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Auditing (Unit I)

Definition of Auditing
Auditing is the systematic examination of financial statements, records and related operations
to determine adherence to generally accepted accounting principles, management policies and
stated requirements - R.E.Schlosser
Auditing is the verification of financial position as disclosed by the financial statements. It is
an examination of accounts to ascertain whether the financial statements give a true and fair
view of the financial position and profit or loss of the business.
Objectives of Auditing
Primary Objectives
1. Internal Controls: One of the primary objectives of the audit process is to examine the
accuracy and effectiveness of all the internal controls within the organization and find
deviations, if any.
2. Examining Financial Records: The main objective of the audit is to examine all the
financial records of the company, including checking arithmetical accuracy of the
books of accounts, verification, and substantiation of all the account balances.
3. Authenticity and Validity: One of the main audit objectives also includes checking
the authenticity and validity of transactions by looking at various proofs and substantive
4. Capital and Revenue Expenditure: Auditors also check whether a clear distinction is
made between capital and revenue expenses in the financial books and records as a part
of primary audit objectives.
5. Existence of Assets and Liabilities: Auditors also look into the fact that whether assets
and liabilities mentioned on the face of the balance sheet actually exist or not. They
also verify the value at which the assets and liabilities are shown in the financial
6. Statutory Compliance: Auditors also aim to assure themselves about the fact whether
the company is in compliance with the rules and guidelines issued by the regulatory
bodies or not.
7. True and Fair View of Financial Statements: Finally, one of the most important
primary objectives of the audit process is to give an opinion over the true and fair view
of the financial statements.
Secondary Objectives
1. Detection and prevention of fraud: It is one of the important subsidiary objectives of
auditing is the detection and prevention of fraud. Fraud refers to intentional
misrepresentation of financial information. Fraud may involve:
● Manipulation, falsification or alteration of records or documents
● Misappropriation of assets.
● Suppression of effect of transactions from records or documents.
2. Detection and prevention of errors: is another important objective of auditing.
Auditing ensures that there is no misstatement in the financial statements. Errors can
be detected through checking and vouching thoroughly books of accounts, ledger
accounts, vouchers and other relevant information.
Features of Auditing
Auditing is a systematic process. It is a logical and scientific procedure to examine the
accounts of an organization for their accuracy. There are rules and procedures to follow.
The audit is always done by an independent authority or a body of persons with the
necessary qualifications. They have to be independent so their views and opinions can
be totally unbiased.
Once again, an audit is the examination of all the books of accounts and financial
information of the company. So it is essentially a verification of the final accounts of
the organization, i.e. the profit and loss statement and the balance sheet at the end of
the financial year.
Auditing is not only the review of the books of accounts but also the internal systems
and internal control of the organization.
Based on Evidence: To conduct the audit, we need the help of various sources of
information. This includes vouchers, documents, certificates, questionnaires,
explanations etc. He may scrutinize any other documents he sees fit like Memorandum
of Association, Articles of Associations, vouchers, minute books, shareholders register
Audit Report: The auditor must completely satisfy himself with the accuracy and
authenticity of the financial statements. Only then can he give the opinion that they are
true and fair statements.
Types of Audits
Statutory Audit (Audit Required Under Law)
This type of audit is also known as statutory audit. The organizations which require audit under
law are the following:
Company Audit
Audit of accounts of companies, registered under the Companies Act, is compulsory. As the
control of the company is vested with the directors of the company, the need for the protection
of the interest of the shareholders arises. The introduction of Companies Act, 1956, which
outlines the procedure of audit work, the different books of accounts to be maintained, rights,
duties and liabilities of the auditor was definitely a right step towards the protection of
shareholders’ interest over the company.
Bank Audit
Audit of banking companies is made compulsory under the statute, since it is governed by the
Banking Companies Regulation Act, 1949. The objective of bank audit is not only to check the
financial result and financial position, so far as its truth and fairness are concerned, but also to
review whether the banks engage only in the businesses prescribed in the Act and whether they
follow the regulations to operate the banking business as per the regulations given in the Act.
