for the auditor to detect fraud and errors quickiy.

2. Moral check on the client's staff: As the auditorvisits frequently and checks the accounts atregul
or irregular intervals, it provides moral check on the employees of the organzation.

3. Preparation of interim accounts: Under continuous audit system, interim accounts can be pre.
pared without much delay in time. It willhelp the board of directors to declare interim dividend.

4. Updated accounts: Due to continuous pressurefrom the auditors, the efficiency of accounts deparn.
ment's staff will increase and their work will be up to date and accurate.

5. More knowledge of technical details: Continuous audit the auditor to understand the
will help

technicalities of the business.This will help the auditorto make valuable suggestions forthe improve
ment of the business.

6. Audit staffcan be kept busy throughout the year: The auditor can make his audit plan in a sys.

tematic manner. He can evenly spread his work to the audit staff throughout the year. Itwill belp the
auditor to keep his staff busy throughout the year.

7. Quick presentation of accounts: Audited accounts can be presented just after the end ofthe finan-
cial year as the auditor has already completed most of his routine audit
work.

8. Efficient audit due to more time: Since the audit iscarried Iout throughoutthe
year,
sufficient time
isavailable for detailed checking. It will result in efficient audit.

Disadvantages
1. Expensive system of audit: Âs the auditing work is required to be carried out th
cannot afford to adopt throughout
year, it becomes an expensive system. Small organization this the
system of audit. expensive
 Alteration of figures alrendy checked:
2. After the aecounts have been checked, the staff of the client
may fraudulently alter the hgures

of
clients work: Prequent visits bythe auditor forchecking the books of accounts and
3. Dislocation

related
documents may dislocate the work flow of the
organization.

LOueries mayremain outstanding: As the work is not completed in one visit, the auditor may lose
tinuity and certain questions and inquiries may
remain unanswered

Unhealthy relationship: Frequent visit anddisturbance in thedaily work may provide scope for
healthy relationship between the audit staff and the client staff.

Reviewing of work already done: Before starting the work, a review of findings of previous
audit
ditwork should be made to establish link with the past work done.
2.5.2 Periodical or Final or Complete Audit
Periodical audit is one, which is taken up at the close of the financial period, when
have been balanced and inal accounts have already been prepared. It may also
final accounts
are prepared and continue ill the audit is completed even afterthe
Commehce
period.

Acconding to Spicer and Pegler, 'A final or complete audit is commonly

audit which is understo
s not commenced until after the end the financial period and is then
of

completed.'
In case of this
carfied n
type of audit, the auditor visits his client only oncein a year and goes
accounts until the audit work for the whole of the period ,on
is completed. Cheo

Applicability
1. Where the volume of transactions of the organization is
small.
2. Where there is
no urgency to present the audited accounts within a certain period
of
3. Where internal control time.
system is very effective.
4. Where interim
statements of accounts are not required by the management for
review
other purposes. or
fors

Advantages
1.
Inexpensive: It is a less expensive system
as compared to continuous audit system.
method of auditing is suitable for small Hence, t
business organizations.

2. Quick completion of audit: Periodical audit can be finished quickly within reasonable
time.
3. Minimum
chances of alteration: There is
minimum chance of alteration of figuresafter
been checked as the auditor completes his they ha
work on a continuous basis.
4. Less disturbance in client's work:
Client's daily office work is not unnecessarily disturbed
auditors visit only once in a year.
because

5. Preparation of audit schedule: The

auditor will not face any problem in
schedule. preparing his audit

6. Requirement of small establishment:

The auditor is not required to maintain a big
for this establishment
purpose.

Disadvantages
1. Delay in presentation of accounts: This type of audit can be satisfactorily applied in
case of small
concerns. Butin case of largeconcerns, ittakes more time to complete the auditwork and hence
presen
tation of accounts to the shareholders is
delayed.

2. Preparation of interim accounts: Under periodical auditing system, it is not possible to prepare
interim accounts. As a result, no interim dividend can be paid without the availability of auditedinterim
accounts.
 to check and verify all the
3. Possibility of undetected errors and frauds: The auditor may nof be able
Assch, there isevery chancethat someof the errors and frauds
may remain undetected
transactions.

the auditorhas severalclients whose financial year ends on the same

Fkation of audit programme: If
4.
thework of all the clients within the scheduled time.
date, it may be difhcult for the auditorto complete

Distinction between continuous auditand periodical audit

Points of
Continuous audit Periodical audit
differences
ensures of annual Publication of annual report may be
1. Publication of It early publication

the annual report report. delayed.

Audit is carried out only once at the close
Period of audit Audit is carried out throughout the year.
2.
of the accOunting period.
Work
Workcoverage Detailed checking of the books of Detailed checking ís usually not possible.
3.
In most of the cases, the checking of the
accounts is possible because of the
existence of sufficient time at the books of accounts is linited to test
disposal of the auditor. checking.

of audited figures is possible Alteration of figures is not possible as

4. Alterationof Alteration
there is no break in the process of
figures due to the long gap between the two con
secutive visits of the auditorto his client. auditing work.

operate this system. It is economical.

