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Advance Auditing

Final Term Project

Classification, Tools and techniques of audit


Submitted to:
Prof. Itrat Naz
5th Semester
Prepared by:

Fezan Akhtar


Faisal Saeed


Hina Shaheen


Ammara Ch


Faculty of Management Studies


Campus, Okara, Pakistan
Date of Submission, 28-3-2016

Table of



1. Define Auditing............................................................................................. 3
2. Features of Auditing....................................................................................... 3
Classificaition of Audit...
1. Based on Organization Structure......................................................................5
2. Based on Scoep............................................................................................ 10
3. Based on time.............................................................................................. 11
4. Based on Object........................................................................................... 21
5. Other Audits............................................................................................... 22
Audit Tools and Techniques...
1. Introduction............................................................................................... 26
2. Audit Procedure.......................................................................................... 26
3. Audit Tools and Techniques........................................................................... 26
4. Other Techniques......................................................................................... 27


The word, audit is derived from the Latin term audire which means to hear. In
early days an Auditor used to listen to the accounts read out by the accountant in order to check
them. Businessman wanted assurance that their book- keepers had accurately and properly kept
the books of account. An auditor is an independent expert who examines the account of a
business concern and report whether the final accounts are reliable or not.
The final accounts of a business concern are used by various persons such as the owners,
shareholders, investors, creditors, leaders, government etc. for different purposes. All these
users need to be sure that the final accounts prepared by the management are reliable. An auditor
is an independent expert who examines the accounts of a business concern and reports the final
accounts are reliable or not. Different authorities have defined Auditing as follows:

Auditing is the process of gathering and evaluation of the economic information with the
purpose of reporting on it
According to Mautz Auditing is concerned with the verification of accounting data, with
determining the accuracy and reliability of accounting statements and reports.
A.W. Hanson defined auditing as, An Audit is an examination of accounting records to
establish their reliability and the reliability of statement drawn from them.
Statement on Standard Auditing Practices (SAP)
Auditing is the independent examination of financial information of any entity, whether
profit oriented or not, and irrespective of its size or legal form, when such an examination
is conducted with a view to expressing an opinion thereon.

1. It is the systematic and scientific examination of the accounts of a business.
2. It is an intelligent and critical examination of the accounts of a business.
3. It is done by an independent person or body of persons qualified for the job.
4. It is a verification of result shown by profit and Loss Account and the state of affairs
shown by Balance Sheet.

5. It is a critical review of the system of accounting and internal control.

6. It is done with the help of vouchers, documents, information and explanations received
from the authorities.

(1) Based On Organizational






(2) Based On Scope

Complete Partial


(3) Based On time

Continuous Final Interim

Audit Audit


(4) Based on object

Financial Audit





(5) Other Audit


Tax Special Environmental Cash


Property Audit


In Depth


Organizational Structure

Statutory Audit
Government Audit

(Private) Audit
Sole Proprietorship
Partnership Firm
Individuals and Non-profit

1. Statutory Audit:
Statutory Audit is compulsory audit prescribed under statute i.e. law. Appointments
of auditors, removal, remuneration, rights, duties, liabilities are governed as per the
Provisions of the respective law applicable to the organization. Scope of the audit work and
all others terms are as laid down by the law. It can be conducted only by a qualified
Chartered Accountant.
Statutory audit is conducted after preparation of final accounts. Statutory auditor has to
report whether the balance sheet and profit and loss A/c are drawn upon conformity with law
and whether they show true and fair view. Statutory auditor has to submit report to the
shareholder. His remuneration is fixed by shareholder.

2. Government Audit:

Meaning and Scope: Government audit is a control measure for public accounting of
government funds. It covers the audit of all expenditure and receipts done by the executive
and audit of commercial accounts maintained by public enterprises. Public enterprises are
classified under three categories department undertaking, statutory corporations financed by
government and government companies set up under the Companies Act.

3. Non-Statutory Audit
Non-Statutory Audit is voluntary audit. They are not compulsory under any law. It is
carried at the discretion of the proprietor terms and conditions of the audit are determined
as per the agreement made between the auditor and proprietor. Example: Financial audit
of the sole trader and partnership firm. Voluntary audit also covers non-financial audit.
Internal audit, management audit, social audit, operational audit etc.