Co-operative Society Audit
Audit of co-operative societies is conducted by the Co-operative Department of the State
Government or by the Registrar of Co-operative Societies, as the case may be. The co-operative
societies are governed by the Co-operative Societies Act, 1912, which gives the detailed
procedures of audit for a co-operative society.
These types of societies engage in a good number of financial transactions. So, these types of
organisations have the statutory obligation to introduce audits for their better performance.
Audit of Trusts
The income of the properties of the trust is distributed by the trustees among the beneficiaries
as per Trust Deed. As the beneficiaries of the trust, in most of the cases, do not know the
techniques of reading the books of accounts, the chances of being defrauded by the trustees
cannot be avoided. So, this type of audit protects the beneficiaries of the trusted properties
against the possible financial misdeeds by unscrupulous trustees.
Insurance Audit
The Insurance Companies that are governed by Insurance Act, 1938, includes fire, marine and
other miscellaneous insurance businesses. The books of accounts that are to be maintained by
the insurance companies are governed by the provisions of the said Act. The auditor will
examine the details of the books of accounts and check the reliability of the internal check
system. The audit of insurance companies, in fact, enhances the confidence of the
Specified Entities as per Income Tax Act
According to the various provisions of the Income Tax Act, certain entities are required to
perform an audit of their accounts to fulfill the requirement of the Income Tax regulations.
These entities are required to appoint a qualified auditor to conduct an audit of their financial
statements in order to get exemptions and deductions from income of the entity.
Audit of Government Departments and Government Public Utilities
Different government departments and public utilities are also subject to independent financial
audit. The requirement for such an audit is contained in the Constitution of India. In addition
to this requirement, government departments and public utilities also have an internal audit
system of their own.
Non Statutory Audits/ Voluntary Audit
Audit of Sole Proprietorship Firms
The sole proprietorship firms are not required to have their accounts audited under any specific
statute. But the sole proprietary businesses, in which the number of transactions are large and
huge amounts are involved in the business, get their accounts audited. The proprietor himself
takes decisions about the scope of audit and the appointment of the auditor. In fact, under this
type of audit, the auditing work will depend upon the agreement of audit and the specific
instructions given by the proprietor.
Audit of a Partnership Firm
There is no legal compulsion to get partnership accounts audited. But in partnership, there are
possibilities of mistrust and dissatisfaction among the partners. As such, an independent
external auditors’ view regarding the correctness of accounts is desirable in this type of an
organisation. Usually, the partnership deed includes the provision of audit of their accounts. In
conducting a partnership business audit, the auditor has to refer to the partnership deed. But in
absence of partnership deed or any aspect, which is not included in the deed, the auditor may
refer to the Partnership Act, 1932.
Hindu Undivided Family Business Audit
In respect of accounts of businesses of Hindu Undivided Family, there is no basic legal
requirement of audit. But the important motive for getting the accounts of this type of family
business to be audited lies in the inherent advantages that follow from an independent
professional audit. If there will be any dispute or mistrust among the members of the Hindu
Undivided Family regarding accounts, it can be settled through the audited accounts.
Audit of Association of Persons
Though it is not legally required to get their accounts audited, the association of persons, for
example the Bengal Chamber of Commerce, is interested to appoint qualified auditors and get
their accounts audited for different reasons. In case of availing exemptions of their income
from income tax liability, they are required to submit their audited accounts to the Income Tax
Authority. In conducting this type of audit, the auditor has to refer to the constitution of the
Audit of Non-Profit Seeking Organizations
Certain non-profit seeking organizations, such as colleges, libraries, hospitals, clubs and
charitable institutions, get their accounts audited. The basic purpose of an audit of this type of
organization is to locate errors or fraud committed by the staff members. The governing body
of this type of organisation usually appoints the auditor. This type of organisation usually
depends on government grants and other aids from different bodies. Audited accounts are
helpful in getting this type of grants and aids.
