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What Is an Internal Audit?

• How It Works
• Internal vs. External Audit
• The Process
• Internal Audit Reports: The 5 C's

Importance of Internal Audits

• Internal Audit FAQs

The Bottom Line

• Corporate Finance

Internal Audit: What It Is, Different Types, and the 5 Cs

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

Investopedia / Paige McLaughlin

Internal audits evaluate a company’s internal controls , including its corporate governance and accounting processes. These types of audits ensure compliance with laws and regulations and help to maintain accurate and timely financial reporting and data collection. Internal auditors are hired by companies who work on behalf of their management teams. These audits also provide management with the tools necessary to attain operational efficiency by identifying problems and correcting lapses before they are discovered in an external audit .

Key Takeaways

• An internal audit offers risk management and evaluates the effectiveness of many different aspects of the company.
• Types of internal audits include financial, operational, compliance, environmental, IT, or for a very specific purpose.
• Internal audits provide management and the board of directors with a value-added service where flaws in a process may be caught and corrected prior to external audits.
• Similar to external audits, internal audits are conducted through planning, auditing, reporting, and monitoring steps.
• Internal audits may enhance the efficiency of operations, motivate employees to adhere to company policy, and allow management to explore specific areas of its operations.

Understanding Internal Audits

Internal audits play a critical role in a company’s operations and corporate governance, especially now that the Sarbanes-Oxley Act of 2002 holds managers legally responsible for the accuracy of their company's financial statements. SOX also required that a company's internal controls be documented and reviewed as part of its external audit.

In addition to ensuring that a company complies with laws and regulations, internal audits also provide a degree of risk management and safeguard against potential fraud, waste, or abuse. The results of internal audits provide management with suggestions for improvements to current processes not functioning as intended, which may include information technology systems as well as supply-chain management.

Internal audits may take place on a daily, weekly, monthly, or annual basis. Some departments may be audited more frequently than others. For example, a manufacturing process may be audited on a daily basis for quality control , while the human resources department might only be audited once a year.

Audits may be scheduled, to give managers time to gather and prepare the required documents and information, or they may be a surprise, especially if unethical or illegal activity is suspected.

Types of Internal Audits

Compliance audit.

A company may be required to adhere to local laws, compliance needs, government regulations , external policies, or other restrictions. To demonstrate compliance with these rules, a company may task an internal audit committee to review, compile appropriate information, and provide an overall opinion on the status of the compliance requirement.

Internal Financial Audit

Public companies are required to perform certain levels of external financial auditing where a completely independent third party provides an opinion on the company's financial records. Companies may want to dive further into audit findings or perform an internal financial audit in preparation for an external audit. Many of the tests between an internal or external auditor may be similar; the nature of independence separates the two types of audits for financial audits.

Environmental Audit

As companies become continually more environmentally conscious, some take the steps of reviewing the business' impact on the planet. This results in an internal audit covering how a company safely sources raw materials, minimizes greenhouse gases during production, utilizes eco-friendly distribution methods, and reduces energy consumption. Companies leveraging triple bottom line reporting may perform internal environmental audits as part of annual reporting.

Technology/IT Audit

An IT audit may have different objectives. The internal audit may be the result of an external lawsuit, a company complaint, or a target to become more efficient. An internal audit focused on technology reviews the controls, hardware, software, security, documentation, and backup/recovery of systems. The goal is likely to assess general IT accuracy and processing capabilities.

Performance Audit

An internal audit focused on performance pays less attention to the processes and more on the final result. The company will have likely have set performance objectives or metrics that may be tied to performance bonuses or other incentives. As a result, an internal auditor assesses the outcome of an objective that may not be easily quantifiable.

For example, a company may wish to have expanded its use of diverse suppliers ; the internal auditor, independent of any purchasing process, will be tasked with analyzing how the company's spending patterns have changed since this goal was set.

Operational Audit

An operational audit is most likely to occur when key personnel leaves or when new management takes over an entity. The company may want to assess how things are done and whether resources are being used more efficiently. During an operational internal audit, the auditor will review whether current staff and processes fulfil the mission statement , value, and objectives of a company.

Construction Audit

Development, operating, real estate , or construction companies may perform construction audits to ensure not only appropriate physical development of a building but appropriate project billing along the life of the project. This mostly includes adherence to contract terms with the general contractor, sub-contractors, or standalone vendors as necessary.

