Types of audit: statutory, continuous, final, cost, management and tax audit

1. Classification

2. Statutory and voluntary audit

Statutory audit is required by law. Examples: companies (Companies Act 2013, s.139 onwards); banks (Banking Regulation Act 1949, read with the Companies Act); insurance companies (Insurance Act 1938); co-operative societies (the State Co-operative Societies Acts and Article 243ZM of the Constitution); public and charitable trusts (State trust laws and the income-tax exemption conditions); government departments and public sector undertakings (audit by the Comptroller and Auditor-General under Articles 148 to 151 and the CAG (Duties, Powers and Conditions of Service) Act 1971). The scope of a statutory audit is fixed by the law and cannot be cut down by agreement with the client.

Voluntary (private) audit is done at the owner’s choice: sole traders, partnerships, clubs and private trusts. Its scope is fixed by the engagement letter. A partnership audit protects a sleeping partner, settles accounts on admission, retirement or death, and helps in obtaining loans.

3. Audits classified by time

Continuous audit: the auditor’s staff visit at regular intervals (weekly or monthly) throughout the year and check the transactions as they are recorded. It suits large concerns with heavy transactions, those where the accounts must be ready soon after the year end (banks), and those with weak internal control.

• Advantages: errors and frauds are detected early; the work is spread out; the final accounts can be audited quickly; the moral check on staff is greater; the auditor acquires a closer knowledge of the business.
• Disadvantages: costly; figures already checked may be altered afterwards; frequent visits disturb the client’s staff; the audit may become mechanical; staff may come to rely on the auditor to find their mistakes.
• Safeguards: tick marks in distinctive ink, an audit note book recording where the work stopped, and checking that totals already verified are not altered.

Final (periodical or completed) audit: begins after the close of the year, when the accounts have been prepared, and is carried through to the end without a break. It suits smaller concerns. It is cheaper and there is no risk of later alteration, but it delays the report and a fraud may go undetected for a whole year.

Interim audit: an audit for part of the year, for example before an interim dividend is declared or for quarterly results of listed companies (limited review).

Balance sheet audit: the auditor concentrates on the items in the balance sheet (assets, liabilities, reserves), and examines the profit and loss account only so far as is needed to verify them. It is common in the United States and suits concerns with strong internal control.

Partial audit: the owner asks for only part of the accounts to be checked, for example cash transactions. The auditor must obtain written instructions and state the limitation in his report.

4. Cost audit

The Institute of Cost and Management Accountants (London) defined cost audit as “the verification of cost accounts and a check on the adherence to the cost accounting plan”. It checks whether the cost records are correctly kept, whether the cost of production of each product is correctly worked out, and whether there is waste or inefficiency.

Law in India. Under section 148 of the Companies Act 2013:

• the Central Government may direct prescribed classes of companies engaged in the production of goods or providing services to keep cost records (s.148(1)); the classes, products and thresholds are listed in the Companies (Cost Records and Audit) Rules 2014;
• it may direct that the cost records be audited (s.148(2));
• the cost auditor must be a cost accountant in practice (a member of the Institute of Cost Accountants of India), appointed by the Board on the recommendation of the audit committee where there is one; the remuneration is ratified by the members (s.148(3));
• the statutory (financial) auditor of the company cannot be its cost auditor (proviso to s.148(3));
• the cost auditor submits his report to the Board, and the company sends it to the Central Government with its comments within thirty days of receipt (s.148(6));
• the cost auditor has the same powers and duties as the company auditor under section 143(1), and the penalties of section 147 apply to him.

Objects and advantages: verifies the cost of production; detects wastage of material, labour and machine time; helps fix prices (and served the Government in regulated pricing); improves efficiency; compares actual cost with standard cost; deters errors and frauds in the cost records.

5. Management audit

A management audit is an appraisal of the performance of management itself: whether the policies, plans, organisation structure and procedures are sound, and whether the business is being run efficiently and economically. It looks forward and is advisory; it is not compulsory by law. It is done by a team of experts (accountants, engineers, economists) appointed by the owners or the Board. It covers organisation, planning, personnel, production, purchasing, marketing and finance. Its value lies in identifying waste, overlapping functions, weak delegation and missed opportunities. Its limitation is that it judges management decisions with hindsight, and the standards for judging “good management” are not precise.

6. Tax audit

Under section 44AB of the Income-tax Act 1961, a person carrying on business whose total sales, turnover or gross receipts exceed Rs. 1 crore in a year (raised to Rs. 10 crore where cash receipts and cash payments are each not more than 5% of the total), or a person carrying on a profession whose gross receipts exceed Rs. 50 lakh, must have the accounts audited by a chartered accountant and furnish the report by the specified date. Persons declaring income under the presumptive schemes below the prescribed rate are also covered. The Income-tax Act 2025, which replaced the 1961 Act from 1 April 2026, carries the same requirement forward.

Nature and significance: the tax auditor reports in a prescribed form, giving particulars such as depreciation, disallowable expenses, payments to related persons and tax deducted at source. It ensures proper books are kept, that the income returned is correct, and reduces the time the department spends on scrutiny. Failure to get the accounts audited attracts a penalty.

7. Other audits

• Secretarial audit: section 204 of the Companies Act 2013 requires listed and prescribed companies to annex a secretarial audit report by a company secretary in practice to the Board’s report.
• Government audit by the CAG of government departments and government companies (the CAG appoints the statutory auditor of a government company under s.139(5) and may conduct a supplementary audit under s.143(6)).
• Internal audit: see the note on internal audit.

How this is examined

“Define audit; explain the different types” (2019, 2022, 2023). Short notes on cost audit (2019, 2021 as cost and management audit, 2024, 2025, January 2026), management audit (2021) and tax audit (“nature and significance”, 2021 and August 2024 as a 10-mark question). For cost audit, give the definition, section 148 points and the advantages. For continuous versus final audit, a two-column comparison of advantages and disadvantages answers well.