Types of Audits Notes
Introduction
Generally the audit to be undertaken depends on the reason as to why the
auditing exercise is required. There are quite a number of types of
audits. These are:
- Statutory Audits
- Private Audits
- Internal Audits
- Management Audits
- Government Audits
Each of these types are explained here below
What is Statutory Audit
These are those audits that carried out as stipulate and governed by the
prevailing laws of the land. These legislations include Companies’ Act
Cap 486, Building Societies’ Act, and Provident Act and other legal
provisions. There is a legal requirement for these audits failure to
which the directors and other officers of the company are liable to an
offence
What is Private Audits
A private audit is carried by an independent auditor at the request of
the shareholders or other interested stakeholders. The cost incurred is
borne by the shareholders
or the stakeholders who requested the audit. This is not a legal
requirement but a personal or group request. There varied reason why the
group or a person is interested in this type of audit. Some of the
reasons include:
- Before liquation
- During mergers
- During take – overs
- During IPOs
Internal Audits
Internal auditing is an independent, objective assurance and consulting
activity designed to add value and improve an organization’s operations.
It is an independent appraisal technique or activity used to review the
operations of the business organisation. 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 effectiveness and efficiency 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.
The scope of internal auditing within an organization is broad and may
involve topics such as the efficacy of operations, the reliability of
financial reporting, deterring and investigating fraud, safeguarding
assets, and compliance with laws and regulations. Internal auditing
frequently involves measuring compliance with the entity’s policies and
procedures. However, internal auditors are not responsible for the
execution of company activities; they advise management and the Board of
Directors (or similar oversight body) regarding how to better execute
their responsibilities. As a result of their broad scope of involvement,
internal auditors may have a
variety of higher educational and professional backgrounds.
Internal is thus:
- Carried out by personnel – the internal auditor is appointed by the
management and is expected to be independent in that he/she reports
directly to the board of directors to the auditing committee of the
board of directors. - An appraisal activity – the work of internal auditors is to appraise
the work done by the others within the organisation - A service to the management – the management needs that the policies
are fulfilled besides that the information used is both reliable and
complete. The management requires also that the company’s assets and
resources are well safeguarded. It is sole responsibility of the
internal auditor to make that the policies are adhered to,
information is reliable and complete and that the assets and
resources are safeguarded. - Managerial control – the internal auditor is concerned that the
internal control system is effective and efficient and working as
required. There need to measure and evaluate the continuous
effectiveness and efficiency of the internal control systems
Methods and Procedures of Internal Auditing
The internal auditor’s approach to his/her work depends on how his/her
role is defined in organizational chart but most of the internal audits
are included in the following broad definitions
- Operational Audits – this means an audit of a specific set of
operations such as the ones carried out on departments - Functional Audits – this implies an audit of specific function
within the such as the way the payroll is prepared - Organizational Audits – this implies audits of the organizational setup.
- Company Audits – in the modern business, companies are in groups and
the internal audit may be the concern to audit one of those
companies within the group - Special or Ad hoc work – an internal is often considered a suitable
person to engage in special investigation or trouble shooting
assignments
Reliance on Internal Audits
The external auditor may rely on the work of internal auditor while
carrying his/her audit work. The internal and external auditor must co –
operative due to the following reasons:
- Internal audit forms part of internal control system which has been
established by the management. The external auditor has accustomed
himself or herself to place reliance on the internal controls - Some of the objectives of the internal audits are almost the same as
for the external auditor The external auditor may use the work of
the internal auditor in two ways: one by taking into account the
work done by the internal auditor and two by agreeing that the
internal will render direct assistance to the external auditor.
Before placing any reliance on the work done by the internal auditor,
external auditor must assess the internal auditor and his/her work
regarding the following areas of concern:
- Independence of the internal auditor – the internal auditor is an
employee of the company, but may be in a position to organize his or
her activities in such a way that he or she reports objectively and
is not compromised at all. If this is possible then the external
auditor can highly rely on the internal auditor’s work otherwise do
not rely on it - The scope and the objectives of internal audit – the external
auditor should whether the scope of the work done by internal
auditor is satisfactory and can be used for external audit - Due professional care – in order for the work of the internal
auditor to be of any use it must have been done professional and in
regard to all required standards and guidelines. - Technical competence – for the work of the internal auditor to
useful, the person conducting the internal audit must technically
qualified as per requirements of the companies’ Act Cap 486 of laws
of Kenya - Recording standards – the external must assess whether the
necessary reporting standards were applied when the internal audit
reports were made - Resources available – an internal audit department that has scarce resources may not be relied
at all and may not be useful to the external auditor’s work
Extent of Reliance on the Internal Audit
The extent of reliance on the internal audit work depends upon many
factors some of which include the following:
- Materiality
- Level of audit risk
- Judgment level required
- Sufficiency of complementary audit evidence
- Specialized skills of the internal auditor
In conclusion the scope and objectives of the internal auditing include
the following:
- Reviewing the accounting systems and internal control systems
- Examining financial and operating information for the management
- Reviewing the economy, efficiency and effectiveness of operations
and of the functioning of non financial controls - Review and implementation of corporate policies, plans and
procedures and - Special investigations as may be needed from time to time
What is Management Audits
A management audit may be defined as an enquiry into the advisability of any of the policies of the board of directors in furthering the objectives of the business as defined in the memorandum and /or into the efficiency with which they are securing the execution of the policies Some of the areas which might be subject of the management audit enquiry include:
- The objectives of the business: are these objectives right? Are the
objectives being pursued and met? - The relationship of the business with shareholder, investors and the
financial markets - The standing of the company with the public, customers, suppliers
and other members of the public - Relations with trade unions and the employees, labour turnover,
health concerns an safety matters and issues, training policies etc - Moral of employees
- Financial ratios both the trend and industrial
- Financial control
- Information flow – is the flow of information adequate or not
