Types of Audit
Subject: Accountancy
Overview
The audit, which is performed under some statute or law, is known as external or statutory report. Internal audit is a continuous and systematic examination and review of the records and the books of account of an entity. This note has information about types of audit.Types of Audit
External or Statutory Audit
The external or statutory audit is known as the audit which is performed under some statute or law. Under the Company Act 2053, every company must get its financial records, books of account and financial statements audited by a qualified auditor. This type of audit is made at the end of the fiscal year. The external audit helps to check, verify, examine and review all the documents, book of account and financial statement. After completing audit work, the auditor must prepare the audit report.
Objectives of External Audit
The following are the main objectives of external audit:
- Complying with law
To comply with the concerned law is the first and foremost objective of the external or statutory audit. It complies with the concerned law under which the entity is established. - Following the statutory requirements
Every organization have to follow some certain requirements regarding forms and content of the profit and loss account, the balance sheet and other information. So, it is the objective of external audit to follow the statutory requirements. - Detecting and preventing errors
The auditor can only certify that the books of account are reliable and dependable if there is no frauds and error. So, it is the responsibility of an auditor to detect and prevent books of accounts from any possible frauds and errors. - Expressing audit opinion
The auditor must present report expressing the opinion of his/her on the view of financial statements. The auditor will be complete after expressing his/her opinions. - Safeguarding the interest of owners
There is a separation of the control from ownership in a company. It is the managers who control and manage the company’s resources provided by the owners. In order to safeguard the interest of the shareholders, the books of account of the company are audited by an independent auditor. The audit report, therefore, addresses the company’s shareholders.
Internal Audit
Internal audit is the examination , monitoring and analysis activities related to company's operation, including its business structure , employee behaviour and information system. It is an independent, objective, assurance and consulting activity designed to add value and improve an organization's operation. Its objective is to bring systematic, disciplinedapproach to improve the effectiveness of risk management, control and governance progress. Internal audit is conducted by the staff of entity.
Objectives of Internal Audit
The following are the main objectives of internal audit:
- Verifying books of account
Internal audit verifies the books of account regularly and continuously of the entity concerned and reports on them. - Reviewing the internal control system
Internal audit constantly reviews the existing internal control system and the accounting system of the entity and reports to the management. - Preventing the errors and frauds
Internal audit regularly and continuously verifies and examines of records and books of account so the errors and frauds can be prevented properly. - Advising the management
Internal audit advises the management for the improvement in the entity’s accounting system, internal control system, and accounting policies and procedures. - Assisting the management
Internal audit assists the management in accounting and financial matters of the entity. - Preparing base for final audit
Internal audit also prepares the base for final audit by completing all accounting activities in time and thus facilitates the smooth conduct of the final audit.
Differences between Internal Audit and External Audit
The differences between internal audit and external audit are as follows:
| External Audit | Internal Audit |
| External audit is of periodic nature and conducted after completion of the fiscal year. | Internal audit is of continuous nature and conducted regularly during a year. |
| The objective of the external audit is to fulfil the statutory requirements. | The objective of the internal audit is to fulfil the requirements of the management. |
| External audit is carried out generally on a random sampling basis. | Internal audit is carried out on a detailed basis. |
| External audit is done by an independent auditor or by a firm of Chartered Accountants. | Internal audit is done by an internal auditor who may be an employee of the firm. |
| External audit is independent to the management, so it is compulsory. | Internal audit is dependent on the management, so it is not compulsory. |
| External audit is the act of examining the books of account from the authorised person & organisation on completion of a fiscal year. | An internal audit is an act of examining the book of an account by the internal staff of the office. |
| The audit report of the external audit is presented to the concerned authority or office of the auditor general. | The audit report of the internal audit is presented to the management or district treasury & comptroller office. |
Things to remember
- The audit, which is performed under some statute or law, is known as external or statutory report.
- Internal audit is a continuous and systematic examination and review of the records and the books of account of an entity.