Private Audit
Private audit is carried out at the behest of the interested parties and not to fulfill
statutory requirements. The terms and conditions between the client and the auditor defines
the scope of latters work. Sole proprietors, partnership firms, certain individuals such as
rent collectors, estate managers, etc. and non-profit organizations such as schools,
hospitals, clubs, etc., get the accounts audited for various reasons. Some of these are to meet
the requirements laid down by internal rules and regulations, to ensure reliability of financial
statements and derive related advantages.
These are listed below:


Audit of Small Entities (Propriety Audit)

Meaning and Features

A small entitle (SE) has the following features:

There is a concentration of ownership and management in a small number of

individuals (e.g. proprietor or partner).

Source of income are few.
Activities are simple.
Record-keeping is simple and personalized.
Internal control is limited.
Management may at times ignore such internal controls.

Features of Audit
a. Audit Procedures: The nature and extent of audit procedures and working
papers are influenced by special features of SE described as above.
b. Fraud and Errors: Auditor should check the following circumstances which
indicate the possibility of fraud and Errors:
Whether owner needs to manipulate the accounts (as the SE is his only
source of income).
Whether personal and business transactions are mixed up.
Whether advisor (lawyer, etc.) are changed frequently.
Whether advisor starts too late or has to be finished in a hurry.
Whether there are unusual material transactions around year-end.
Whether there are unusual transactions with group concern.
Whether excessive fees/ commission is paid.
Whether there disputes about taxes.
Whether accounting records are partly missing.
Whether cash transactions are too many.
Whether documents for many transactions are inadequate.
Whether many confirmations for debtors/stock have not been received back.
Whether owner/senior manager have not been leave for long period.
Whether working capital is insufficient.
Whether remarks in earlier audit report are ignored.
Whether stock records are not kept.

C. Audit Evidence:
a) Adequate audit evidence may not be available. The owner may want that some
transactions are not recorded at all. The internal controls, which should generate the
documents, may be weak.
b) Auditor should focus on cross-checking of data, quantity reconciliations, analytical
review, external confirmations and review of transactions after year-end.
c) Audit Planning: Audit of a Se may be done by a sole C.A. Hence, audit planning will be
d) Management Certificate: Auditor should obtain a written certificate from the owner that
the accounting records/ financial statements are complete and accurate.
e) Analytical Review: Evaluating the Gross Profit Ratio over years/trade is often very
helpful in case of a SE.
f) Audit Sampling: In view of the small size, it may be possible to check 100% entries or
at least select a; large sample size for checking.

2. Audit of Partnership Firm:

The matters which should be specially considered in the audit of accounts of a
partnership firm are as under:
a. Appointment: Confirm that the letter of appointment, signed by a partner, on
behalf of firm, clearly states the nature and scope of audit expected by the partners
specially the limitation, if any, under which the auditor shall have to function.
b. Partnership Deed: Examine the partnership deed signed by all partners and its
registration with the registrar of firms. Also ascertain from the partnership deed
about capital contribution, profit sharing ratios, interest on capital contribution,
powers and responsibilities of partners, etc.
c. Minute Book: Study the minute book, if any, maintained to record the policy
decision taken by partners specially the minutes relating to authorization of
extraordinary and capital expenditure, raising of loans, purchase of assets,
extraordinary contracts entered into and other such matters which are not of a
routine nature.
d. Authorized Business: Verify the business in which the partnership is engaged is
authorized by the partnership agreement; or by any extension or modification
thereof agreed by the partners subsequently.

e. Books of accounts: Examine whether books of accounts appear to be reasonable

and are considered adequate in relation to the nature of the business of the
f. Unauthorized Acts: Verify generally that the interest of no partner has suffered
prejudicially by an activity engaged in by the partnership which it was not
authorized to do under the partnership deed or by any violation of a provision in the
partnership agreement.
g. Taxes: Confirm that a provision for the tax payable by the firm has been made in
the accounts before the arrival at the amount of profit divisible among the partners.
h. Division of Profits: Verify that the profits and losses have been divided among the
partners in their agreed profit-sharing ratio.


Audit of trusts: (non-profit organizations)

1. The audited statements can serve as a basis for relying on the persons at the helm of
affairs i.e., members of governing body or managing committee.
2. It helps in dealing with third parties.
3. It helps in protecting the assets and ascertaining the liabilities.