Audit Based on Time:
1. Interim Audit: When an audit is conducted between two annual audits, such audit is known
as Interim audit. It may involve complete checking of accounts for a part of the year. Sometimes
it is conducted to enable the board of directors to declare an Interim dividend. It may also be
for the purpose of dealing with interim figures of sales.
2. Continuous Audit: The Continuous Audit is conducted throughout the year or at the regular
short intervals of time. A continuous audit is one where the auditor or his staff is constantly
engaged in checking the accounts during the whole period or where the auditor or his staff
attends at regular or irregular intervals during the period.
Advantages of Continuous Audit
1. Easy to quick discovery of errors
Errors and frauds can be discovered easily and quickly as the auditor checks the accounts at
regular intervals and in detail. As an auditor visits the client after a month or two or so on, the
number of transactions will be small and hence, the errors will be detected easily and quickly.
2. Knowledge of technical details
Since the auditor remains more in touch with the business, s/he is in a position to know its
technical details and hence can be of great help to her/his clients by making valuable
3. Quick presentation of accounts
As most of the checking works are already performed during the year, the final audited accounts
can be presented to the shareholders soon after the close of the financial year at annual general
4. Keeps the client's staff alert
As the auditor visits the clients at regular intervals, the clerks are very regular in keeping the
accounts up-to-date. They will see that there is no accuracy or frauds as it would be detected
by the auditor at the next visit.
5. Moral check on the client's staff
If the auditor pays a surprise visit, it will have a considerable moral check on the clerks
preparing the accounts as they do not know when the auditor may pay a visit to check. Moral
check will be more valuable to make staff alert and careful.
Disadvantages of Continuous Audit
Alteration of figures
Figures in the books of account which have already been checked by the auditor at previous
visit, may be altered by a dishonest clerk and the frauds may be committed.
Disturbance of client's work
The frequent visits by the auditor may disturb the work if the client and cause inconvenience
to the latter.
Continuous audit is an expensive system of audit because an auditor devotes more time. So,
company needs to pay more amount as the remuneration of an auditor.
Queries may remain outstanding
The audit clerk may lose the thread of work and the queries which s/he wanted to make may
remain outstanding as there might be a long interval between two visits.
Extensive note taking
Extensive note taking may be necessary in order to avoid any alteration in the figures after
the audit.
3. Periodical or Final or Complete Audit
Periodical audit is taken up at the close of the financial period, when all the accounts have been
balanced and final accounts have already been prepared. It may also commence before the final
accounts are prepared and continue till the audit is completed even after the close of the
financial period. According to Spicer and Pegler, “A final or complete audit is commonly
understood to be an audit which is not commenced until after the end of the financial period
and is then carried on until completed.” In case of this type of audit, the auditor visits his client
only once a year and checks the accounts until the audit work for the whole of the period is
On the Basis of Function
Internal Audit
An internal audit is usually conducted by an in-house audit team, and is focused on control
assessments, process assessments, legal compliance, and the safeguarding of assets. The team’s
reports are sent to management and the organization’s audit committee, and may result in
recommended changes being implemented. The internal audit is undertaken to verify the
accuracy and authenticity of the financial accounting and statistical records presented to the
External Audit
External audit is conducted by an independent external auditor. This type of audit is usually
conducted to fulfil the requirement of the provisions of law. The qualified chartered
accountants who are not connected with the preparation of accounts or management of the
organisation can be appointed as external auditor. The auditor who conducts such an audit is
‘independent’ of the enterprise under audit, i.e., he is an independent professional who does
not have any such relationship with the enterprise as might adversely affect his ability to form
an objective judgment about the financial statements.
On the Basis of Audit Dimension
Management Audit
Management audit is a comprehensive critical review of all aspects of the management process.
