Audit Note

Audit

The general definition of an audit is an evaluation of a person, organization, system, process,

enterprise, project or product. The term most commonly refers to audits in accounting, but

similar concepts also exist in project management, quality management, water management, and

energy conservation.

Accounting

Audits are performed to ascertain the validity and reliability of information; also to provide an

assessment of a system's internal control. The goal of an audit is to express an opinion of the

person / organization / system (etc.) in question, under evaluation based on work done on a test

basis. Due to constraints, an audit seeks to provide only reasonable assurance that the statements

are free from material error. Hence, statistical sampling is often adopted in audits. In the case of

financial audits, a set of financial statements are said to be true and fair when they are free of

material misstatements - a concept influenced by both quantitative (numerical) and qualitative

factors. But recently, the argument that auditing should go beyond just True and fair is gaining

momentum. And PCAOB has come out with a concept release on the same.

Financial audit

A financial audit, or more accurately, an audit of financial statements, is the verification of the

financial statements of a legal entity, with a view to express an audit opinion. The audit opinion

is intended to provide reasonable 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 enhance the degree of confidence of intended users in

the financial statements.

Financial audits are typically performed by firms of practicing accountants who are experts in

financial reporting. The financial audit is one of many assurance functions provided

by accounting firms. Many organizations separately employ or hire internal auditors, who do not

attest to financial reports but focus mainly on the internal controls of the organization. External

auditors may choose to place limited reliance on the work of internal auditors. Internationally,

the International Standards on Auditing (ISA) issued by the International Auditing and

Assurance Standards Board (IAASB) is considered as the benchmark for audit process. Almost

all jurisdictions require auditors to follow the ISA or a local variation of the ISA.

Purpose

Financial audits exist to add credibility to the implied assertion by an organization's management

that its financial statements fairly represent the organization's position and performance to the

firm's stakeholders. The principal stakeholders of a company are typically its shareholders, but

other parties such as tax authorities, banks, regulators, suppliers, customers and employees may

also have an interest in ensuring that the financial statements are accurate. The audit is designed

to increase the possibility that a material misstatement is detected by audit procedures. A

misstatement is defined as false or missing information, whether caused by fraud (including

deliberate misstatement) or error. "Material" is very broadly defined as being large enough or

important enough to cause stakeholders to alter their decisions. Audits exist because they add

value through easing the cost of information asymmetry, not because they are required by law

(note: audits are obligatory in many EU-member states).

Why you need financial statement audit?

Audits are performed on financial statements in order to:

Prevent fraud, Eliminate errors or mistakes from the bookkeeping process

Auditors must also ensure the information presented is:

Accurate, Reliable and valid, Meets SEC requirements, Adheres to GAAP, Conforms to tax

laws, Passes industry regulations, Discloses any events relevant to shareholders

Auditors

Auditors of financial statements can be classified into two categories:

External auditor / Statutory auditor is an independent firm engaged by the client subject to the

audit, to express an opinion on whether the company's financial statements are free of material

misstatements, whether due to fraud or error. For publicly-traded companies, external auditors

may also be required to express an opinion over the effectiveness of internal controls over

financial reporting. External auditors may also be engaged to perform other agreed-upon

procedures, related or unrelated to financial statements. Most importantly, external auditors,

though engaged and paid by the company being audited, are regarded as independent auditors.

The most used external audit standards are the US GAAS of the American Institute of Certified

Public Accountants; and the ISA International Standards on Auditing developed by the

International Auditing and Assurance Standards Board of the International Federation of

Accountants

Internal auditors are employed by the organization they audit. They perform various audit

procedures, primarily related to procedures over the effectiveness of the company's internal

controls over financial reporting. Due to the requirement of Section 404 of the Sarbanes Oxley

Act of 2002 for management to also assess the effectiveness of their internal controls over

financial reporting (as also required of the external auditor), internal auditors are utilized to make

this assessment. Though internal auditors are not considered independent of the company they

perform audit procedures for, internal auditors of publicly-traded companies are required to

report directly to the board of directors, or a sub-committee of the board of directors, and not to

management, so to reduce the risk that internal auditors will be pressured to produce favorable

assessments.