This may also include ensuring the company has remit the appropriate payments, collected the appropriate payments, and internal project reports regarding project completion are correct.

Special Investigations

Many of the audits above may be recurring and performed each year. In some cases, it might make sense for an internal audit committee to evaluate a special circumstance that will occur only once. This may entail gathering a report on the efficiency on a recent merger, the hiring of a key employee, or a complaint from staff. When selecting the individuals for the special investigation audit, a company must be especially mindful to select members with appropriate expertise and independence.

Depending on the structure of the organization, the internal audit may be prepared by the board of directors of by upper management.

Internal Audit vs. External Audit

Internal and external audits have the same objective. Both types of audits analyze an aspect of a company to determine a specific opinion. However, there are many differences between the two types of audits.

In an internal audit, the company is often able to select its own audit team. As such, the team represents the interests of the company's management team. This may be advantageous to specifically place certain employees with very niche experience on the team. In an external audit, the company can often select the external audit firm; however, the company often does not have a say in the specific employees put on their external audit.

There may be some requirements regarding the external audit staff depending on the audit. For example, in an external financial audit, a Certified Public Accountant (CPA) must certify the financial statements. In an internal audit, there is no requirement that any member of the audit team must be a CPA.

The end goal of either audit is an audit report; however, audit reports are used for very different reasons. An internal audit report is usually used by internal management to improve the operations, processes, or policies of the company. An external audit report is often required for an outside reason and is more often used by members outside of the company.

Finally, the nature of the engagement will be very different. During an internal audit, the employees of a company may often freely give advice, discuss unrelated matters with the company, or may have a very fluid consulting agreement. During an external audit, a very defined scope is often set, and the external auditor will often take great care to ensure they do not exceed their audit boundaries.

A company is usually able to select its own internal audit lead and team members

Members of the audit team often do not need to have specific titles or licenses

Audit reports are primarily used by internal management to improve company operations

Internal audits may be less formal with blurred structure as the auditor provides casual guidance

A company or board can usually pick the audit firm but not audit team members

Members of the audit team may be required to hold specific titles or license as part of the audit agreement

Audit reports are primarily used by external parties to satisfy a reporting requirement

External audits are often more formal with defined boundaries and disallowed services

Internal Audit Process

Internal auditors generally identify a department, gather an understanding of the current internal control process, conduct fieldwork testing, follow up with department staff about identified issues, prepare an official audit report, review the audit report with management, and follow up with management and the board of directors as needed to ensure recommendations have been implemented.

Step 1: Planning

Before any audit procedures are performed, the internal auditors often start by developing the audit plan . This sets the audit requirements, objectives, timeline, schedule, and responsibilities across audit team members. The audits may review prior audits to understand management expectations for presentation and data collection.

The audit plan often has a checklist to ensure members of the team adhere to broad expectations. The internal audit team may also preemptively plan to meet with management throughout the audit to communicate the status and any struggles of the audit. The planning stage often ends with a kick-off meeting that launches the audit and communicates the initial information needed.

Step 2: Auditing

Many of the auditing procedures used by internal audits are the same as external auditors. Some companies might use continuous audits to ensure ongoing oversight of company practices. Assessment techniques ensure an internal auditor gathers a full understanding of the internal control procedures and whether employees are complying with internal control directives.

To avoid disrupting the daily workflow, auditors begin with indirect assessment techniques, such as reviewing flowcharts, manuals, departmental control policies, or other existing documentation.

Auditing fieldwork procedures can include transaction matching, physical inventory count, audit trail calculations, and account reconciliation as is required by law. Analysis techniques may test random data or target specific data if an auditor believes an internal control process needs to be improved.

The internal audit may have started with a defined scope; but as the internal audit team gathers and analyzes information, it may become necessary to redefine the purpose and extent of the audit. This includes re-evaluating the original timeline or resources allocated to the audit.

Step 3: Reporting

Internal audit reporting includes a formal report and may include a preliminary or memo-style interim report. An interim report typically includes sensitive or significant results the auditor thinks the board of directors needs to know right away. Similar to an interim financial statement , an interim audit communicates a partial set of information useful for laying the road for the remaining portion.

Often, a company may deliver a draft copy of the final audit report and host a pre-close internal audit meeting with management. This may allow management to provide rebuttals, additional information that may change findings, or provide commentary on their feedback regarding the audit findings.