In fact, it is a tool of management control. It covers all areas of management like planning,
organizing, co-ordination and control. It assists at all levels of the management in the effective
discharge of managerial functions. A management audit is forward-looking, independent and
systematic evaluation of the activities of the management at all levels for the improvement of
the organizational profitability and attainment of other objectives of the organization through
improvements in the performance of the management function. In short, management audit is
a guide, which helps in improving the efficiency of the management
Cost Audit
Cost audit is an effective means of control in the hands of the management to have an idea
about the working of the costing department of the organisation and to suggest ways and means
for its smooth running. It is the detailed checking as well as the verification of the correctness
of the costing techniques, systems and cost accounts. The need for such provision in the Act
arose as the maintenance and proper use of scientific cost records is essential for companies
that are engaged in the manufacturing and related activities.
Tax Audit
Tax audit refers to audit of incomes or expenses or specific claims of deductions or exemptions
for the purpose of assessment of income tax. Tax audit is required in addition to financial audit,
which does not fulfil the specific requirement of the tax authority. Since the assessment year
1985–86, certain provisions under Section 44AB of the Income Tax Act was introduced for
compulsory tax audit of accounts of certain persons. These persons shall get their accounts of
the previous year audited by an accountant before the ‘specific date’ and obtain before that date
the report of such audit in the prescribed form duly signed and verified by a qualified
Social Audit
Business organisations are now regarded as a great social force. They are not expected to be
only engaged in profit-earning activity and paying dividend to the shareholders but they have
an important role to play in the social well-being. They have some responsibility to the society.
Social audit is aimed at an assessment of the performance of an entity towards the fulfilment
of social obligations. The objective of social audit is to bring to light for public knowledge how
far an organisation has discharged its responsibility to the society and to make an assessment
of the social performance of an organisation. But audit of social accounts is not yet in practice
and the term ‘social audit’ is still in a conceptual stage in India.
Cash Audit
Cash audit is the oldest concept in auditing system. In the olden times, a person was appointed
to check cash transactions only, i.e., whether the person responsible for recording cash receipts
and payments on behalf of the business owner has done his job properly or not. Hence it was
merely a cash audit. So, when an audit is conducted of all items of cash book, it is known as
cash audit. The auditor will check the receipt and payments made by cash with the vouchers
and documents. It is useful in an organisation in which most of the transactions are made
through cash. It is only a partial audit and at present the concept of auditing has a wider
Secretarial Audit
Secretarial audit is also a relatively new concept and is coming to be recognised with growing
complexities in the corporate laws. Compliance with the provisions of various corporate laws
is as important to be in the business. Any failure to comply with corporate laws may invite
heavy penalty and/or even imprisonment.
It is therefore imperative for corporate entities to ensure compliance with the applicable legal
requirements, which are numerous. A secretarial audit assures the corporate body that the legal
requirements have been duly complied with and in time. If non-compliances are noticed by the
audit, management will have time to rectify the situation with much lesser problems and costs.
Partial Audit
An audit which is conducted considering the particular area of accounting is known as partial
audit. Under partial audit, audit of the whole account is not conducted. Audit of particular area
where the owner thinks essential to conduct the audit will be conducted. Generally, transaction
of business is related to cash, debtor, creditor, stock etc. A business may conduct an audit of
any of these transactions.
Objectives of Partial Audit
1. To know whether the capital is fully mobilized or not.
2. To clarify the doubts where the owner has suspected.
3. To conduct final audit in less time and in less expenses because a particular area of account
is checked in detail.
Advantages of Partial Audit
1. Partial audit conducts the audit of suspected areas so, work of audit remains less expensive.
2. Partial audit helps to detect and improve the frauds and errors quickly because audit of
suspected areas is conducted.
3. Partial audit provides suggestions after checking books of accounts of a particular area which
helps to increase the efficiency of staffs.
Disadvantages of Partial Audit
1. An organization and auditor cannot present as proof to the report of partial audit because it
is not a legal audit.