The most used Internal Audit standards are those of the Institute of Internal Auditors

Consultant auditors are external personnel contracted by the firm to perform an audit following

the firm's auditing standards. This differs from the external auditor, who follows their own

auditing standards. The level of independence is therefore somewhere between the internal

auditor and the external auditor. The consultant auditor may work independently, or as part of

the audit team that includes internal auditors. Consultant auditors are used when the firm lacks

sufficient expertise to audit certain areas, or simply for staff augmentation when staff are not

available.

Types of auditors

1. Independent Auditors

Independent auditors are usually CPA’s who are either individual practitioners or members of

public accounting firms who render professional auditing services to clients. In general, licensing

involves passing the uniform CPA examination and obtaining practical experience in auditing.

2. Internal Auditors

Internal auditors are employees of the organization they audit. This type of auditors is involved

in an independent evaluation of evidence, called internal auditing, within an organization as a

service to the organization. The objective of internal auditing is to assist the management of

organization in the effective discharge of its responsibilities.

3. Government Auditors

Government auditors are employed by various local, state, and federal governmental agencies.

At the federal level, the three primary agencies are the General Accounting Office’s (GAO), the

Internal Revenue Services (IRS), and the Defense Contract Audit Agency) (DCAA).

What is the relationship between accounting and auditing?

Accounting is a listing of all financial transactions, and there will be a correspondence

with bank statements. Auditing is a check by an independent person or company that has

no other financial interest in the first company etc to check nothing illegal or against

accounting principles has occurred. Companies usually carry out their own internal audit

first, but that doesn't count for much legally.

“The relationship of auditing to accounting is close, yet their natures are very different;

they are business associates, not parent and child.

Accounting includes the collection, classification, summarization, and communication of

financial data; it involves the measurement and communication of business events and

conditions as they affect and represent a given enterprise or other entity. The task of

accounting is to reduce a tremendous mass of detailed information to manageable and

understandable proportions. Auditing does none of these things.

Auditing must consider business events and conditions too, but it does not have the task

of measuring or communicating them. Its task is to review the measurements and

communications of accounting for propriety.

Auditing is analytical, not constructive; it is critical, investigative, concerned with the

basis for accounting measurements and assertions. Auditing emphasizes proof, the

support for financial statements and data. Thus, auditing has its principal roots, not in

accounting, which it reviews, but in logic on which it leans heavily for ideas and

methods.”

Disadvantage of audit

A financial statement audit is subject to a number of inherent limitations. One constraint is that

the auditor works within fairly restrictive economic limits.

1. Frauds by management or planned:

Some time the management commits a planned fraud. And for the auditor it is not possible to

find out that fraud. In this case the audited account cannot describe the true and fair view of the

business.

2. Wrong certificates:

Auditing is based on many certificates taken from management and other persons. These

certificates may not disclose true information. Auditing may to fail to provide desired results.

When certificates provide wrong information, the financial statement cannot show correct

position.

3. Misleading clarification:

Auditing fails to disclose correct information. The background of entries may not be clear to the

audit staff. The management may not provide correct clarification is not true. The auditing fails

to help many persons who rely on audit report.

4. No true picture:

The auditing does not cent percent true picture. The auditor is concerned with the facts figures

shown in the books of accounts. When figures have been manipulated, the auditing fails to

disclose true picture. The purpose of audit fails when it is unable to depict real scene of business

affairs.

5. No correct view:

The auditing fails to present correct view. There are limitations of accounting. So accounting

figures are not facts. There are based on opinion. Moreover the auditor has to make judgment on

various matters. The personal judgment may be wrong in certain cases. Thus auditing is unable

to disclose correct view.

6. No suggestion:

The audit is conducted to show the fair view of financial statements. Auditing is not concerned

with management policies. The auditor cannot guide the management for better use of capital.

