MODULE-1- INTRODUCTION –

PART3

QUALITIES AND QUALIFICATIONS

OF AUDITOR- TYPES OF AUDIT
 QUALITIES AND QUALIFICATION OF
AUDITOR
 Auditor should be well versed with the principles and
practices of all aspects of accounting.- he should be fully
aware of the new changes in accounting.
He must have thorough knowledge of cost accounts.
He should be fully aware of the technical and minute details of
the working of the business which he is auditing.
Thorough knowledge of company law and mercantile law and
acts.
Familiar with principles of economics
Audit case laws
Industrial management, financial administration, and business
He should be honest, impartial and not be influenced by
others while performing duties.
He must be cautious, vigilant, methodical, hard-working and
accurate in judgement.
He should possess high moral standards.
He should seek clarification on the matters which he is not
able to understand from the information provided to him.
He must have the necessary courage and ability to write out
his report clearly, correctly, concisely and forcefully.
He should build up a reputation for himself as a man of
integrity and independence.
He should not adopt an attitude of suspicion.
He should not disclose the secrets of his client.
Last but not the least, he must have commonsense.
 TYPES/ CLASSIFICATION OF AUDIT
 Independence of an Auditor
The auditor must be independent of his client. He must not be influenced by any person
connected with the enterprise and audit. He should be independent in his approach and
free from bias and prejudice.

An audit can be classified into different classes, types or kinds on different bases. The
following are some forms of special audits.
1. Tax Audit
Audit of financial accounts for satisfying the income tax authorities is called Tax
Audit. Tax audit is the verification of the books of accounts of an assessee to
validate the Income Tax computation and compliance with the laws of Income Tax.
Section 44 AB of the Income Tax Act, 1961 provides for compulsory audit of
accounts of certain persons.
1. According to Section 44 AB, every person should get his accounts audited before the
specified date and furnish the report of such audit in the prescribed form duly signed
and verified by qualified accountant before the specified date.

(a) if his total sales in business exceeds 1 crore rupees in any previous year,
(b) if his gross receipts in profession exceeds 25 lakhs rupees in any previous year

OBJECTIVES OF TAX AUDIT

1.To ensure that the books of account and other records of assessee are properly
maintained
2. To ensure that the books of accounts accurately reflect the accounts of income tax
payers and deductions are correctly declared.
3. To facilitate the administration of tax laws by proper presentation of accounts before
tax authorities and considerably save the time of assessing officers in carrying out
routine verification.
4. To report the requirements of Form Number 3CA/3CB and 3CD.Form 3CA/3CB and
3CD: Chartered accountant has to furnish tax audit repo before tax authority in
 PERFORMANCE AUDIT
Performance audit refers to an independent examination of a program, function,
operation or the management systems and procedures to assess whether the
entity is achieving economy, efficiency and effectiveness in the employment of
available resources.
It is mainly employed in governmental and non-profit entities.
OBJECTIVES:
To see that every rupee invested in the business gives the optimum return.
 To see that the balancing of investment between different functions and aspect
is so designed to give optimum results.
c. To see that the areas of uncertainty in the business is located and effective
measures are taken to reduce it.
To help in removing the areas of inefficiencies and waste.
For ensuring adherence to sound strategies to result in future profitability. For
ensuring economic and efficient use of man, machine and materials.
 SOCIAL AUDIT
Any activity, which can create an impact on the society shall become subject to
social audit.
 a business enterprise has to be responsible for the welfare of the society and is
accountable to the public at large.
 Objectives of Social Audit
To see that the resources of the enterprise are put to their optimum and best
utilization.
To assess the extent of responsibility towards society.
To evaluate or assess the company's performance against planned goals in the
areas of social responsibility.
To see how far the enterprise functions for the welfare of the society.
To see how much is the impact of activities of the concern on the social and
economic environment of the society at large.
 GENERAL CLASSIFICATION OF AUDIT ON
DIFFERENT BASES
Complete Audit:
A complete audit is one in which all transactions recorded in the books of
accounts are audited thoroughly.
Partial Audit
A partial audit is one in which only a particular type of transactions is
audited.
Voluntary Audit
A voluntary audit is one which is carried on at the will of the proprietor of
the concern. He may or may not get his accounts audited.
Compulsory Audit
Compulsory audit is one which has been made compulsory under specific
statute.
Private Audit
Private audit means the audit of enterprises which are private in
character. Such an audit is not required by statute.
Government Audit
The Government Audit is the audit through which public management is
verified and controlled. In government audit, the activities of government
departments, corporations and companies are analyzed as to their
efficiency and transparency as they have to work in accordance with the
relevant legal provisions.
Internal Audit
It is a review of operations and records undertaken within a business by
specially assigned staff of the organization. It is a post transaction review
to evaluate the correctness of rewords and the effectiveness of operation.
Cash Audit
It is a type of audit under which only cash receipts and cash payments are
audited in detail by the auditor. The auditor checks all items of cash
receipts and cash payments with the counterfoils of receipts, vouchers,
documents, correspondence etc.
Special Audit
It is an audit conducted with some special objects in view. It is a fact
finding enquiry.
The Central Government is empowered to appoint special auditors under
the following circumstances:
a. When the Central Government is of the opinion that the affairs of the
company are not being managed according to the sound business
principles or
b. When the company is being managed in a manner likely to cause
serious injury or damage to the interests of the trade, industry or business
to which it pertains or When the solvency of the company is continuously
deteriorating.
Joint Audit
When two or more persons or firms of Chartered Accountants jointly
undertake the audit work of a company, it is said to be a Joint Audit. The
practice of appointing joint auditors has been adopted by very large sized
companies, especially the Government companies, in order to conduct the
Balance Sheet Audit
Balance sheet audit is of recent origin. It is an audit concerned only with
the items appearing in the Balance Sheet.
Cost Audit
The cost audit implies thorough examination of the cost accounting
records of a company. It involves the examination of cost accounts and
ascertaining that the plan prepared in this connection has been duly
executed.
Management Audit
It is a method to evaluate the efficiency of the management at all levels
through out the organization. It is an audit to examine review and
appraise the various policies and action of the management on the basis
of certain standards.
Propriety Audit
It refers to an audit in which the various actions and decisions are
examined to find out whether they are in public interest and whether
they meet the standards of conduct. This audit is undertaken for
verifying that there has been any leakage of revenue or
misappropriation of assets due to a transaction or group of transactions
entered into without considering legal requirements.
Environmental Audit
Environmental Auditing aims at measuring the impact of activities of
an organization on the environment.
Statutory Audit
where audit In the case of an enterprise is made compulsory by law, it is
called statutory audit
Continuous Audit
Audit work done in an enterprise continuously through out the course of
the accounting year at regular intervals is called Continuous audit.
It is also known as detailed audit or running audit.

