3.

Types of Audit

1. Continuous
Audit

2. Final/Aunnual
Audit

Types of Audit On the basis of 3. Interim Audit

time

4. Balance sheet
audit

5. Concurrent
audit

1. Continuous Audit
Meaning
Continuous audit is defined by R. C. Williams as one where the auditor is constantly or at (regular
or irregular) intervals engaged in checking the accounts during the period.
Continuous Audit means an audit at regular intervals throughout the accounting year.

Advantages
Continuous Audit has the following advantages -
1. Quick Preparation of Final Accounts: Since, the routine audit is done continuously, the Final
Accounts can be prepared immediately after the year end.
2. Early Dividends to Shareholders: The shareholders would be happy as they receive dividends
soon after the end of the financial year. The Company can prepare interim accounts and pay even
interim dividends to the shareholders.
3. Up-to-date Accounts for Banks/ Investors: The up-to-date final accounts are useful to banks and
investors for taking decisions regarding loans and investment.
4. Check on Employees: Since the auditors visit regularly throughout the year, it acts as check on
the employees to keep the accounts ready and up-to-date.
5. Prevents Errors and Frauds: Constant checking by the auditors helps to detect and even prevent
errors and frauds.
6. Familiarity with Client's Business: Since the auditor spends more time at the client's place, he
becomes familiar with all the aspects of client's business. This is a great help in audit work.
[Link] Audit: The auditor has more time at his disposal to do a thorough checking of all
transactions. This reduces the risk of missing any material items.
[Link] of Audit Staff: Audit Staff can be kept busy throughout the year. Audit work can be
evenly distributed to avoid overwork after year end.

Disadvantages
1. Expensive: Since the auditor spends more time on the audit work, the audit fees are much more.
Continuous Audit is thus expensive.
However, only a large organization should opt for a Continuous Audit.
2. Audit in Instalments: Since the audit work is done at intervals and not at one go, audit may be
inefficient. The queries during the last visit may remain unsolved. It is difficult at each visit to take
up the work precisely at the stage of last visit.
To overcome this disadvantage, audit should be well-planned. All queries should be noted in the
Audit Note Book and cleared before taking up fresh work. The work done up to end of each visit,
relevant voucher numbers, totals etc. should be carefully noted in the Audit Note Book.
3. Errors and Frauds in Books Already Checked: If an employee changes some figures in the books
already checked by the auditor during his earlier visits, it would be difficult to detect such errors
and frauds subsequently.
To overcome this disadvantage, the auditor should strictly prohibit any alteration in checked books.
Any mistake in the checked entries should be rectified only by a Journal Entry passed subsequently
and not by alteration of figures in books. The auditor can also put secret ticks to detect alteration
of figures.
[Link] Accounts Work: Frequent visits by audit staff disrupts the work of accounts staff. The
day-to-day accounting may suffer if the accountants have to attend to audit work every now and
then.
To overcome this disadvantage, the audit programme should be co-ordinated with the client to
avoid disruption in routine accounts work. The client should appoint an employee specially to co-
ordinate with and attend to the auditors.
5. Undue Reliance on Auditors: The client and the accountant may become unduly dependent upon
the auditor. Even small routine matters may be referred to the auditors.
Continuous Audit may become a routine affair of a mere Vouch and Post Audit.
This disadvantage can be overcome by making clear to the client the scope and nature of
Continuous Audit. Auditor should keep his distance from the routine matters. The audit staff may
be frequently rotated to prevent the audit from becoming repetitive and mechanical.
2. Final Audit
Meaning
Spicer and Pegler define it as "an audit which is not commenced until after the end of the financial
year and then carried on until completed. Final or Periodic Audit means an audit taken up after the
end of the accounting year. The audit work begins only after the accounting year is over. Generally,
majority of audits are in the nature of Final, Periodical or Annual Audits.