The auditor examines what has been done. He is unable to suggest how it should have been done.

7. Absence of honesty:

The auditing work depends upon various professional and personal qualities of an auditor.

Honesty and independence are highly essential traits. The auditor must certify which is true.

Management or other parties cannot influence him. The absence of honesty and independence

means failure of audit purpose.

8. Bias:

The auditing fails to present fair view due to bias of an auditor. It is quality of an auditor. It is the

quality of an auditor that he should be independent when such trait is missing the opinion of the

auditor is included in the audit work. The biased auditing fails to help many people.

9. High cost:

The audit work is completed with high cost. The cost of audit should not exceed the cost of error

and fraud. The small-scale business enterprise considers it as burden on their performance. Audit

fails to save million of business entities.

10. Past actions:

Auditing is nothing more than checking of past activities. It has no concern with present or

future. The audit fee increases the cost of business concern. Such cost does not help to improve

the market standing of enterprise. It fails to suggest improvement in qualities and reduction in

cost.

GAAS

Generally Accepted Auditing Standards or GAAS are sets of standards against which the quality

of audits are performed and may be judged. Several organizations have developed such sets of

principles, which vary by territory. GAAS are divided into these main sections:

General Standards

1. The auditor must have adequate technical training & proficiency to perform the audit.

2. The auditor must maintain independence (in fact and appearance) in mental attitude in all

matters related to the audit.

3. The auditor must exercise due professional care during the performance of the audit and

the preparation of the report. The auditor must diligently perform the audit and report any

misleading statements in the report.

Standards of Field Work

1. The auditor must adequately plan the work and must properly supervise any assistants.

2. The auditor must obtain a sufficient understanding of the entity and its environment,

including its internal control, to assess the risk of material misstatement of the financial

statements whether due to error or fraud, and to design the nature, timing, and extent of

further audit procedures.

3. The auditor must obtain sufficient appropriate audit evidence by performing audit

procedures to afford a reasonable basis for an opinion regarding the financial statements

under audit.

Standards of Reporting

1. The auditor must state in the auditor's report whether the financial statements are

presented in accordance with generally accepted accounting principles.

2. The auditor must identify in the auditor's report those circumstances in which such

principles have not been consistently observed in the current period in relation to the

preceding period.

3. When the auditor determines that informative disclosures are not reasonably adequate,

the auditor must so state in the auditor's report.

4. The auditor must either express an opinion regarding the financial statements, taken as a

whole, or state that an opinion cannot be expressed, in the auditor's report. When the

auditor cannot express an overall opinion, the auditor should state the reasons therefore in

the auditor's report. In all cases where an auditor's name is associated with financial

statements, the auditor should clearly indicate the character of the auditor's work, if any,

and the degree of responsibility the auditor is taking, in the auditor's report.

Definition of 'International Accounting Standards - IAS'

An older set of standard stating how particular types of transactions and other events should be

reflected in financial statements. In the past, international accounting standards (IAS) were

issued by the Board of the International Accounting Standards Committee (IASC). Since 2001,

the new set of standards has been known as the international financial reporting standards (IFRS)

and has been issued by the International Accounting Standards Board (IASB).

Investopedia explains 'International Accounting Standards - IAS'

IASC has no authority to require compliance with its accounting standards. However, many

countries require the financial statements of publicly-traded companies to be prepared in

accordance with IAS.

Auditor independence

Auditor independence refers to the independence of the internal auditor or of the external auditor

from parties that may have a financial interest in the business being audited. Independence

requires integrity and an objective approach to the audit process. The concept requires the

auditor to carry out his or her work freely and in an objective manner.

Independence of the internal auditor means independence from parties whose interests might

be harmed by the results of an audit. Specific internal management issues are inadequate risk

management, inadequate internal controls, and poor governance. The Charter of Audit and the

reporting to an Audit Committee generally provides independence from management, the code

of ethics of the company (and of the Internal Audit profession) helps give guidance on

independence from suppliers, clients, third parties, etc.