Applicable:
 where it is necessary to present the final accounts just at the close of
the accounting year, like banks, railway..
Transactions are numerous.
Chances of errors and frauds.
Monthly and quarterly review.
Features
 examination of books of accounts continuously through the year.
Accounting and auditing go together.
Detailed checking.
 Advantages

 close and exhaustive checking

Early and easy discovery of errors and frauds
Quick presentation of accounts
Enforces regularity in accounting
Familiarity with technical details
Moral check
Declaration of interim dividend.
Relief to the auditor.
 Disadvantages

 alteration of audited figures.

 interruption of client work
 loss of link in work
Leads to unhealthy relationships
Exhaustive and tedious work
More expensive
mechanical
 Safeguards against Draw-backs of Continuous Audit or
Precautions to Guard Against its Disadvantages.

1.The auditor should so plan his audit programme.

2. The auditor should complete the checking of a book, as far as possible,
in one sitting.
3. He should prepare elaborate notes and check-list on each visit
4. Before commencing the work at each subsequent visit, the auditor,
must carefully glance over the work done at the previous visit so as to find
out the alteration in the figure, if any.
5. There should be strict instructions from the auditor to the client's staff,
prohibiting them from making any alterations in the figures already
recorded without the auditor's knowledge.
6.It is desirable for the auditor to arrange his visit to the client's
business at irregular intervals. This would prevent the client's staff from
taking steps to cover up the frauds committed by them.

7. The auditor should devise special forms of ticks and use different
colors for specific ticks so that he can know whether any alterations
have been made by the client's staff.

8. To prevent collusion between the client's staff and his staff, the
auditor may rotate the work among his staff in such a way that no audit
clerk is allowed to check an account from the beginning to the end.

9. By a judicious allocation of audit work among his staff, the auditor

can prevent the audit work from becoming mechanical.
 FINAL AUDIT
Final or periodical or Annual or Completed Audit

Final audit is done at the close of the financial or trading period after
the close books of accounts and the preparation of Final Accounts.

The audit is commenced and completed in a single uninterrupted

session.

The auditor is given possession of the books of accounts and are

returned to the client only after the audit ha been completed.

This form of audit is very convenient for small business houses.

 In large businesses, periodical audit is rarely practicable as it would

cause delay in the presentation of audited accounts.
 Features of Final Audit

The work in the case of final audit is generally



started after the close of the financial year.

The audit work is started and completed in one

continuous session.

It is convenient for small concerns.

 ADVANTAGES DISADVANTAGES

No dislocation of Detailed checking not

possible.
client’s work
Non- detection of errors
Smooth flow of work
and fraud.
Less expensive Delay in presentation of
Little chance of final accounts
collusion Unsuitable for large
No loss of interest concerns
Dependence on
management
 INTERIM AUDIT
An audit conducted in between two annual audits is called interim audit.

ADVANTAGES DISADVANTAGES
 it facilitates early completion of the  It may subsequently be altered
annual audit by the accountant staff
 It helps in quick detection and  it has to make extensive notes –
rectification of errors and frauds this involves unnecessary
 It exercise an effective moral check additional work.
on the staff of the enterprise  expensive
 it is helpful where interim figures are
to be published