Based on Scope
Complete Audit
Partial Audit
Detailed Audit

Complete Audit:
In this type of audit, the auditor is required to check each and every transaction recorded
in the books of accounts. He has to examine each and every voucher, document or
correspondence relating to the transaction. This type of audit is not possible for large
sized organizations.

Partial Audit:
In Partial audit, the auditor is not required to examine all the books of accounts. Only a
part of the accounts or some transactions as desired by the clients may be scrutinized.
Auditor has to state the area covered by the audit. This type of audit cannot be followed
in the case of statutory audit. It may be followed in the case of statutory audit. This audit
is not convenient when the audit is legally required.

Detailed Audit:
Under detailed audit, few business transactions are examined in detail by the auditor.
Spicer and Pegler have defined it as, An audit which starts with books of prime entry
and ends with the balance sheet. The checking sequence is arranged in order of recording
the transactions in the primary book.
Thus, for the purpose of detailed audit certain transactions are traced through various
stages from beginning to their end with the help of available evidence. This technique of
examination is also called audit-in-depth. To take an example, detailed audit of purchase
of goods for inventory would consist of tracing the transaction though all the points of
transaction cycle viz., requisitioning the goods, ordering the goods requisitioned,
receiving the goods ordered and preparing the payment voucher.


Based On Time
Continuous Audit
Final Audit
Interim Audit
Balance sheet Audit

1. Continuons Audit :
Continuous audit is defined by R.C. Williams as one where the auditor is
constantly or at (regular or irregular) intervals engaged in checking the accounts during
the period. Continuous Audit means an audit at regular intervals throughout the
accounting year. Generally, the audit work begins after the accounting year is over. But
in case of Continuous Audit, the work begins the accounting year itself.

Continuous Audit is necessary in the following casesa.


Where the volume of transaction is very large and complex.

where the management requires monthly or quarterly audited statements
of accounts or the statements of accounts are required immediately after the
accounting year;
Where the system of internal control or internal check is weak.
Sometimes continuous audit becomes necessary for self-survival against
cut-throat business competition.
When interim dividend is to be declared.

Advantages of Continuous Audit

a. Quick Preparation of Final accounts: Since, the routine audit is done continuously; the
Final Accounts can be prepared immediately after the year end.
b. Early Dividends to Shareholders: The shareholders would be happy as they receive
dividends soon after the end of the financial year. The Company can prepare interim accounts
and pay even interim dividends to the shareholders.
c. Up-to-date Accounts for Banks/Investors: The up-to-date final accounts are useful to banks
and investors for taking decisions regarding loans and investment.
d. Check on Employees: Since the auditors visit regularly throughout the year, it acts as check
on the employees to keep the accounts ready and up-to-date.
e. Prevents Errors and Frauds: Constant checking by the auditors helps to detect and even
prevent errors and frauds.
f. Familiarity with Clients Business: Since the auditor spends more time at the clients place,
he becomes familiar with all the aspects of clients business.
g. Thorough Audit: The auditor has more time at his disposal to do a through checking of all
transactions. This reduces the risk of missing any material items.
h. Utilization of Audit Staff: Audit Staff can be kept busy throughout the year. Audit work can
be evenly distributed to avoid overwork after year end.

Disadvantages of Continuous Audit:

a. Expensive: Since the auditor spends more time on the audit work, the audit fees are much
more. Continuous Audit is thus expensive. However, only a large organization should opt for
a Continuous Audit.
b. Dislocation of clients work: If a proper audit programme is not adopted, continuous audit
may disrupt the routine accounting work of the client. Either the audit staff may have to sit
idle or the accounts staff of the client may waste time for want of books of accounts.
Employees have to attend the auditor for explanation. They have to keep aside their usual
work to attend the auditors for explanation.

Errors and Frauds in Books Already Checked: If an employee changes some figures in the
books already checked by the auditor during his earlier visits, it would be difficult to detect
such errors and frauds subsequently.



Monotonous- tiresome-tedious: Continuous visits to the clients place may make the work
tedious and the audit staff loses interest from work consequently. The quality of audit suffers.


Absence of link: In the absence of well-planned audit work, an auditor may miss the thread
of audit work. Further, some important queries may be overlooked if no proper audit notes
and queries are recorded by the audit staff during the course of the audit.


