Aspects of Audit: Its importance and limitations; the advantages and limitations of the different types of audits

Audit Type

Meaning

Advantages

Limitations

Management Audit

In simple words, a management audit refers to a type of audit in which the auditor examines the activities done by the management so that errors in the company’s overall performance can find out and the end should be corrected.

1.     It provides the solutions to the problems faced by the management for better utilization of resources of the entity.

2.     It evaluates all the operational activities at all levels of management which describes the potential of the activities and processes.

1.     It’s a very costly method due to detailed checking of the activities.

2.     Not suitable for every business form of organization.

Performance Audit

It examines whether public sector undertakings, operations, and activities are operating as per the principles of economy, efficiency, and effectiveness.

1.     It reviews the wastages and utilization of resources.

2.     It examines whether the business processes are working efficiently and effectively.

1.     There can be chances of window dressing of accounts and fraud as well as unlawful activities.

2.     Under this audit, high costs and time are involved in conducting the audit.

Secretarial Audit

Under this audit, it checks whether the organization complies with the applicable laws and regulations.

1.     It assures compliance with good corporate practices.

2.     It helps to find out the events related to non-compliance.

1.     It takes systematic checking hence it’s a time-consuming audit.

2.     It is also costly due to the hiring charges and fees of the auditor as well as the additional cost.

Transfer Pricing Audit

Under this audit, A tax authority investigates to ascertain whether a company is compliant with applicable transfer pricing regulations.

1.     It saves the cost for the departments since the transfer price is usually lower than the market price of the product.

2.     No dependency on suppliers as products are readily available in the company itself.

1.     Some departments do not work the same as goods for example service departments.

2.     The issue of transfer prices in multinational companies is highly complicated.

Information System Audit

Under this audit, the auditor checks the management controls within an information technology infrastructure and business applications.

1.     It helps to safeguard and maintain the security of data stored.

2.     It improves the controls from external factors.

1.     It is very costly in nature due to the heavy implementation of security controls.

2.     It’s a very difficult process that can be done by the experts only.

Forensic Audit

It covers the activities which are investigative and is conducted to prosecute a party for fraud, embezzlement, or other financial crimes. Under this audit, the auditor checks and inspects financial records.

1.     It provides assistance in solving crimes that are financial.

2.     It makes sure the cross-checking of information collects the relevant evidence and writes and documents reports.

1.     It takes lots of effort and time hence it’s a very time-consuming process.

2.     It hurts the public image of the business entity even entity does not involve with crimes and fraud.

CSR Audit

It is a formal and systematic checking of the company towards social responsibilities and it becomes a tool to support companies to achieve socially responsible business.

1.     It measures the social performance of the company.

2.     It assures and improves transparency and accountability towards social obligations.

1.     This audit can be biased if the auditor is not worked independently.

2.     Sometimes while conducting the audit, auditor faces resistance from management since they do not want to be seen negatively in the market.

Operational Audit

It is a systematic review of effectiveness, efficiency, and economy of operation in which financial data may be used, but the primary sources of evidence are the operational policies and is a more comprehensive form of an internal audit.

1.     This audit improves the effectiveness of business operations.

2.     It can also recognize any points for improvement even if businesses are running well enough

1.     It involved the costs for the improvements made in the inefficiencies in the operations, it becomes expensive.

2.     For better business operations, it requires detailed evaluation and reviews eventually it becomes time-consuming.

Cost Audit

In simple words, a Cost audit means an audit of cost accounts that assures the accuracy and correctness of cost accounts with the costing concepts and costing techniques.

1.     It helps to detect any wastages in processes and conform the costing entries with them.

2.     It controls the cost by identifying inefficiencies and improves production costs.

1.     Cost audit is different from other audits in which specialized auditors are hired by entities who charge high fees in return for their services.

2.     It has limited scope since it only works on the cost aspects of a company’s operations.

Internal Audit

Under this audit, a qualified auditor evaluates the internal control and accounting process of the company which includes financial, operational, compliance, environmental, and IT aspects.

1.     It helps to find out the weaknesses of the business entity in the business operations or internal control of the company.

2.     It’s a continuous process that helps them to correct their mistakes immediately.

1.     Audit reports are not considered for external reporting under this audit.

2.     This audit is only helpful to those business entities which are having multiple numbers of financial activities hence suitable for big business entities only.

Statutory Audit

As per the requirement of law, the assessment and review of the financial accounts of the company conducted by a qualified auditor are known as statutory audits.

1.     It ensures the authenticity and reliability of the financial statements of the company.

2.     It provides assurance to stakeholders and users of the financial statements that financial statements are free from material misstatements.

1.     Auditor only gives reasonable assurance hence it does not give total assurance since not reviewing of total all transactions.

2.     The cost of conducting this audit is very high since it includes some additional costs for which audit firms hired others.

Tax Audit

As per the Income Tax Act, 1961, there are some classes of taxpayers described in section 44AB in which they have to audit their books of accounts by a qualified auditor and issue the audit report.                                            

1.     It makes sure that there will be no errors in the return and also helps to get any deductions and exemptions in case taxpayers missed.

2.     It also helps in the proper presentation of accounts before tax authorities.

1.     It an expensive since business owners have to hire an expert and qualified auditor to conduct the tax audit.

2.     It’s a laborious audit since it takes a lot of time and effort to complete the entire audit as per the rules and laws.

GST Audit

Under this audit, the auditor ensures the all-over records of returns and turnover declared, taxes paid, and all the acts under the GST act by the taxpayer.

1.     It double-checks the returns and matches the input tax credit from the books of accounts.

2.     It assures the tax liability is calculated correctly by the taxpayer as per the GST act.

1.     This audit is a very time-consuming process since checking all the multiple bills and invoices takes lots of effort.

2.     There’s no readily clearly evident system in place to correct discrepancies/mistakes in the annual return.