Advantages
Final Audits have the following advantages -
1. Inexpensive: Since the auditor spends normal time on the audit work, the audit fees are also
normal. Final Audit is thus inexpensive. Even a small organization (a sole trader or a firm) can opt
for a Final Audit to obtain the advantages of an independent financial audit.
[Link] At a Stretch: Since the audit work is done at a stretch, without any gaps, audit is carried
out efficiently. All queries are solved immediately. The work is done continuously and not in
instalments. The audit planning and programme are simple.
3. No Alteration: Since the books are checked at a stretch, no employee can change any figures in
the audited books.
4. Does Not Disrupt Accounts Work : The accounts staff is not disturbed anytime during the
accounting year. There is no need for the accountants to attend to audit work every now and then.
5. Less Errors and Frauds: Since the books are checked without any break, the chances for errors
and frauds are less.

Disadvantages
Final Audit has the following disadvantages -
1. Delay in Final Accounts: Since the routine audit is done after the year end, the Final Accounts
may be delayed and ready long after the year end.
2. Late Dividends to Shareholders: The shareholders would be unhappy as they receive dividends
long after the end of the financial year. It would be difficult for a Company to prepare interim
accounts and pay interim dividends to the shareholders during the financial year.
3. Stale Accounts for Banks/Investors: The final accounts are available long after the end of
accounting year. Such stale accounts are not useful to banks and investors for taking decisions
regarding loans and investment.
4. No Moral Check on Employees: Since the auditors visit only at the end of the year, dishonest
employees have a chance to commit frauds during the year and clean up the accounts just before
the auditors arrive, e.g. teeming and lading.
5. No Familiarity with Client's Business: Since the auditor spends little time at the client's place,
he cannot become familiar with all the aspects of client's business. This may affect the quality of
audit.
6. Sample Check: Since the auditor has to complete the audit in a short time, he has to resort to
sample checking. This increases the risk of missing material items.
7. Uneven Work-load for Audit Staff: Audit staff is overworked immediately after year end and
comparatively less busy at other times.

3. Interim Audit
Meaning
Interim Audit is an audit conducted in between the annual audits. For example, an audit of accounts
prepared for the period of six months from 1st April to 30th September, would be Interim Audit.

When conducted
Interim audit is conducted in the following cases -
1. Quarterly Results: Public Limited Companies listed on the stock exchange have to declare their
quarterly results. It is preferable, though not compulsory, to declare such results on the basis of
interim audit.
2. Interim Dividends : Interim audit is also advisable when a company intends to pay interim
dividends. Interim audit would ensure that there are enough profits to justify payment of interim
dividends.
3. Sale of Business: In case of a sole proprietor, interim audit may be conducted when the business
is proposed to be sold, to fix the purchase consideration.
4. Changes in Firm: In case of a partnership firm, interim audit becomes necessary on admission,
retirement or death of a partner, dissolution of partnership, sale of firm to a company, valuation of
goodwill etc.

Advantages
Interim audit is similar to Continuous Audit and enjoys similar advantages -
1. Quarterly Results: A public limited company listed on the stock exchange can comply with the
statutory provision of declaring quarterly results.
2. Interim Dividends to Shareholders : The shareholders would be happy as the Company can pay
interim dividends to the shareholders.
3. Quick Preparation of Final Accounts : Since the interim audit is already done, the Final
Accounts can be prepared immediately after the year end.
4. Up-to-date Accounts for Banks/Investors: The up-to-date interim accounts are useful to banks
and investors for taking decisions regarding loans and investment.
[Link] on Employees : Interim audit acts as check on the employees to keep the accounts ready
and up-to-date.
6. Prevents Errors and Frauds: Checking by the auditors for the purpose of interim audit helps to
detect and even prevent errors and frauds.
7. Thorough Final Audit: The auditor has more time at his disposal at the time of final audit, which
reduces the risk of missing any material items.
8. Utilization of Audit Staff: Audit staff can be utilized in a better manner. Interim audit is done
when the audit staff is relatively free.