2. Partial audit is made only for control purposes but it does not prove true and fair of financial
3. Partial audit is not statutory audit. So, final audit is compulsory which is misuse of time,
labor and cost.
Internal Audit
Internal audits evaluate a company's internal controls, including its corporate governance and
accounting processes. These audits ensure compliance with laws and regulations and help to
maintain accurate and timely financial reporting and data collection.
Objectives of Internal Audit
The primary objective of internal audit lies in helping management attain maximum efficiency
by providing an important source of review of operations and records for the assistance of all
levels of management.
Following are the objectives on internal audit 
Review of accounting system and related internal control
Examination of financial and operating system
Examination of effectiveness and efficiency of financial control
Objectives of an Internal Audit
Accuracy in Accounts
To verify the accuracy and authenticity of the financial accounting and other records presented
to the management.
Adoption of Standard Accounting Practices
To ascertain that the standard accounting practices, as have been decided to be followed by the
organisation, are being adhered to.
Asset Protection
The protection of assets is ensured with the conduction of an internal audit. With the proper
record of assets, an internal auditor would be able to examine the valuation, verification and
possession of assets belonging to the company. It would confirm that the purchase or sale of
assets would be made under proper authority.
Confirmation of Liabilities
To confirm that liabilities have been incurred only for the legitimate activities of the
Keep a Check on Errors
There will be mistakes in financial records and is checked at the end of a financial year. But
with Internal Audit, the mistakes are spotted and rectified immediately.
Prevention and Detection of Fraud
To implement such techniques in the conduct of the internal audit so that it can detect and
prevent frauds in the accounts.
Provide Suggestions
Conducting an internal audit would provide suggestions for the improvement of the business
activities. The internal audit staff would be able to suggest ways and means by which the
difficulties could be overcome. However, an internal auditor cannot compel the management
to implement the suggestions.
New Ideas
Internal audits can bring about new ideas concerning the procedures, marketing, financing and
other matters of the business. The auditors would be able to offer new insights about various
business matters which could be implemented for the betterment of the business.
Advantages of an Internal Audit
1. Prevention of Errors and Frauds
It helps in the prevention of errors and frauds including misappropriation of cash and goods.
2. Early Detection of Errors and Frauds
It makes early detection of errors and frauds possible.
3. Continuous Review of Internal Control System
It undertakes continuous review of the internal control system, and as a result, it is capable of
reporting irregularities for enabling corrective action in time.
4. Assurance Regarding Accuracy of Books and Accounts
It checks books, records and accounts to ensure correct recording and their maintenance up to
5. Preparation of Interim Accounts
It facilitates the preparation of interim accounts.
6. Early Completion of Annual Audit
It is of great use in early completion of annual statutory audit.
7. Periodic Physical Verification
It carries out periodic physical verification of assets like cash, stock, investments and items of
fixed assets.
8. Assistance to the Statutory Auditor
It can render direct assistance to the statutory auditor by undertaking detailed checking of the
accounting data and leave him free to concentrate on more important issues of principle,
presentation and policy on accounting.
Disadvantages of an Internal Audit
1. Extra Cost
Internal audit system is not possible to be adopted by small organisations because the cost of
running an internal audit department is very high.
2. Biased Opinion
Internal audit department employees are the paid staff of the organisation. In most of the cases,
they have to work according to the directions of the management. So it is not expected that
they will provide unbiased opinion about the financial statements.
3. Possibility of Becoming Ineffective
If the employees of the internal audit department are not efficient or if the internal audit is not
conducted effectively, it will provide no assistance to the management.
4. Possibility of Distortion
If the management is interested to distort financial figures and if it is supported by internal
audit department, the users of the financial statements will be totally misguided.