The final report includes a summary of the procedures and techniques used for completing the audit, a description of audit findings, and suggestions for improvements to internal controls and control procedures. The final report may also communicate next steps in terms of changes to be implemented, future monitoring processes, and what future reviews will entail.

Step 4: Monitoring

After a designated amount of time, an internal audit may call for follow-up steps to make sure the appropriate post-close audit changes were implemented. The details and process for these monitoring and review steps is often agreed to at the delivery of the final audit.

For example, an internal financial audit may find severe internal control deficiencies that an internal auditor believes will not pass an external financial audit. Management agreed to implement changes within the next six weeks. After six weeks, the internal auditor may be tasked with implementing a small-scope or limited review of the deficiency to see if the issue still persists.

The monitoring step of an internal audit is technically not required. Management or the board may decide to disregard internal audit findings and not implement the changes the audit report suggests.

Internal Audit Reports: The 5 C's

Internal audit reports are often known for adhering to the 5 C's reporting requirement. A complete, sufficient internal audit often ends with a summary report that communicates answers to the following questions:

• Criteria: What particular issue was identified, and why was the internal audit necessary? Is the internal audit in preparation for a future external audit? Who requested the audit, and why did this party request the audit?
• Condition: How as the issue in relation to a company target or expectation? Does the company have a policy that was broken, a benchmark that was not met, or other condition that was not satisfied? Is the company confident no issue exists, or do they believe an issue is at hand?
• Cause: Why did the issue arise? Who was involved, what processes were broken, and how could the issue have been avoided?
• Consequence: What is the outcome of the problem? Are issues limited to internal matters, or are there risks of external consequences? What is the financial implications of the issue?
• Corrective Action: What can the company do fix the problem? What specific steps will management take to resolve the issue, and what type of monitoring or review will occur after solutions have been put in place to ensure a fix has been implemented?

Some may think internal audits are not as valuable as external audits. After all, a company may hand-pick its own internal audits who do not have full independence from the company. However, there are many ways internal audits provide value to the company and external parties:

• Management can be more efficient about what to explore. For example, while external financial audits must test an entire financial system, a company may be concerned about whether the cash management process is being fraudulently managed; therefore, management can elect to have all audit procedures analyze cash processes.
• Internal audits may save companies money. If a company's processes are very strong, the external audit process may not be as long as intensive, thereby reducing the external audit fee and time spent supporting external auditors.
• The company enhances its control environment. Even if the internal audit yields no findings, employees may be aware that their work gets analyzed and reported on, thereby motivating adherence to company policy.
• Internal audits may make companies more efficient. External audits often are not intended to make processes better; they are meant to review whether processes are accurate. This distinction is important because a company may be "just getting by" with inefficient processes that meet very minimum requirements.
• Internal audit reports give management a head start to make corrections. Instead of having to scramble when an external audit finds a deficiency, management can take longer to think through solutions, implement the solution with care, and review whether the solution worked.
• Certain departments may need enhanced oversight. Whether it is lack of expertise, staffing shortages, or problem with current personnel, a company may benefit from targeting a specific area and formally reviewing its workflow and processes.

What Are the Types of Internal Audits?

A company can choose to perform an internal audit for almost any reason. This may lead to an internal financial audit, operational audit, compliance audit, environmental audit, IT audit, or a special one-time circumstance.

What Is the Role of Internal Audit?

The role of an internal audit is to identify a deficiency or substantiate a proficiency. For example, a company may issue an internal financial audit to make sure its internal controls over accounts payable adhere to company policy. Alternatively, the company may launch an internal environmental audit to explore how environmental impact its eco-friendly changes had on the planet last year.

What Is the Internal Audit Process?

The internal audit process entails planning the audit, performing the audit procedures, compiling the audit report, and monitoring post-audit changes. Management may choose to expand the scope of an audit at any point of the audit if findings during the audit cause the scope to shift a different direction.

What Are the 5 C's of Internal Audit?

Internal audit reports often outline the criteria, condition, cause, consequence, and corrective action. These five areas report why the audit was performed, what caused the reason for the audit, how the audit will be performed, what the auditor aims to achieve, and what steps will be taken after the audit findings are presented.

An internal audit is a process that allows a company to self-select an audit team to carry out the review of its operations. The company can often define the scope of the internal audit. In addition, the company can often choose almost any reason to conduct an internal audit. Though internal audits are less useful for meeting external reporting requirements, they hold tremendous value for improving internal operations as well as informing management ways the company can get better.