Independence of the external auditor means independence from parties that have an interest in

the results published in financial statements of an entity. The support from and relation to the

Audit Committee of the client company, the contract and the contractual reference to public

accounting standards/codes generally provides independence from management, the code of

ethics of the Public Accountant profession) helps give guidance on independence from suppliers,

clients, third parties...

Types of independence

1. Programming independence, 2. Investigative independence, 3. Reporting independence

Programming independence essentially protects the auditor’s ability to select the most

appropriate strategy when conducting an audit. Auditors must be free to approach a piece of

work in whatever manner they consider best. As a client company grows and conducts new

activities, the auditor’s approach will likely have to adapt to account for these. In addition, the

auditing profession is a dynamic one, with new techniques constantly being developed and

upgraded which the auditor may decide to use. The strategy/proposed methods which the auditor

intends to implement cannot be inhibited in any way.

While programming independence protects auditors’ ability to select appropriate strategies,

investigative independence protects the auditor’s ability to implement the strategies in whatever

manner they consider necessary. Basically, auditors must have unlimited access to all company

information. Any queries regarding a company’s business and accounting treatment must be

answered by the company. The collection of audit evidence is an essential process, and cannot be

restricted in any way by the client company.

Reporting independence protects the auditors’ ability to choose to reveal to the public any

information they believe should be disclosed. If company directors have been misleading

shareholders by falsifying accounting information, they will strive to prevent the auditors from

reporting this. It is in situations like this when auditor independence is most likely to be

compromised.

Compliance tests

Manner of furnishing reasonable assurance that internal accounting control procedures are being

applied as prescribed so that the auditor is assured of the validity of underlying evidence. Any

exceptions to compliance must be noted. Underlying evidence comprises an examination of the

accounts themselves including reviewing the journals, ledgers, and worksheets. If the compliance

tests provide evidence that controls are functioning properly, the underlying evidence is deemed

reliable, and the CPA can reduce the degree of validation and analytical review procedures. The

following three audit procedures are typically used in conducting compliance tests: (1) inquiry of

personnel regarding the performance of their duties; (2) observing personnel actions; and (3)

inspecting documentation for evidence of performance in conducting employee functions. An

example is examining invoices to assure that receiving documents and proof of delivery are

attached when the invoices are presented for payment.

Tests of compliance should be applied to transactions throughout the year under audit since the

financial statements reflect transactions and events for the whole year. Compliance tests may be

conducted on a subjective or statistical basis.

Substantive Test

Test of account balances to verify the correctness of the amounts. The three forms of substantive

tests are: 1. tests of transactions (which are often conducted concurrently with compliance tests);

2. tests of balances; and 3. analytical review procedures.

Tests of transactions and balances gather evidence of the validity of the accounting treatment of

transactions and balances. They are designed to identify errors and irregularities. Statistical

sampling may be used in determining the accuracy of financial statement numbers.

Tests of transactions may be conducted continually throughout the audit year or at or close to the

balance sheet date. When the CPA traces a sales invoice from the journal to the ledger for

correctness, it is called a transaction test. When the CPA compares the book balance of cash to

the book balance, it is a test of balances. This test is done near or at the year-end reporting date.

Another substantive test is calculating interest expense on corporate debt and verifying the

amount in the financial records. Analytical review procedures involve examining the

reasonableness of relationships in financial statement items and uncovering variations from

trends. The procedures may be applied to overall financial information, financial data of

segments, and individual elements. If relationships appear reasonable, evidence corroborating the

account balance exists.

Interim audit:

An audit that is taken up between two annual audits is called an Interim Audit. A specific date, as

per the client’s requirement is taken into account, e.g. 30th September, 31st December, etc. a

trial balance is drawn and verified with a view to prepare financial statement. Financial statement

are prepared and authenticated for the interim audit period. Assets and liabilities are verified for

interim balance sheet purposes. Independence is considered less independent than the statutory

Auditor; generally an employee of the enterprise will be the internal auditor. In the interim audit

no format is prescribed. It depends on the nature of work, coverage and audit observations.