Conflict between audit and accounts staff: The members of audit and accounts staff come
in close contact and sometimes it may result in spoiling the healthy relations between them
and thereby the quality of audit may suffer.


Dependence of the accounts staff on the auditor: The accounts staff may depend on the
audit staff. They may require the help of auditor for even small errors which they can
discover or avoid by taking proper care.

a. Strict instructions: Strict instructions should be given to clients staff not to alter
the audited figures. Mistakes, if any, should be rectified by passing rectification
journal entries and not by alteration of figures.
b. Audit programme: Proper audit programme should be prepared by the auditor,
so that the time of accounts and audit staff is not wasted.
c. Special ticks: Special ticks should be used for unaudited altered figures. Auditor
should write in the margin the actual figures audited with his audit pencil.
d. Audit notes: the auditor should keep exhaustive audit notes. The queries and their
explanation by the client should be properly recorded.
e. Checking the ledger: Checking the impersonal ledger should be done only after
the close of the accounting year.

Surprise visits: Surprise visits should be made in addition to the regular visits.


Rotation: There should be reasonable rotation of audit staff and their duties so
that they may not lose interest in their work.


Better control and supervision: There should be better control and supervision
over the audit staff. All the important figures in the balance sheet should be noted
in the audit diary and they should be rechecked at the time of subsequent visits.


Rectification entry: Any alteration should be done by means of a rectification

entry in the journal.


2. Final Audit
It is also known as periodical audit. It is generally start after the completion aspect
more than the depth aspect of audit. The danger of alteration of figures or manipulation of
accounts is totally absent. Generally, it starts after the close of the financial period. There is
very little impact on prevention of errors and frauds by way of moral checks. It is best suited
for small and medium sized business. It saves in terms of time, energy and money.

Final Audit Advantages:

a. Inexpensive: Since the audit spends normal time on the audit work, the audit fees are
also normal. Final Audit is thus inexpensive. Even a small organization (a sole trader or a
firm) can opt for a Final Audit to obtain the advantages of an independent financial audit.
b. Audit at a Stretch: Since the audit work is done at a stretch, without any gaps, audit is
carried out efficiently. All queries are solved immediately. The work is done continuously
and not in installments. The audit planning and programme are simple
c. Less errors and Frauds: Since the books are checked at a stretch, no employee can
change any figures in the audited books.
d. Do not Disrupt Accounts Work: The accounts staff is not disturbed anytime during the
accounting year. There is no need for the accountants to attend to audit work every now
and then.

Final Audit Disadvantages:

a. Delay in final Accounts: Since the routine audit is done after a year end, the Final
accounts may be delayed and ready long after the year end.
b. Late Dividends to Shareholders: The shareholders would be unhappy as they receive
dividends long after the end of the financial year. It would be difficult for a Company to
prepare interim accounts and pay interim dividends to the shareholders during the
financial year.
c. Stale Accounts for Banks/Investors: The final accounts are available long after the end
of the accounting year. Such stale accounts are not useful to banks and investors fro
taking decisions regarding loans and investment.
d. No Moral check on Employees: Since the auditors visit only at the end of the year,
dishonest employee have a chance to commit frauds during the year and clean up the
accounts just before the auditors arrive, e.g. teeming and lading.


e. No Familiarity with Clients Business: Since the audit spends little time at the clients
place, he cannot become familiar with all the aspects of clients business. They may
affect the quality of audit.
f. Sample Check: Since the auditor has to complete the audit in a short time, he has to
resort to sample checking. The increases the risk of missing material items.
g. Uneven Work-load for Audit Staff: Audit staff is overworked immediately after year
end and comparatively less busy at other times.

3. Interim Audit:
Interim Audit is an audit conducted in between the annual audits. It is conducted to find out
the interim profit and know the financial position at the end of a part of the accounting year.
For example, an audit of accounts prepared for the period of six months from 1 st April to 30th
September, would be Interim Audit.

