Audit and its different types

1. AUDIT
Sheetal Wagh

2. • An audit is a systematic and independent examination of books, accounts, statutory
records, documents and vouchers of an organization to ascertain how far the financial
statements as well as non-financial disclosures present a true and fair view of the
concern.
• It also attempts to ensure that the books of accounts are properly maintained by the
concern as required by law. Auditing has become such a ubiquitous phenomenon in the
corporate and the public sector that academics started identifying an "Audit Society".
• The auditor perceives and recognises the propositions before them for examination,
obtains evidence, evaluates the same and formulates an opinion on the basis of his
judgement which is communicated through their audit report.
• Any subject matter may be audited.
• Audits provide third party assurance to various stakeholders that the subject matter is
free from material misstatement.
• The term is most frequently applied to audits of the financial information relating to a
legal person. Other areas which are commonly audited include: secretarial &
compliance audit, internal controls, quality management, project management, water
management, and energy conservation.
• As a result of an audit, stakeholders may effectively evaluate and improve the
effectiveness of risk management, control, and the governance process over the subject
matter.

3. Different Performance Measurement Tool as a Audit Function:
1. Financial Audit
2. Internal Audit
3. Cost Audit
4. Management Audit

4. 1. Financial Audit
A financial audit is conducted to provide an opinion whether "financial
statements" (the information being verified) are stated in accordance with
specified criteria.
Normally, the criteria are international accounting standards, although auditors
may conduct audits of financial statements prepared using the cash basis or
some other basis of accounting appropriate for the organisation.
In providing an opinion whether financial statements are fairly stated in
accordance with accounting standards, the auditor gathers evidence to
determine whether the statements contain material errors or other
misstatements.
The audit opinion is intended to provide reasonable assurance, but not absolute
assurance, that the financial statements are presented fairly, in all material
respects, and/or give a true and fair view in accordance with the financial
reporting framework.
The purpose of an audit is to provide an objective independent examination of
the financial statements, which increases the value and credibility of the
financial statements produced by management, thus increase user confidence in
the financial statement, reduce investor risk and consequently reduce the cost
of capital of the preparer of the financial statements

5. 2. Internal Audit
Internal auditing is an independent, objective assurance and consulting activity
designed to add value and improve an organization's operations.
It helps an organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes.
Internal auditing is a catalyst for improving an organization's governance, risk
management and management controls by providing insight and recommendations
based on analyses and assessments of data and business processes.
With commitment to integrity and accountability, internal auditing provides value to
governing bodies and senior management as an objective source of independent
advice.
Professionals called internal auditors are employed by organizations to perform
the internal auditing activity.

6. The scope of internal auditing within an organization is broad and may involve
topics such as an organization's governance, risk management and management
controls over: efficiency/effectiveness of operations (including safeguarding of
assets), the reliability of financial and management reporting, and compliance with
laws and regulations. Internal auditing may also involve conducting proactive fraud
audits to identify potentially fraudulent acts; participating in fraud investigations
under the direction of fraud investigation professionals, and conducting post
investigation fraud audits to identify control breakdowns and establish financial
loss.
Internal auditors are not responsible for the execution of company activities; they
advise management and the Board of Directors (or similar oversight body)
regarding how to better execute their responsibilities. As a result of their broad
scope of involvement, internal auditors may have a variety of higher educational
and professional backgrounds.

7. 3. Cost Audit
Cost Audit represents the verification of cost accounts and check on
the adherence to cost accounting plan.
Cost Audit ascertain the accuracy of cost accounting records to
ensure that they are in conformity with Cost Accounting principles,
plans, procedures and objective.
Cost Audit comprises following:
1. Verification of the cost accounting records such as the accuracy of
the cost accounts, cost reports, cost statements, cost data and
costing technique and.
2. Examination of these records to ensure that they adhere to the cost
accounting principles, plans, procedures and objective.

8. 4. Management Audit
‘Management Audit' is a systematic examination of decisions and actions of the
management to analyse the performance.
Management audit involves the review of managerial aspects like organizational objective,
policies, procedures, structure, control and system in order to check the efficiency or
performance of the management over the activities of the Company.
Unlike financial audit, management audit mainly examine the non financial data to audit the
efficiency of the management. Somehow audit tries to search the answer of how well the
management has been operating the business of the company? Is managerial style well
suited for business operation? Management Audit focuses on results, evaluating the
effectiveness and suitability of controls by challenging underlying rules, procedures and
methods.
Management Audit is an assessment of methods and policies of an organization's
management in the administration and the use of resources, tactical and strategic planning,
and employee and organizational improvement.
Management Audit is generally conducted by the employee of the company or by the
independent consultant and focused on the critical evaluation of management as a team
rather than appraisal of individual.

9.  Advantages of Auditing:
1. Audited accounts are readily accepted by Government authorities like Tax authorities
and Central banks.
2. By auditing the accounts Errors and frauds can be detected and rectified in time.
3. Audited accounts carry greater authority than the accounts which have not been
audited.
4. For accessing finance from financial institutions like Banks, previous years audited
accounts are evaluated for determining repayment capability.
5. Regular audit of account create fear among the employees in the accounts department
and exercise a great moral influence on clients staff thereby restraining them from
commit frauds and errors.
6. Audited accounts facilitate settlement of claims on the retirement/death of a partner.
7. In the event of loss of property by fire or on happening of the event insured against,
Audited accounts help in the early settlement of claims from the insurance company.
8. In case of Public Company where ownership is separated from management, auditing
of accounts reassure the shareholders that accounts have been properly maintained,
funds are utilized for the right purpose and the management have not taken any undue
advantage of their position.
9. To determine the value of the business in the event of purchase or sales of the
business, audited account will be the treated as the base for the evaluation.

10. 10. The audit of accounts by a qualified auditor also help the management to
understand the financial position of the business and also it will help the
management to take decision on various matters like report in internal control
system of the organization or setting up of an internal audit department etc.
11. If the accounts have been audited by an independent person, disputes
between the management and labour unions on payment of bonus and higher
wages can be settled amicably.
12. In the event of admission of a new partner, audited accounts will facilitate
the formation of terms and conditions for joining the new partner. Last 3 years
audited accounts will give a general idea about the growth and financial
position of the business to the new partner.

11.  Disadvantages of Auditing:
1. An audit does not assure future viability of the organization audited
2. An audit does not assure the effectiveness and efficiency of management.
3. Auditors express opinion and therefore does not give total assurance of the
true fair presentation of annual reports.
4. The payment of audit fees brings extra cost burden to the organization.
5. During an audit the auditor requires the attention several company staff and
therefore causes disruption.