Continuous audit: A continuous audit is one in which the auditor’s staff is engaged

continuously in checking the accounts of the client, during the whole year round or when for the

purpose, the staff attends at quite frequent intervals say weekly basis during the financial period.

A continuous audit is preferred for the following reasons:

i. It makes it possible for the management to exercise a stricter control over the accounts in as

much as one is able to check sooner the causes of any errors of frauds uncovered by such an

audit.

ii. The frequent attendance by the staff deters persons so inclined, from committing a fraud.

iii. The accounting staff of the client is motivated to keep the books of account up-to-day.

Definition of audit note book

“Audit notebook is a diary on which auditor scribble down all important inquiries to avoid the

possibility of unquestioned material facts.”

An audit Note- Book is a book which is maintained by the audit staff during the course of audit,

to note the errors, difficulties, doubts and new points to be discussed with the seniors or the

auditor. Such a book is a written record of queries made; replies received thereto,

correspondence entered into, etc.

Importance/Value of audit note book

Justice William throws light on the importance of audit notebook in the following words,

“The audit note book that contained detailed information proved to be very helpful to the auditor

in every critical moment”.

For preparing the audit report it is very useful for that auditor.

In case of negligence charge against the auditor, but note book good evidence can be

presented. It may be also used for future guidance and reference. It also enables to auditor

to know that what work his assistant at each audit has done.

Contents of audit note book

a) A list of books of accounts maintained by the company

b) Names of key officials, their powers, duties, and responsibilities

c) The system of maintaining books of accounts

d) Details about the fraud and errors found in the books

e) Details about the missing vouchers, the duplicates of which have to be maintained

f) Totals or balances of certain books of accounts, bank reconciliation statement

g) List of books and records not made available for auditing

h) Date of commencement and completion of the audit

i) Any points which are to be discussed with the seniors or the auditor

j) Provisions in the Articles and Memorandum of Association affecting the accounts and

Audit

k) Records of all important correspondence especially with the debtors, creditors

l) Totals of important ledger accounts

Audit working papers

The audit working papers constitute the link between the auditor’s report and the client’s records.

Documentation is one of the basic principles listed in AAS 1. According to AAS 3 (reproduced

in Appendix l), documentation refers to working papers prepared or obtained by the auditor and

retained by him in connections with performance of his audit. The objects of an auditor’s

working papers are to record and demonstrate the audit work from one year to another.

Therefore, working papers should provide for:

a) Means of controlling current audit work;

b) Evidence of audit work performed;

c) Schedules supporting or additional item in the accounts; and

d) Information about the business being audited, including the recent history.

Importance of audit working papers:

IT provides guidance to the audit staff regards to the manner of checking the schedules. The

auditor is able to fix responsibility on the staff member who signs each schedule checked by him.

It acts as evidence in the court in the court of law when a charge of negligence is brought against

the auditor. It acts as the process of planning for the auditor so that he can estimate the time that

may be required for checking the schedules. The auditor should adopt reasonable procedures for

custody and confidentiality of his working papers and should retained them for a period of time

sufficient to meet the needs of his practice and satisfy any pertinent legal or professional

requirements of record retention.

Internal control

Internal control is an important tool of management. It assists the management in the

performance of its various functions. It means the built in cross-checks in the system

supplemented with proper supervision and internal audit carried out by the staff appointed by the

organization These days business has been become more complex both in nature and size and the

management finds it difficult to get correct information about the various aspects of the business.

Internal control assures the management that the information supplied to it is reliable and

accurate. The Internal controls are exercised to ensure the accuracy and the reliability of

accounting data and other records, to identify weaker areas of operation and to improve them to

increase operational efficiency of the business, to safeguard its assets and to ensure orderly

conduct of business.

