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 documents. 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 statements. 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 etc. 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 policyholders. 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 association. 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 suggestions. 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 meeting. 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. Expensive 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 complete. 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 management. 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 accountant. 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 meaning. 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 position. 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 organisation. 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 date. 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 properly. 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 completion. 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 negligence. 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: i. ii. 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 audit. 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 principles 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 population. 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 Basis Meaning Objective No. of transactions Details 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. Traditional It is one of the most traditional systems used in an audit. Also known as It is also known as a form of extensive or detailed checking. Suitability Routine checking is most suitable in the case of small entities. Cost and time It may prove to be a more expensive and time-taking exercise. Nature of errors 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 checked. Test checking is done on a selective basis. 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. Monotony Due to its mechanical nature, routine checking can get monotonous at It is not monotonous. times. 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.