5. Inefficient Staff Members
As there is no prescribed qualification for the appointment of internal auditors, less qualified
persons can get appointment in the department. They will not be able to discharge their duties
Audit Programme
Audit Programme may be defined as a careful flexibly written layout of the work to be done
by the auditor and his staff in the conduct of an audit. It is a detailed plan of work, prepared by
the auditor, for carrying out an audit. The preparation of audit programme involves the
following considerations:
i. Area or extent of work
ii. Allocation of work
iii. Time duration for the completion of the work
iv. Responsibility of the persons, who have been assigned the work for its’ timely
Purposes of Audit Programme
Different purposes of audit programme are given below:
i. For the purpose of coordinating the procedures of audit.
ii. For the purpose of ascertaining the progress of audit-work.
iii. For the purpose of recording the work done during the process of auditing. Such records
can act as an evidence of work done.
iv. For the purpose of assigning responsibilities to the audit staff for the completion of audit
work within the time limit.
Advantages of Audit Programme
1. Assurance of Completion of Work
It ensures that all necessary work has been done and nothing has been omitted.
2. Information About Work-Progress
The auditor is in a position to know about the progress of the work done by his assistants.
3. Uniformity of Work
A uniformity of the work can be attained as the same programme will be followed at
subsequent audits.
4. Simplification of Work Allocation
It simplifies the allocation of works to various grades of articled and audit assistants.
5. Guidance to the Staff
It is a kind of guidance to the audit assistants for the work he has to perform.
6. Legal evidence
Audit program is legal evidence for work done by every assistant of the audit team. Audit
program can be presented in the court of law if any action is taken against the auditor of
7. Fixation of responsibility
If any error of fraud remains undetected the responsibility of negligence will fall on that
particular assistant who has performed that job.
8. Final Review of Work
An audit programme facilitates the final review of work before the report is signed.
9. Helpful to the New Employees
For a new employee, the audit programme is a guide to his duty.
10. Basis of Future Programmes
It is a useful basis for planning the programme for the subsequent years.
Disadvantages of Audit Programme
1. Loss of Initiative
An efficient audit assistant loses his initiative, because he has to follow the programme which
has been fixed in advance.
2. Want of Flexibility
Even if the audit programme is well drawn up, it may not cover everything that might come
up during the course of audit.
3. Rigidity in Programme
Each business may have a separate problem of its own and hence a rigid programme cannot
be laid down for each type of business.
4. Unsuitable for Small Concerns
Drawing up an audit programme may be unnecessary for a small organisation.
5. No Scope of Changes
The audit programme may be followed mechanically year after year though some changes
might have been introduced by the client.
6. New problems overlooked
Time to time new problems arise which may be overlooked.
7. Omission of work
Work may be hurried in order to complete a required schedule involving omission of one
aspect or other.
Types of Audit Programme
An audit programme can be of the following two types:
1. Fixed Audit Programme
It is a set of standardized instructions, which are to be followed while conducting the audit. A
fixed audit program includes all possible audit procedures, although all of them may not be
applicable in a situation. Its attempts to take care of every possible audit situation, therefore, it
prescribes procedure to be followed in each situation.
The problem with this kind of program is that it is very rigid. Nothing is left to the initiative of
the audit team. Further, it is difficult to follow the same audit program even in the same
organization over the years, as the conditions in the enterprise are likely to undergo changes.
2. Flexible Audit Programme
A flexible audit program does not prescribe the exact audit procedure to be followed. It prefers
to give an outline of the scope, nature and limitations of the audit assignment. It does not
predetermine the nature of work to be performed by each person of the audit staff. Most of the
things are decided as the work proceeds and the reliability of procedures and internal control
system becomes known to the auditor.
Thus, a flexible audit program allows the auditor to develop, adapt and modify the program
according to the needs of the situation. It also leaves scope for some initiative by the audit staff
if the situation warrants.
Audit Note Book
An audit note book is usually a bound book in which a large variety of matters observed during
the course of audit are recorded. It is thus a part of the record of the auditor available for
reference later on, if required. The matters may be observed during the course of audit for
which no satisfactory answer has been given by the client or those which require to be
incorporated in the audit report. It is a kind of permanent record available to the auditor.