Internal audit

Internal audit is described as the verification of the operations within the business by a specially

assigned staff. It is an important tool of management to evaluate the correctness of records on a

continuous basis in an organization. The term internal audit has been defined as "an independent

appraisal of activity” within an organization for review of operations as a basis of service to

management. It is a managerial control which functions by measuring and evaluating the

effectiveness of other controls.

Objectives of internal audit

The main objectives of internal audit are as under:-

To verify the correctness and authenticity of the financial records and statistical records

presented to the management.

To ensure that the standard accounting practices are strictly followed in the organization.

To facilitate early detection of errors and frauds.

To ensure that all the transactions have been carried out under a proper authority and by

persons authorized for the same in the business.

To review the system of internal checks from time to time to advice the management on

improvement of the system and to undertake special investigation for the management.

To confirm that the liabilities have been incurred by the organization for legitimate

activities.

Thus, efficiency of internal audit depends on the efficiency of the staff employed for the

purpose; internal audit can be effective only if the internal auditor is given wider

authority to investigate the transactions not only from financial angles but also from other

organizational activities. Internal auditor should report directly to the top management.

He must operate independently of the accounting and other staff. He must be given an

independent status as an important functionary and a part of the management.

Internal check

Internal check is a system enforced in business under which the recording of business

transactions is arranged in such a manner that the work of one staff member will automatically

be checked by others in the course of recording of transaction itself.

Spicer and Pegler have defined a system of internal check as "an arrangement of staff duties

whereby no one person is allowed to carry through and record every aspect of a transaction such

that without collusion between two or more persons, fraud is prevented and at the same time

possibilities of errors are reduced to a minimum". De Paula has defined internal check as "a

continuous internal audit carried on by the staff itself by means of which the work of each

individual is independently checked by other member of the staff."

Objectives of internal check

To reduce chance of fraud and errors that may be committed by any member of the staff

and make it more difficult. If any fraud is to be committed two or more persons must

collude together.

To detect fraud and errors easily and correct them promptly.

To exercise moral pressure among the members of the staff.

To allocate duties and responsibilities of every person in such a way that he can be taken

to task for any lapse on his part.

To increase overall efficiency of the members of the staff by assigning duties based on

the principle of division of labour.

To have an accurate and reliable record of all business transactions.

Test checking

Carrying out detailed check of each and every transaction of a large business shall be time

consuming for the auditor. In auditing the accounts of a business, every single copy is not usually

checked by the auditor; what is usually done in practice is that a representative number of entries

of each class are selected and checked and if they are found correct, the remaining entries are

taken to be correct. This is known as Test Checking. In those organizations, where satisfactory

internal check system is in existence, the auditor need not carry out detailed checking.

He may adopt Test checking. It is a system of sampling employed by the auditor for the purpose

of reducing the volume of detail checking involved in the audit. If, in Test Checking, he finds

that the records checked by him are correct then no further detail checking need be carried out.

Precautions To Be Taken - While adopting the test check, the auditor must take the following

precautions:

1. Entries selected for test checking must be representative of all transactions.

2. The selection of the items should be at random.

3. It cannot be adopted in case of vouching the cash book.

4. Client's staff should not come to know of the entries selected for test checking.

5. Period selected for test checking should differ from book to book and year to year.

6. He should not adopt test checking where the law requires thorough audit.

7. A number of entries of the first and last month of the year must be checked thoroughly.

8. Test should be so devised that a sizeable portion of the work done by each employee is

checked.

9. Control accounts or impersonal ledger should not be subject to test checking.

Auditing in depth

Taylor and Perry have defined Auditing in Depth as : “the examination of the system applied

within a business entailing the tracing of certain transactions from their origin to their

conclusion, investigating at each stage the records created and their authorization”.

Audit in depth does not mean 100% checking. It is a detailed examination of the selected

transactions from the beginning to the end. Thus, it is used along with test checking. For

example, if the auditor has decided to check 25% of purchase transactions, these transactions

should be checked in depth. Auditor should check the Purchase Requisition, Tenders, Purchase

Orders, Purchase Bills, Goods Received Note, Inspection Note, Purchase Journal, Stock

Register, and Bin Card and so on. Thus, the auditor should check the purchase transaction right

from the beginning to the end. This enables him to evaluate the accounting system and internal

controls.