Cornell University, Legal Information Institute. " Sarbanes-Oxley Act ."

Congressional Research Service. " Corporate Responsibility: Sarbanes-Oxley Act of 2002 ." Pages 5-8.

U.S. Securities and Exchange Commission. " All About Auditors: What Investors Need to Know ."

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A Step-by-Step Guide to Crafting an Assignment on Auditing and Assurance

In the world of accounting and finance, auditing and assurance are essential elements that guarantee the veracity and accuracy of financial information. You might encounter various assignments as a finance student that require you to delve into the intricacies of assurance and auditing. These assignments help you develop your analytical and critical thinking abilities while also testing how well you understand the material. To help you submit a well-organized and insightful piece of work, we will walk you through the process of writing a thorough assignment to do auditing and assurance homework in this blog. You will learn how to review assignment guidelines, gather pertinent materials, take organized notes, and effectively structure your assignment by following the procedures described in this guide. We'll look at the theoretical underpinnings of auditing and assurance, talk about the various kinds of auditing and assurance homework, and give some insights into the auditing procedure. We'll also talk about the difficulties and moral dilemmas that auditing and assurance professionals face, emphasizing the value of professional ethics and the most recent developments in the industry. You will have the information and resources required to produce and complete your assignment on auditing and assurance by the blog's conclusion.

Understanding Auditing and Assurance

Let's establish a firm understanding of the concepts of assurance and auditing before we begin the assignment writing process. An organization's financial records, transactions, and internal controls are systematically examined and evaluated during an audit to make sure they are accurate, fair, and in compliance with all applicable laws. External auditors are frequently impartial experts who have been hired to conduct this assessment and offer a dispassionate opinion on the company's financial statements. On the other hand, assurance is a more comprehensive idea that goes beyond auditing and encompasses it. It includes a range of services, including attestation, reviews, and agreed-upon procedures, where an impartial expert assesses and offers assurance on various elements of financial data or operational procedures. As you begin writing your assignment, you must comprehend the differences between auditing and assurance. It enables you to comprehend the breadth and importance of each concept and successfully meet the requirements of the assignment. Having established this foundation, let's move on to the assignment writing process and investigate the essential steps to produce a properly organized and insightful piece of work.

Definition of Auditing

The goal of auditing is to verify the accuracy, fairness, and compliance with applicable laws of an organization's financial records, transactions, and internal controls. To evaluate the accuracy and integrity of financial information, a thorough analysis of financial statements, supporting materials, and accounting practices is required. Usually, external auditors, who are independent and impartial experts, are hired to conduct this assessment and offer an unbiased opinion on the company's financial statements. Organizations can be certain that their financial statements accurately reflect their financial position, performance, and cash flows by having them audited.

Definition of Assurance

Auditing is a subset of the larger concept of assurance, which goes beyond it. It includes a range of services like attestation, reviews, and established protocols. Independent experts evaluate and offer assurance on various facets of financial information or operational processes as part of assurance engagements. Assurance services go beyond the review of financial records, while auditing focuses on the verification of financial statements. They also consist of non-financial elements like risk assessment, process evaluation, performance measurement, and others. Engagements in assurance assure stakeholders that information beyond financial statements is trustworthy, credible, and transparent.

Key Differences Between Auditing and Assurance

Although auditing and assurance are similar, their scopes and objectives are different. Through an unbiased assessment of an organization's financial records, auditing primarily focuses on confirming the veracity of financial statements. It guarantees adherence to accounting rules, laws, and regulations. Contrarily, assurance covers a wider range of services beyond the simple verification of financial statements. It entails assessing risks, giving assurance regarding operational procedures, and judging the accuracy of non-financial data. Internal controls, sustainability reporting, regulatory compliance, and performance measurement are some examples of topics that can be covered by assurance engagements. Although assurance includes auditing as a subset, assurance services go beyond financial reporting to give confidence in a variety of organizational operations.

Preparing for the Assignment

Thorough planning is essential for a successful assignment on auditing and assurance. You can prepare for your assignment effectively by following the steps below. First and foremost, carefully read the instructions for the assignment that your teacher has provided. It's essential to comprehend the precise issues or subjects you must deal with as well as any format or citation requirements. Then, compile pertinent information by conducting in-depth research with the aid of scholarly journals, books, and reliable online sources. You will gain a thorough understanding of the subject matter as a result. Take detailed notes as you conduct your research to remember key ideas, quotations, and sources. The writing process will be streamlined as a result, and your assignment's structure will be simpler. Consider outlining as well to structure your ideas and guarantee a logical flow of ideas in your assignment. You will lay a strong foundation for writing an informed and coherent assignment on auditing and assurance by adhering to these pre-writing steps.