The audit note book may be in two parts:
for keeping a record of general information as regards the audit as a whole, and
for recording special points which have been observed during the course of audit of
the accounts of different years.
Contents of Audit Note Book
Some of the important points which are noted down in an audit note book are given below:
i. A list of books of accounts maintained by the clients.
ii. The names of the principal officers, their powers, duties and responsibilities.
iii. The technical terms used in the business.
iv. The points that require further explanations.
v. The particulars of missing vouchers, the duplicate of which have to be obtained.
vi. The mistakes and errors discovered.
vii. Total or balances of certain books of accounts, bank reconciliation statement, etc.
viii. Notes and queries which might be required at a subsequent audit.
ix. The points which have to be incorporated in the audit report.
x. Any matter which requires discussions with the senior officials or with the auditor.
xi. Accounting method followed in the business.
xii. Date of commencement and completion of audit.
xiii. Provisions in the Articles and Memorandum of Association affecting the accounts and
xiv. Abstracts from minutes, contracts etc. having a bearing upon accounts.
xv. Particulars of accounting and financial policies followed.
Advantages of Audit Note Book
1. Facilitates Audit Work: It facilitates the work of an auditor as all important details about
the audit are recorded in the notebook which the audit clerk cannot remember everything at all
the time. It helps in remembering and recalling the important matters relating to the audit work.
2. Preparation of Audit Report: Audit note book helps in providing required data for
preparing the audit report. An auditor examines the audit note book before preparing and
finalizing the audit report.
3. Serves as Documentary Evidence: Audit note book serves as documentary evidence in the
court of law when a suit is filed against the auditor for his negligence.
4. Serves as a Guide: When an audit assistant is changed before the completion of audit work,
an audit note book serves as a guide in completion of balance work. It also acts as a guide for
carrying on subsequent audits.
5. Evaluating Work of Audit Staff: It helps to assess the work performed by the audit staff
and helps in evaluating their level of efficiency.
6. Fixation of Responsibility: Audit note book helps in fixing responsibility on concerned
clerks who are responsible for any undetected errors and frauds in the course of audit.
Disadvantages of Audit Note Book
1. Fault-finding Attitude: It leads to development of a fault-finding attitude in the minds of
the staff.
2. Misunderstanding: Very often maintenance of audit note book creates misunderstanding
between the client’s staff and the audit staff.
3. Improper Preparation: Since it serves as evidence in the court of law, it needs to be
prepared with great caution. When the note book is prepared without due care it cannot be used
as evidence against the auditor for negligence.
4. Adverse Effects on Subsequent Audits: Since audit note book is used in performing
subsequent audits, any mistakes in the note book may have adverse impacts on the next audit.
Routine Checking
Routine checking is a total process of accounting control, which includes
i. examination of the totaling and balancing of the books of prime entry,
ii. examination of the posting from the primary books to the ledger accounts,
iii. examination of totaling and balancing of the ledger accounts and of the trial balance
prepared with those balances and
iv. overall examination of writing up the transactions properly.
In short, the routine checking is concerned with ascertaining the arithmetical accuracy of
casting, posting and carry forwards. For the purpose of confirming the arithmetical accuracy
and detecting frauds and errors of very simple nature, this method is adopted as basic to all
types of audit work. The scope of application of routine checking depends upon the nature and
size of the organisation as well as the effectiveness of the internal check and control system.
Objectives of Routine Checking
To verify the arithmetical accuracy of entries Made in books of accounts. Justify the
mathematical accuracy of the accounts, entered in the primary books of accounts.
To verify that postings into the ledgers have been made to the correct accounts and
these accounts have been balanced correctly.
To know the regularity of accounting in primary books of accounts.
Ensuring, by special ticks, that no figures are altered after they have been checked. in
relation to the use of symbols.