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


How Conducted:
An interim audit should be done as if it is the final audit for the concerned period.
Thus, it would involve not only vouching but also verification of assets and liabilities,
valuation of closing stock, computation of depreciation, confirmation from parties and so on.
Once an interim audit is done, at the time of the final audit, the auditor has to concentrate
only on the remaining period. Thus, interim audit helps in timely completion of final audit.
The auditor at the time of final audit, however, should ensure that there are no alterations in
the books previously checked by him. He should carefully compare the final accounts with
the interim accounts to find out if they are consistent.
Interim audit is similar to Continuous Audit and enjoys similar advantages:
a. Quarterly Results: A public limited company listed on the stock exchange can
comply with the statutory provision of declaring quarterly results.
b. Interim Dividends to Shareholders: The shareholders would be happy as the
Company can pay interim dividends to the shareholders.
c. Quick Preparation of Final Accounts: Since the interim audit is already done, the
Final Accounts can be prepared immediately after the year end.
d. Up-to-date Accounts for Banks/Investors: The up-to-date interim accounts are
useful to banks and investors for taking decisions regarding loans and investment.
e. Check on employees: Interim audit acts as check on the employees to keep the
accounts ready and up-to-date.
f. Prevents errors and frauds: Checking by the auditors for the purpose of interim
audit helps to detect and even prevent errors and frauds.
g. Thorough Final audit: The auditor has more time at his disposal at the time of
final audit, which reduces the risk of missing any material items.
h. Utilization of Audit staff: audit staff can be utilized in a better manner. Interim
audit is done when the audit staff is relatively free.

Disadvantages and Precautions:

a. Expensive: Since the auditor does two audits in one year, the audit fees are more to
that extent. Interim Audit is thus expensive.
b. Audit in Installments: since the audit work is done at two stages (interim and final)
and not at one go, audit may be inefficient. It is difficult at the time of final audit to
take up the work precisely at the stage where it was left at the time of interim audit.
To overcome this, audit should be well-planned. The work done up to end of the
interim audit, relevant voucher numbers, totals, etc. should be carefully noted in the
c. Disrupts Accounts Work: Interim audit disrupts the work of accounts staff. To avoid
this advantage, the audit programme should be co-ordinated with the client to avoid
disruption in routine accounts work. The client should appoint an employee specially
to co-ordinate with and attend to the auditors.

4. Balance Sheet Audit:

Balance Sheet Audit is an American term which means verification of the items
appearing in the balance sheet. It includes verification and valuation of assets and liabilities
appearing in Balance Sheet.
Profit and loss account is not given much importance in this type of audit. In balance
sheet audit, the auditors assume that there is a reliable system of internal check and internal
audit. Balance sheet is also referred as Limited Audit. Such a type of audit is used where
the size of the type of audit is used where the size of the company is very large. Under
balance sheet audit accounts are verified and tests are imposed only on those items in Profit
and Loss A/c which are directly related to assets such as depreciation, repairs, bad debts etc.

Balance sheet Audits are not conducted in all cases. Such Audits are conducted in case of
very large organization banks, etc. in the following circumstances:
a. The Internal Control System is very strong. The controls have been developed
and tested over the years. The controls are capable of detecting and preventing
errors and frauds.
b. The volume of transaction is so large that an in-depth checking is impossible. A
detailed vouch-and-post audit is not possible if the final accounts arte to be ready
in time.
c. The concern has its own internal audit department. The statutory auditor,
therefore, need no duplicate this work.
d. The accounts staff is highly qualified, the management is professional and
accounts are computerized.

Balance Sheet Audit is conducted in the following manner

Review of Internal Controls: The auditor must evaluate the system of internal
controls in the following respects:
a. Whether the internal controls are effective: If the internal controls are effective,
auditor can concentrate on material items instead of checking arithmetical
accuracy of vouchers and books. He should study the internal control system with
the help of questionnaires, manuals, organization charts and flow charts.
b. Whether the internal controls are in operation: He should carry out tests to
ascertain that the controls are actually in operation. Based on his evaluation of the
internal controls, the auditor should plan his audit programme.

Verification of Items in the Final Accounts : He should verify the major items of
assets and liabilities and income and expenditure appearing in the Final Accounts
(Balance Sheet and Profit and Loss) in the following manner:
a. Verification: He should carry out physical verification of major items of
assets and liabilities on sample basis.
b. Inspection: He should inspect documents of title etc. in respect of major items
on sample basis to verify whether such transactions actually occurred, and
whether such transactions are recorded in the books for the right amount.
c.Vouching: He should vouch only the major transactions on sample basis to
ascertain whether such transactions are actually occurred by the concern; and
whether such transactions are recorded in the books for the right amount.
d. Valuation: He should satisfy himself that the assets and liabilities are properly
e.Presentations and Disclosure: He should check whether the assets, liabilities,
income and expenses are presented and disclosed in the Final Accounts
properly, according to the recognized accounting policies and the
requirements of law.