5. Cost involvement It is very expensive to

a business is applicable in case of small business

It is applicable to large It

6. Applicability
organization. organizations.

and checks the The audit staff visits the client's business
7.Audit process The audit staff visits
only once in a year after the accounts are
accounts frequently.
closed.

of Errors and frauds are left in the books till

is very effective for early detection
8. Detection of It

conducted at the close of the year.

and frauds. audit is
errors and frauds errors

2.5.3 Interim Audit

between two annual audits with a view to finding out
Interim audit is an audit, which is conducted in
It is a kind of audit that is con
it to declare an interim dividend.
interim profit of the business toenable
sheet audit.
ducted between two periodical or balance

Advantages
of interim accounts is required.
1.This type of audit ishelpful tothose concerns where the publication
audit has already been con
2. The final audit can be completed within the scheduled time,
if interimn

ducted by the organization.

during the course of the interim audit.
3.Errors and frauds can be more quickly found and detected
are checked afterthree or six months.
4. There is a moral check on the staffof the client as the accounts

Disadvantages
1. Figures may be altered in the accounts, which have already been audited.
finishthe audit work.
It will mean that the audit staff will have to prepare notes, when they
2.
 additional work.
3. This audit implies this purpose ha
the interim balance has to be prepared and for
trial
A le caseof interim audit,
at the middle of the
year.
accounts is required to be made
of allexisting

V2.5.4 Partial
the work of
Audit
the auditor is curtailed.The
auditor isasked tocheck
a e
Itisakind ofauditwhere of the cash book.
to check the payment side
be asked
forexample, he may as according
(private or public)
of limited companies
Partial audit is not permitted
in case case ofa v
cannot be curtailed.Again, in
of an auditor of a company
Companies Act, the duties to disburse all payments
arm

proprietor himself
it may not be
possible for the the cash book.
proprietary concen, appoint an auditor to check only
of cash, then he may report that
suspects misappropriation
partial audit, he must make it clear in his
to conduct
When an auditor isappointed
per the instructions
of the client.
performed partial audit as

Advantages
of the client.
1. Itserves the specific
interest
to deal with only one
or two as
as the auditor has
to renderquick service,
2. There is much scope
of business transactions.
item or group of items
1S
relating to a particular
of the books of accounts
3. Critical analysis
possible. to accounts.
on the part of persons who intend
falsify

4. It may act as a moral check

Disadvantages
strictly restricted under the Companies Act.
The conduct of this type of audit is
1. as a whole.
the financial position of the business
2. The audit report does not
reflect

3. It cannot be widely used.

only for a particular purpose.
4. This type of audit is conducted

2.5.5 Occasional Audit

in a while, whenever the
need arises and
As the name indicates, this type of audit is conducted once
to be carried out.
client desires it
banki
concerns but in case of joint stock companies,
This is possible only in case of proprietary
has to be carried out once or twice
a year, according to t
and insurance companies, etc., the audit
Companies Act.

Advantages
1. The client can know its actual financial position on the date, when the books of accounts are auditec

2. It brings some sort of satisfaction in the mind of the client that the audited accounts are accepte
by all.

3. Impartial view can be expressed through the procedure of audit.

4. Itcan be profitably used in small concerns.
Disadvantages
1 The oonduct ofthis audit brings some confusion aboutthe authenticity of final aditin a big concern

2 Ris expensive to operate.

The auditor faces a lotof problems in conducting his audit work, as the client's staff members are
hot accustomed
tothe procedures of auditing.
The books of accounts nmay not be available according to the requirement of audit procedures.

2.5.6 Standard Audit

Standard audit can be defined as a 'complete check and analysis of certain items and contingent upon
effectiveinternalcheck, appropriate test checks on remaining items, the whole of work being in accor
dance with general auditing standards.'
From theabove, it is clear that under thistype of audit,certain items in the accounts are thoroughly
checked and analysedand appropriate test checks are applied toother items, provided there isagood
ndeffective internal check in operation.

Advantages
L Development of new auditing standards in view of changing socio-economic condition can be
made possible through scrutiny of auditing standards so far established.
Itcontrols the nature andextent of documents and evidences which are obtained through the pro
cedure of an audit.
3.It infiuences the audit programme.
4. The destructivecriticismoften made by the general public that the management in collusionwith auditor
distort the financialstatements, may be rooted out through the applicationof standard audit procedures.

Disadvantages
1. It is very difficult to bring all organizations under the same accounting practices for the uniform

application of standard audit.

2. The application of a particular standard procedure to different organizations having different stan

dards may invite chaos instead of development.

environment of business.
3.Standards are always subject to change of circumstances, nature and
4. Finally, setting up standard narrows the development of standard.

2.5.7 Balance Sheet Audit

means the balance sheet items are verified and tests
limited audit in which all
Balance sheet audit
are directly related to the assets and liabilities, such
imposed only on those profit and loss items which
bad debts. Accounts such as these are analysed,
as repairs and maintenance, provision for depreciation,
butotherwise no detailed audit is conducted.
the balance sheet working back to the books
Under this type of audit, the audit is commenced from
of original entry and the related documents, etc.
countries.
This type of audit is more popular
in the United States than in England and other European

But this type of audit is more widely used.

Advan tages
can be reflected shroet
of theperiod. The change inworking
capital
events
L. Itrecords thechanging

balance sheet audit.

undercapitalize.
information relatingto overcapitalization,
2 This tvpe of audit furnishes different
of the business.
tion, overtrading and
undertrading
of the business.
proper relationship between assets and liabilities
3. Itestablishes decisions
in the affairsof the business in taking business
interested
4. Itguides different parties

Disadvantages
measuring bases.
information needed to evaluate different
1. It lacks in disclosing certain material
point of time. Events
reflects the financial position of the business only at a given
2. Balance sheet
date may affect materially the process of decision.
occurring after balance sheet
may be drawn, but the causes for the change of figures
3. Comparison between the two periods

between the two periods are not stated.

or loss of the business is not stated in the balance
4. The information regarding the generation of profit

sheet. This is required to make the balance sheet more informative

and balance sheet audit more dynamic.