Review the Assignment Guidelines

It is crucial to carefully read the instructions provided by your instructor before beginning your assignment on auditing and assurance. Spend some time carefully reading and comprehending the directions, noting any particular questions or subjects you need to cover. Be mindful of the formatting specifications, including the need for margins, font size, and citation style. You can make sure that your assignment satisfies the requirements and addresses the particular areas of focus specified by your instructor by being aware of the rules upfront.

Gather Relevant Materials

Conducting thorough research is essential to producing a well-informed assignment. Make use of a range of resources, including scholarly journals, books, reliable websites, and trade publications. assemble trustworthy and pertinent resources that offer in-depth insights into the field of assurance and auditing. To ensure the accuracy of the information you use in your assignment, keep in mind to critically evaluate the credibility and dependability of each source.

Take Notes and Organize the Information

Organizing your notes will help you remember important ideas, quotations, and sources as you conduct your research. Whether you choose to use digital note-taking tools or conventional pen and paper, come up with a system that works for you. Make sure to meticulously note important details from your sources, such as author names, publication dates, and page numbers. By keeping your notes organized, you can structure your assignment more easily and avoid confusion or plagiarism concerns when citing sources.

Structuring Your Assignment

To present your ideas coherently and logically, it is essential to structure your assignment on auditing and assurance. You can create an assignment that is well-organized by using the following framework. Start by giving a brief overview of auditing and assurance, their importance, and the goal of your assignment in an interesting introduction. Discuss the theoretical underpinnings of auditing and assurance after the introduction, paying particular attention to important terms like materiality, independence, audit risk, and professional skepticism. Continue by describing the various auditing and assurance services, using appropriate examples, such as financial statement audits, operational audits, compliance audits, and review engagements. The auditing procedure should then be described in detail, including each step from planning and risk assessment to assembling evidence and arriving at a conclusion. Consider including a section on the difficulties and moral issues that arise in auditing and assurance, such as professional ethics, ongoing problems, and new trends. Finish your assignment by reiterating the most important ideas. By following this format, you will produce a well-organized assignment that thoroughly explores the subject of auditing and assurance.

Professional Ethics and Code of Conduct

Professional ethics are crucial for maintaining integrity, trust, and public confidence in the fields of auditing and assurance. Describe the role that professional ethics play in maintaining the veracity and accuracy of financial information. The International Ethics Standards Board for Accountants (IESBA) and the American Institute of Certified Public Accountants (AICPA) are two well-known professional organizations that have established high ethical standards. Investigate issues like impartiality, discretion, and professional competence. Emphasize the moral dilemmas that auditors might face and the ethical frameworks for making decisions. In the practice of auditing and assurance, emphasize the importance of adhering to a strict code of conduct and upholding high ethical standards.

Current Issues and Emerging Trends

Practises for auditing and assurance are constantly changing to address new issues and keep up with emerging trends. Highlight the most important current problems and new developments in the industry. Talk about how technology, including data analytics and artificial intelligence, has affected auditing procedures. Learn how technology is being used by auditors to improve efficiency, accuracy, and risk assessment. What role do auditors play in assessing and ensuring the accuracy of environmental, social, and governance (ESG) disclosures? Discuss the rising importance of sustainability reporting. Discuss how auditors are evolving in their ability to spot and stop fraud, financial irregularities, and cybersecurity risks. Your assignment will demonstrate a modern understanding of the dynamic auditing and assurance landscape by addressing these current issues and emerging trends.

Challenges and Ethical Considerations in Auditing and Assurance

Professionals in auditing and assurance face a variety of obstacles and moral quandaries in their work. These issues must be covered in your assignment. Talk about typical difficulties like auditing complicated financial instruments, handling client privacy issues, and preserving independence and objectivity. Describe any challenges auditors might encounter when determining the risk involved in complex financial transactions or juggling confidentiality issues when handling private client information. In addition, stress the value of maintaining ethical standards in assurance and auditing. Investigate subjects like business ethics, regulatory organizations' codes of conduct, and the value of professional skepticism. By addressing these issues and ethical concerns in your assignment, you will show that you have a thorough understanding of the complexities that exist in the auditing and assurance industry as well as your capacity for critical analysis and issue evaluation.