- Internal audit regularly and continuously verifies, examines and reviews the books of account of the entity concerned and reports on them.
- Internal audit constantly reviews the existing internal control system and the accounting system of the entity and reports to the management.
- It includes every relationship which established among the people.
- There can be more than one community in a society. Community smaller than society.
- It is a network of social relationships which cannot see or touched.
- common interests and common objectives are not necessary for society.
Questions and Answers
What is external or statutory audit?
The audit, which is performed under some statute or law, is known as external or statutory report.
State the objectives of statutory or external audit.
The following are the main objectives of statutory or external audit:
- To comply with the concerned law
- To follow the statutory requirements
- To detect and prevent errors
- To express audit opinion
- To safeguard the interest of the owners
What is internal audit?
Internal audit is a continuous and systematic examination and review of the records and the books of account of an entity.
State the objectives of internal audit.
The following are the objectives of internal audit:
- To verify books of account
- To review the internal control system
- To prevent errors and frauds
- To advise the management
- To assist the government
- To prepare base for final audit
Explain the objectives of internal audit.
The following are the main objectives of internal audit:
- Verifying books of account
Internal audit regularly and continuously verifies, examines and reviews the books of account of the entity concerned and reports on them. - Reviewing the internal control system
Internal audit constantly reviews the existing internal control system and the accounting system of the entity and reports to the management. - Preventing the errors and frauds
Errors and frauds are detected and prevented in internal audit since there is a regular and continuous verification and examination of records and books of account. - Advising the management
Internal audit advises the management for the improvement in the entity’s accounting system, internal control system, and accounting policies and procedures. - Assisting the management
Internal audit assists the management in accounting and financial matters of the entity. - Preparing base for final audit
Internal audit also prepares the base for final audit by completing all accounting activities in time and thus facilitates the smooth conduct of the final audit.
Explain the objectives of external audit.
The following are the main objectives of external audit:
- Complying with law
To comply with the concerned law is the first and foremost objective of external or statutory audit. It complies with the concerned law under which the entity is established. - Following the statutory requirements
There are certain requirements in the statute regarding the forms and contents of the profit and loss account, the balance sheet and other information which every company must follow. - Detecting and preventing errors
The auditor has an aim in mind to detect and prevent any kind of errors and frauds in an external audit that exists in the books of account. In the presence of any error or fraud, the auditor cannot certify that the books of account are reliable and dependable. - Expressing audit opinion
The external audit is complete only when the auditor issues a report expressing his/ her opinion on the view presented by the financial statements as to whether they give a true and fair view. - Safeguarding the interest of owners
There is a separation of the control from ownership in a company. It is the managers who control and manage the company’s resources provided by the owners. In order to safeguard the interest of the shareholders the books of account of the company are audited by an independent auditor. The audit report, therefore, addresses the company’s shareholders.
Write the differences between internal audit and external audit.
The differences between internal audit and external audit are as follows:
| External Audit | Internal Audit |
| External audit is of periodic nature and conducted after completion of the fiscal year. | Internal audit is of continuous nature and conducted regularly during a year. |
| The objective of the external audit is to fulfill the statutory requirements. | The objective of the internal audit is to fulfill the requirements of the management. |
| External audit is carried out generally on a random sampling basis. | Internal audit is carried out on a detailed basis. |
| External audit is done by an independent auditor or by a firm of Chartered Accountants. | Internal audit is done by an internal auditor who may be an employee of the firm. |
| External audit is independent to the management, so it is compulsory. | Internal audit is dependent on the management, so it is not compulsory. |
| External audit is the act of examining the books of account from the authorized person & organization on completion of a fiscal year. | Internal audit is an act of examining the book of an account by the internal staff of the office. |
| The audit report of the external audit is presented to the concerned authority or office of the auditor general. | The audit report of the internal audit is presented to the management or district treasury & comptroller office. |
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