Question

What is Audit? An organization do audit for what purpose in their financial statement? What are the types of audit and explain each part? (10 Markes)

Answer 1

Definition of Audit:- Audit is an independent examination of books of accounts of the organization, whether it is a profitable or non-profit organization, conducted in order to provide a true and fair view on books of accounts.

An audit can be done internally by employees or outside by independent firms depending on statutory requirements.

Purpose of Audit: -

1. To provide true and fair view:- Primary objective of the audit is to provide the True and Fair opinion on the books of accounts maintained by the entity. To achieve this purpose he has to gather sufficient and appropriate audit evidence so as to reach the conclusion that there doesn't exist any material mistake in books whose effect is persuasive.

2. Protection of entity and owner interest:- Auditor needs to verify that financials prepared by the entity are accurate and correct to the best of his opinion. He needs to check that any material error or fraud is conducted so as to safeguard the interest of owners of the entity.

3. Internal Control System:- Internal auditors have a different objective. His main purpose is to check and provide opinion on the internal business environment and internal control system maintained by the entity.

Apart from the above purposes, there can be different purposes depending on the type of audit.

Types of audit:-

1. Statutory/External Audit:- This audit is conducted by an external independent agency to check the accuracy of the books of the client. This audit is done due to the statutory requirement of law. Statutory requirements include the Company law, other regulations.

2. Internal audit:- This audit is conducted to check the internal control system of the organization. Purpose of the internal audit include;-

a. To monitor the effectiveness of internal checks

b. To check the compliance of law & regulation.

c. To propose new improvements in system

3. Tax Audit:- This audit is conducted to assess the tax return submitted by the client. The auditor verifies that is there any non-payment of tax liabilities. This audit basically includes certain interrogatories which the client needs to answer.

4. Operational Audit:- This audit is similar to an internal audit. The purpose of an operational audit is to analyze the company's goals, planning process, operational results. The objective of an operational audit is to check the operational efficiency and to provide the measure to improve them.

5. Compliance Audit: - Compliance audit is conducted to check that Entity has complied with the business law & regulation. For example:- Banks need to comply with Bank regulation acts & companies act also.

6. Information System Audit:- This audit is conducted to detect the issues relating to software development, data processing & computer systems.

7. Payroll Audit:- Payroll audit is conducted to check the payroll calculation & payroll process of the organization. It includes checking the wage rates, Provident fund deduction, insurance deduction, etc.