In conclusion, writing an assignment on auditing and assurance necessitates having a firm grasp of the material, meticulous planning, and adherence to ethical standards. You can create a well-organized and insightful assignment that demonstrates your knowledge and critical thinking abilities by following the instructions provided in this guide. Before beginning the writing process, don't forget to read the assignment instructions, gather pertinent materials, and organize your thoughts. Take into account the value of professional ethics as well as the changing auditing and assurance industry, including present problems and future trends. Your assignment will show that you are knowledgeable in the subject by addressing these important factors and will advance both your academic and professional careers. Therefore, approach this assignment with confidence and produce an outstanding piece of work on auditing and assurance.

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• Meaning and Definitions of Audit

Once we complete preparing the final statements and accounts for the year the accounting process is over. However, we still cannot be completely certain of the accuracy of these accounts. This is when the concept of auditing comes in. Let us see the audit meaning and features of an audit.

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Audit meaning.

The word “audit” is a very generic word, it essentially means to examine something thoroughly. But we will be learning about auditing as it relates to accounting and the finance world. So audit meaning is the thorough inspection of the books of accounts of the organization .

This involves the examination of vouchers and the verification of various assets of the organization. And the person who carries out such an audit is known as the auditor.

The International Federation of Accountants has given the following definition of an audit, “audit is an independent inspection of the financial information of any organization, whether profit-oriented or not profit-oriented, irrespective of its legal form, status or size when such examination is conducted with a view to express an opinion thereof”.

The one important thing to remember is that an audit is a close inspection of the books of accounts, but it does not absolutely guarantee error-free books. The auditor only expresses his opinion on the accuracy of the books, he does not give his opinion on the financial status of the company or predict its future.

If he is satisfied with the examination then he will state that the financial accounts are true and fair, which means they are absent of any material misstatement. But this is not an opinion about the financial status of the company.

(source – ipleaders) 

Browse more Topics under Concept Of Auditing

• Basic Principles Governing an Audit
• Principle aspects covered by auditing
• Advantages and Limitations of Audit
• Investigation vs Auditing

Features of an Audit

• 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.
• 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.
• 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.

Solved Question for You

Q: What are the main types of functional audits?

Ans: The main types of functional audits are,

• Propriety Auditing
• Efficiency Auditing
• Operational Auditing
•  Voucher Auditing
• Statutory Auditing
• Social Auditing
• Cost Auditing

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Concept of Auditing

• Advantages and Limitations of Auditing
• Principle Aspects Covered by Auditing

One response to “Principle Aspects Covered by Auditing”

You have well explained about financial auditing, when it comes to IS auditing it necessary to check all the application and related to the organization which includes third party accessibility and their data base too. Information system auding includes checking of every department’s software application system to provide utmost security to the data in an entity or organization.

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Concept of Continuous Audit

The audit that remains continue throughout the financial year is called continuous audit . This audit is an audit that involves a detailed examination of books of account at regular intervals i.e. one month or three months. These audits are usually technology-driven and designed to automate error checking and data verification in real-time. The auditor visits clients at regular intervals during the financial year and checks each and every transaction.

This audit is performed generally by the firm’s internal auditors to eliminate the year-end workload. At the end of the year, the auditor checks the profit and loss account and the balance sheet. It focuses on testing the prevalence of risk and the effectiveness of control. A continuous audit is not of much use to the small firms as its accounts can be audited at the end of the financial year without much loss of time.

A business where the continuous audit is applicable:

• Businesses are shifting over to a continuous approach to auditing because, quite simply, it is more effective.
• Where it is desired to present the account just after the close of the financial year, as in the case of a bank.
• Where the volume of the transactions is very large. If necessary, any alteration can be made only after obtaining the approval of the auditor.
• Where the statements of accounts is required to be presented to the management after every month or quarter. This process is not intended to replace traditional internal auditing.
• Reduces audit costs while improving effectiveness. Where no satisfactory system of internal check is in operation. Trend analysis makes it easier to identify fraud.

Characteristics of Continuous Audit –

• The auditor visits the business regularly.
• It is conducted in a large business concern.
• It is conducted throughout the year.
• It is an expensive audit
• It is used to cover the deficiencies of the business.

Asset Retirement Obligation (ARO)

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