Types of Audits Notes

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:

  1. Statutory Audits
  2. Private Audits
  3. Internal Audits
  4. Management Audits
  5. Government Audits

Each of these types are explained here below

Statutory Audits
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

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
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

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
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