Specific Items: The auditor should pay special attention to the following specific items
in the Final Accounts:
a. Verify fixed assets, investment physically.
b. Check the addition to and deduction from fixed assets and investments.
c. Check the amount of depreciation charged.


d. Check the accounts of major debtors and creditors and obtain confirmations
and statement of accounts.
e. Verify cash and stocks physically.
f. Check valuation of stocks.
g. Ascertain amount of bad or doubtful debts.
h. Check estimates of contingent liabilities.

Overall Checking of Final Accounts (Analytical Review):

a. Compare the amount of each item for the previous year with that of the
current year. Investigate the reasons for abnormal variations.
b. Check major rates e.g. Current Ratio, Debt Equity Ratio, Gross Profit Ratio,
Operating Ratio, Expenses Ratio, Stock Turnover, Net Profit Ratio, return on
Capital Employed and Debtors Turnover etc.
c. Check quantitative ratios (input-output ratios), Material Consumption ratio
and quantity reconciliations.
d. Check all unusual or non-recurring transactions.
e. Check statement of Sources and application of Funds and Cash Flow
f. Check the Minute Books.

Procedure to conduct Balance Sheet Audit:

1. Before commencing the audit see that the system of internal control is effective and
qualified staff is appointed.
2. Examine the minute book and consider those items which have bearing on final
3. Compare the Profits and Loss Accounts and Balance Sheet of the current year with
that of the previous year and find out any material difference.
4. Compare the increase and decrease in each item appearing in Profit and Loss
Account and Balance Sheet.
5. Investigate into the causes of any variations in gross profit and consider the
valuation of stock.


6. Examine reconciliation of material consumed and stock.

7. Examine the details of material consumed and find out its ratio to production.
8. Find out whether there is any change in depreciation and see its effects on Profit
and Loss Account and Balance Sheet.
9. Investigate into the items of non-recurring nature and see that Profit or Loss on sale
of fixed asset is properly ascertained.
10. Get the details of asset and liabilities as on the date of Balance Sheet.
11. Verify the statement of fixed asset additions made and destructions made. Also
verify changes if any.
12. Pay attention to the valuation of the fixed assets.
13. Consider the details of current assets and enquire into the variations in current
14. Consider, in detail, any substantial changes in items of Balance Sheet from the
normal figure.
15. Verify the assets and properties held and liabilities arising.
16. See that adequate provision is made for all the known liabilities.
17. Ascertain any capital commitment.
18. Scruteriez contingent liabilities.
19. See that adequate provision is made for actual liability.
20. Collect a list of contingent liabilities from the officer of the company.
21. See the resolutions regarding transfers.
22. Obtain a copy of all suits filed by the company against the company.
23. Evaluate the system of internal control and see how far it is effective.
24. See whether the presentation of financial statements is done properly as per the
provisions of law.
25. Check the Statements of Sources and Application of funds.



Based on Object
Independent Financial Audit
Cost Audit
Management Audit
Internal Audit
Social Audit

1. Independent audit: An independent audit an independent audit is an examination of the

financial records, accounts, business transactions, accounting practices, and internal controls
of a charitable nonprofit by an "independent" auditor. "Independent" refers to the fact that the
auditor/is not an employee of the nonprofits but instead is retained through a contract for
services, and hence is "independent During the independent audit, the auditor will review the
organizations financial statements to determine whether they adhere to generally accepted
accounting principles (commonly referred to as GAAP). These accounting principles are
created by the "Financial Accounting Standards Board," known as "FASB." While not law,
these standards carry weight - when they are not followed, the auditors are required to note
that in their report.
2. Cost Audit: Cost Audit represents the verification of cost accounts and check on the
adherence to cost accounting plan. Cost Audit ascertain the accuracy of cost accounting
records to ensure that they are in conformity with Cost Accounting principles, plans,
procedures and objective.

3. Management Audit:

Management Audit is an assessment of methods and policies of an

organization's management in the administration and the use of resources, tactical and
strategic planning, and employee and organizational improvement.