Disadvantages and precautions

1. Expensive: Since the auditor does two audits in one year, the audit fees are more to that extent.
Interim Audit is thus expensive.
2. Audit in Instalments : Since the audit work is done at two stages (interim and final) and not at
one go, audit may be inefficient. It is difficult at the time of final audit to take up the work precisely
at the stage where it was left at the time of interim audit. To overcome this, audit should be well-
planned. The work done up to end of the interim audit, relevant voucher numbers, totals etc. should
be carefully noted in the Audit Note Book.
3. Errors and Frauds in Books Already Checked: If an employee changes some figures in the books
already checked by the auditor during the interim audit it would be difficult to detect such errors
and frauds subsequently. To overcome this disadvantage, the auditor should strictly prohibit any
alteration in checked books.
Any mistake in the checked entries should be rectified only by a Journal Entry passed subsequently
and not by alteration of figures in books. The auditor can also put secret ticks to detect alteration
of figures.
[Link] Accounts Work: Interim audit disrupts the work of accounts staff. To avoid this
disadvantage, the audit programme should be co-ordinated with the client to avoid disruption in
routine accounts work. The client should appoint an employee specially to co-ordinate with and
attend to the auditors.
4. Balance Sheet Audit
Meaning
Balance sheet audit involves an in-depth examination of the various items in the balance sheet
and the profit and loss account. The original entries are and vouchers are examined only to the
extent necessary.

Advantages
1. No changes in accounts: Balance sheet audit commences after completion of books of
accounts and preparation of the balance sheet. Therefore, changes in accounts are not possible
once the verification process is started.
2. No interruptions: There is no interruption from the accounts department. Checking can be
done smoothly without any breaks in between.
3. No loose links: There are no loose links because audit is conducted in a continuous flow,
which reduces the chances of missing the verification of any aspect.
4. Less time and cost: Sample test reduce the time involved for routine checking. It also reduces
cost of audit.
5. Comparison: It helps compare figures of current and past periods.
6. Analysis: This type of audit helps to analyses information relating to over-capitalization,
under-capitalization, over-trading, under-trading of the business. It helps to study the relationship
between assets and liabilities of the business.
7. Decision: It helps different parties in taking business decisions.

Disadvantages
1. No check on employees: As no routine checking is done so check on employees is lost.
2. No review of internal control: Reliance on internal control is assumed and no efforts are made
to review of internal controls or checks.
3. Post mortem: There is no timely detection of errors and frauds as it commences at the end of
the financial year and works like a postmortem analysis.
4. Programming errors: In this era of computerization, there may be programming error in the
system of recording of transactions and presentation of financial statements, which may not be
detected in balance sheet audit.
5. Ignore events after balance sheet: Balance sheet reflects the financial position of the business
only at a given point of time. Events occurring after balance sheet date may affect materially the
process of decision.
6. Ignores causes of change: Comparison between the two periods may be drawn, but the causes
for the change of figures between the two periods are not stated.
7. No information about profit/loss: The information regarding the generation of profit or loss of
the business is not stated in the balance sheet. This is required to make the balance sheet more
informative and balance sheet audit more dynamic.

5. Concurrent audit
Definition
Concurrent audit is defined by the RBI as "an examination which is contemporaneous with the
occurrence of transactions or is carried out as near thereto as possible. It attempts to shorten the
interval between a transaction and its examination by an independent person."

Objectives
The objectives of concurrent audit are :
• To supplement efforts of the Bank in carrying out simultaneous internal checks of transactions
and compliance with the systems and procedures of the Bank.
• To perform substantive checking in key areas and rectification of deficiencies in the earliest
possible period to preclude the incidence of serious errors and fraudulent manipulation.
• To reduce the interval between a transaction and its examination by an independent person not
involved in its documentation.
• To improve the functioning of the branch; leading to upgradation of working of the branch and
prevention of fraud.
• Compliance with internal control as well as RBI / Government of India guidelines.
• Identification of areas / activities requiring corrective action and urgency.

Scope
The concurrent auditor, in particular, should see that :
• The transactions are properly recorded / documented and vouched.
• The irregularities are rectified immediately.
• The systems and procedures of the bank are implemented properly.
Introduction to Auditing
• The transactions are performed or decisions are taken within the policy parameters of the Head
Office and the RBI.
•The delegated authority is exercised and the same is within the terms and conditions of the
delegated authority.

Reporting
The concurrent auditors may report the minor irregularities, wrong calculations, etc., to the Branch
Manager for on-the-spot rectification and reporting compliance. If these irregularities are not
rectified within a week, these may be reported to the Controlling offices. If the auditors observe
any serious irregularities, these will be straight away reported to Controlling Office or Head Office
immediately. Banks may institute an appropriate system of follow up of the reports of the
concurrent auditors. There must be a system of an annual review of the working of concurrent
audit.