Advantages of Routine Checking
i. It is the simplest form of audit work.
ii. Detection of errors and frauds of simple nature can be very easily detected.
iii. The books of accounts can be thoroughly checked.
iv. It is the basis of checking the final account as it helps in checking castings and postings.
v. Arithmetical accuracy of all the transactions can be confirmed by this method.
vi. It offers an opportunity to train the new entrants to the profession.
Disadvantages of Routine Checking
i. It is not generally considered as an important part of audit work where a self-balancing
system is maintained.
ii. As the audit staff are engaged in the same type of work, the possibility of becoming
monotonous may grow in this system.
iii. Negligence of work and taking advantage of the internal check system are frequent.
Fails to detect errors and frauds arising from the fraudulent manipulation in accounting
Test Checking
The term ‘test checking’ stands for the method of auditing, where instead of a complete
examination of all the transactions recorded in the books of accounts, only some of the
transactions are selected and verified. The underlying intention is to test some of the
transactions to form an opinion for the whole. According to Professor Meig, “test checking
means to select and examine a representative sample from a large number of similar items”.
Objectives of Test Checking
Accounts of large organisations usually include an enormous number of transactions. But
the auditor is not in a position to check each and every transaction within the limited time
and due to the constraint of resources available to him. So, he has to depend on selective
verification of the transactions. The selection of transactions will be made in such a way
that the auditor will verify a small but representative number of transactions and he can
draw conclusions about the transactions as a whole. So, the basic objective of test checking
is to draw a valid conclusion by undertaking examination of some transactions from the
large number of transactions and thereby save time and cost.
Advantages of Test Checking
i. It is one of the best techniques of auditing through which the cost of audit can be reduced.
ii. It can ensure the speed of audit work.
iii. It can easily locate the deficient areas and thus helps to come to the conclusion as to
the acceptability of financial records.
iv. It saves time and effort.
v. It acts as a guide to the auditor to arrive at a conclusion regarding the true and fair view
of the state of affairs of the business.
Disadvantages of Test Checking
i. It will prove inefficient where internal check and control system are not operating or
found ineffective.
ii. It is not suitable for small concerns.
iii. It will bound to show incorrect result if the samples are not proper representative of the
iv. It does not offer any consistency in selecting the percentage of check that will be
adopted by all concerns.
Routine Checking Vs Test Checking
No. of
Routine Checking
Routine checking is a form of audit
examination in which certain books
and records that are common to all
types of businesses are checked.
The ultimate objective of routine
checking is to confirm the
arithmetical accuracy of the entries
made in the books of account. It also
ensures accuracy of the casting of
subsidiary books, posting of entries,
and balancing of ledger accounts. It
further checks the correctness of
the trial balance.
Each and every transaction is
checked here.
Routine checking is a form of
detailed and thorough checking.
It is one of the most traditional
systems used in an audit.
Also known
It is also known as a form of
extensive or detailed checking.
Routine checking is most suitable in
the case of small entities.
Cost and
It may prove to be a more expensive
and time-taking exercise.
Nature of
Only clerical errors and frauds of a
very ordinary nature can be detected
with the help of routine checking.
Test Checking
Test checking is an established
auditing process in which only a
portion of the transactions is verified
to form an opinion rather than
checking all of the transactions.
The objective of test checking is to
obtain a reasonable level of
assurance about the authenticity of a
group of transactions by verifying
only a representative sample.
Only a few selected transactions are
Test checking is done on a selective
Test checking is an unconventional
method that has gained a lot of
traction over the past few years.
Test checking is also known as
selective examination.
It is most suitable for large
businesses where the volume of
transactions is enormous.
Test checking is somewhat costeffective and saves time too.
With test checking, some errors and
frauds can go undetected too. There
is an element of doubt as well as a
risk when only a few transactions
are tested.
Due to its mechanical nature, routine
checking can get monotonous at It is not monotonous.
Important Questions
Q1. What are different types of audit? Explain.
Q2. What is a continuous audit? Discuss its advantages and disadvantages.
Q3. What is an internal audit? Discuss its advantages and disadvantages.