4. Social Audit: A social audit is a way of measuring, understanding, reporting and ultimately
improving an organization's social and ethical performance. A social audit helps to narrow
gaps between vision/goal and reality, between efficiency and effectiveness.


5. Internal Audit:
Internal audit is an independent, objective assurance and consulting activity designed to add
value and improve an organization's operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve
the effectiveness of risk management, control, and governance processes. Internal auditing is
a catalyst for improving an organization's governance, risk management and management
controls by providing insight and recommendations based on analyses and assessments of
data and business processes. With commitment to integrity and accountability internal
auditing provides value to governing bodies and senior management as an objective source of
independent advice. Professionals called internal auditors are employed by organizations to
perform the internal auditing activity.

Other Types
Special Audit
Occasional Audit
Secretarial Audit
Audit in Depth
Cash Audit
Operational Audit
Tax Audit
Environmental Audit
Propriety Audit


1. Special Audit:
Central Government has power to order a special audit of the accounts of a company for a
specific period. When affairs of any company are not managed as per the sound business
a. When company is being managed in a manner which is likely to cause serious
injury or damage to the interest of trade or industry.
b. When financial position of a company is such as to endanger its solvency.
Special audit can be entrusted by the central government to the companys auditor
himself or to any other chartered accountant. Auditors remuneration will be fixed by the
Central Government and paid by the company Auditor submits his report to the central
government. On the basis of his report the Central Government may take adequate actions.
Such auditor has the same rights, duties, powers and liabilities as the statutory auditor of the

2. Occasional Audit:
This audit is carried out according to the occasional need of the business of the client.
It is done at the specific desire of the owners of the business where the audit is legally not
compulsory. The auditor will conduct the audit according to the terms and reference. His
report will mention the terms of reference as per the letter he has received.

3. Secretarial Audit:
Secretarial Audit is compliance audit it is a part of total compliance management in an
organization. The Secretarial Audit is an effective tool for corporate compliance
management. It helps ensure timely corrective measures when non-compliance is detected.

4. Audit in Depth:
Taylor and Perry define auditing in depth as it implies 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 appropriate authorization.
It is a method according to which a few selected transactions are subject to a thorough
scrutiny in forming an opinion as regards the accuracy of the data so scrutinized.
Under this type of audit, the auditor examines thoroughly selected transactions right
from their origin to the conclusions. All records and documents pertaining to the transactions
are checked in detail. The basic purpose of this type of audit is to see whether the system of
internal check or control system is effective.

This type of audit enables the auditor to suggest to the management a better procedure for
recording the transactions to avoid any loop holes for committing frauds.
For example, the item sales will be examining as follows:

Order from the customer.

Acceptance of the order.

Intimation to the dispatch section to send goods.

Gate Pass.

Challans outward duly acknowledged by the recipients.

Goods outward Register.

Stock Register.

Copy of Invoice.

Cash Book.


Bank Pass Book.

Customers Ledger.
The principal of audit in depth is applicable in the case of large-sized companies. It
is not suitable to small sized companies as they do not have internal check system. All the
transactions of small firms are required to be checked. The auditor should resort to in depth
audit only when he is satisfied with the efficacy of the internal check system which is in
operation. The extent of efficiency of internal check system will decide the extent to which
the auditor should apply the technique of in-depth audit. He should select those
transactions which are material in relation to the affairs of the company.

5. Cash Audit:
It is a partial audit and not a complete audit. In this type of audit, the auditor examines
only the cash transactions. He examines cash receipts and cash payments. The receipts and
payments may be capital or revenue in nature. Cash transactions are checked with the help of
receipts and vouchers and other evidences.


6. Operational Audit:
Operational audit is conducted to see that the business operations are improved in future.
Operational audit goes beyond financial audit. It is conducted for the following purposes:

To improve the profitability.

To guide the management in achievement of organizational objectives.
To examine the efficiency of the management in conducting various operations.
To evaluate the management policies and procedures.
To advice the management on business operations.

7. Tax Audit:
Statutory audits as well as the cost audit are taken up as result of specific provisions
contained in the companies Act. However, a new concept of tax audit has been evolved lately
under the Income Tax Act, 2001. Income tax act provides for compulsory audit of accounts of
certain assesses whose turnover or receipts exceed the specified limit. The Income Tax Act
has provided for rules and regulations regarding tax audit. The tax audit can be undertaken by
the practicing member of the institute of Cost and Works Accountants of Pakistan.