Audit programme

It is desirable that in respect of each audit and more particularly for bigger audits an audit

programme should be drawn up. Audit programme is nothing but a list of examination and

verification steps to be applied set out in such a way that the inter-relationship of one step to

another is clearly shown and designed, keeping in view the assertions discernible in the

statement of account produced for audit or on the basis of an appraisal of the accounting records

of the client. In other words, an audit programme is a detailed of the accounting records of

applying the audit procedures in the given circumstances with instructions for the appropriate

techniques to be adopted for accomplishing the audit objectives. Businesses vary in nature, size

and composition; work which is suitable to one business may not be suitable to be rendered by

the auditor are the other factors that vary from assignment to assignment. Because of such

variations, evolving one audit programme applicable to all business under all circumstances is

not practicable. However it becomes a necessity to specify in details in the audit programme the

nature of work to be done so that no time will be wasted on matters not pertinent to the

engagement and any special matter or any specific situation can be taken care of.

Advantages of audit programme

a. It provides the assistant carrying out the audit with total and clear set of instructions of the

work generally to be done.

b. It is essential, particularly for major audits, to provide a total perspective of the work to be

performed.

c. Selection of assistants for the jobs on the basis of compatibility becomes easier when the work

is rationally planned, defined and segregated.

d. Without a written and pre-determined programme, work is necessarily to be carried out on the

basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or

overlooking certain books and records. Under a properly framed programme, the danger is

significantly less and the audit can proceed systematically.

e. The assistance, by putting their signature on programme, accepts the responsibility for the

work carried out by them individually and, if necessary, the work done may be traced back to the

assistant.

f. The principal can control the progress of the various audits in hand by examination of audit

programmes initiated by the assistants deputed to the jobs for completed work.

g. It serves as a guide for audits to be carried out in the succeeding year.

h. A properly drawn up audit programme serves as evidence in the event of any charge of

negligence being brought against the auditor. It may be of considerable value in establishing that

he exercised reasonable skill and care that was expected of professional auditor.

Disadvantages of audit programme

a. The work may become mechanical and particular parts of the programme may be carried out

without any understanding of the object of such parts in the whole audit scheme.

b. The programme often tends to becomes rigid and inflexible following set grooves; the

business may change in its operation of conduct, but the old programme may still be carried on.

Changes in staff or internal control may render precaution necessary at points different from

those originally decided upon.

c. Inefficient assistants may take shelter behind the programme i.e., defend deficiencies in their

work on the ground that no instructions in the matter is contained therein.

d. A hard and fast audit programme may kill the initiative of efficient and enterprising assistants.

Internal audit v/s statutory audit

Internal audit helps the statutory audit to a large extent. Both the internal auditor and the

statutory auditor have a common interest as far as authenticity of the accounts is

concerned. However soundness of internal audit relieves the statutory auditor from

detailed checking.

The internal auditor reviews the operations and performs such functions as evaluation,

compliance, verification and ensures that policies, procedures, rules and other type of

controls of the business are carried out efficiently.

He is helpful to statutory auditor in the matter of examination of books of accounts.

Generally, the statutory auditor accepts some of the detailed checking made by the

internal auditor. However, the area of co-operation between internal auditor and statutory

auditor is somewhat limited as the statutory auditor has a responsibility under law to

various authorities, while the internal auditor is responsible only to the management. The

statutory auditor has to carry out his duties in accordance with standard accounting and

auditing practices and provisions of law which govern the organization. Before accepting

the checking of accounts and other documents carried out by internal auditor, the

statutory auditor must undertake such test checks necessary to find out the effectiveness

of internal audit.

Both internal auditor and statutory auditor carry out examination of records and

documents and make physical and other verifications. Despite these similarities there are

differences in the status, responsibilities, approach and scope of work of internal auditor

and statutory auditor.