8. Environmental Audit:
In recent times, new type of audit has emerged which is known as Environmental
Audit. The objective of such an audit is to examine the effect of the activities of an
organization on environment. Environment audit is a management tool comprising a
systematic, periodic and objective evaluation of how well organization, management and
equipment are performing to safeguard the environment. It is concerned with assessing
whether the company policies meet regulatory requirements as perceived by the

9. Propriety Audit:
In the words of Kohler, Propriety means that which meets the tests of public interest,
commonly accepted customs and standards of conduct. Applied to audit, propriety audit can
be defined as an examination of actions and decisions to find out whether they are in public
interest and meet the standards of proper conduct. Thus under propriety audit, the auditor
not only examine the transactions from the books of accounts with the help of vouchers and
documents, but he verifies also as to how far transactions effected from the decisions or
actions are proper or reasonable. The propriety audit is concerned with examining that there
is no leakage of revenue or wastage of funds by mistake or fraud. It is concerned with
ascertaining appropriateness from legal, financial or economic point of view.

Audit Tools & Techniques:

Audit techniques are tools, methods or processes by means of which an auditor collects
necessary evidence to support his opinion in respect of the propositions or assertions submitted
by the client to him for his examination.

Audit procedures are ways of applying techniques to particular phase of an audit.

Generally, the attainment of the audit objectives required the collection of the evidence to
support a decision.

Posting Verification

Verification of items by one source to another source

To establish the authencity and consistency of recording process

Extension Verification

Multiplying two or more accounts to prove the accuracy of the total

An examination of all original evidences

To proving the accuracy of the entries in the books of accounts



To ascertain the correctness of the figures and validity of the clients record

With the third party

Selection of representative items from the records and examining them for
reaching on conclusion about the trend


Analysis of Financial Statement

Uses various Financial Ratios horizontally and vertically

Physical Examination

Includes inspection, counting, identification and measurement of quantity


May observe the process of stocktaking


Reconcile two or more related items if they are not agreeing or match with each

Selection of representative items from the records and examining them for
reaching a conclusion about trend of activity.

Items must be sufficiently representative of whole data.


Analysis of Financial Statements

Financial ratios

Horizontal and Vertical comparison

Relationship with Industry averages

Documentary Examination

Same as Vouching in nature

To examine the adequacy and reliability

Make a wide search to find out which of the entries are regular, consistent and



Observe the various policies and procedures or plans followed by the client

Flow Charting

To describe graphically the issue of transactions through different stages


Techniques of auditing means the procedure and method which is adopted by the auditor in
checking the accounts.
Following are the important techniques of audit :


1. Examination Of Record:
This technique is commonly used by the auditors, The inspection of books and documents is
made to verity the validity of data.
2. Inquiry:
The auditor can also use the technique of inquiry. He can get the information from resource
persons inside or outside the enterprise.
3. Sampling:
Auditor can select few items from whole accounting information. This technique enables the
auditor to obtain and evaluate the evidence of some characteristics of the whole class. It is
helpful in forming the conclusion.
4. Confirmation:
To ensure the accuracy of the data auditor can collect the information from the debtor.
Confirmation is response to an inquiry to prove certain data recorded in the books.
5. Compliance:
To check the arithmetical accuracy of accounting record, the balancing accounts can be
compared with the vouchers to test the reliability of data.
6. Compliance Test:
These tests are designed to check the effectiveness and compliance of internal control. In
obtaining the audit evidence, auditor is concerned with the existence of effective internal control.
7. Use Of Computer Techniques:
There are large number of audit techniques like audit software, test packs and mapping which
can be used by the auditor to test the accuracy of the data.
8. Substantive Test:
There are designed to obtain evidence that data produced by accounting system is accurate or
not. It has two kinds :
a) Test of detail transaction.
b) Test of significant ratios and trends.

9. Dependence On Experts And Auditors:

The auditor has to rely on the internal and other auditors to complete his work. He has also to
rely on other experts like lawyers, engineers and doctors for their expert opinion about the
10. Analytical Review:

It consists of studying significant ratios, trends and investigating different changes. This review
procedure is based on the expectations of relationship among the past and present data.