Commercial Law and Preliminaries of Auditing · Ch 8 — Different Types of Audits – II
On the Basis of Scope of Work: Complete Audit, Partial Audit, and Internal Audit
On the Basis of Scope of Work: Complete Audit, Partial Audit, and Internal Audit
This second classification asks a different question: how much of the business's records does the audit actually cover?
Complete Audit
A Complete Audit covers the entire set of books of account and every transaction of the business for the whole period under review. It is the traditional, most commonly understood form of audit, and it is the only form the law accepts for a Statutory Audit — a company's statutory auditor cannot agree to examine only part of the accounts.
Advantages: gives a genuinely comprehensive, reliable overall opinion, since no part of the business is left unchecked; and it is the form legally required wherever a statutory audit applies.
Limitations: it is costlier and more time-consuming than examining only a specific area; and it may simply be more than is needed where management has one narrow, specific concern (in which case a Partial Audit may be the more sensible choice).
Partial Audit
A Partial Audit is confined, by specific agreement between the entity and the auditor, to only a defined part of the accounts or transactions — for example, examining only cash receipts and payments to check for suspected embezzlement, rather than the entire set of books. A Partial Audit is never used to satisfy a Statutory Audit requirement, since the law requires a complete examination wherever a statutory audit applies; it is only ever undertaken voluntarily.
Advantages: it is quicker and more economical than a Complete Audit, since only the agreed area is examined; and it is well suited to a specific, narrow concern (such as suspected cash fraud) that does not justify the cost of auditing the whole business.
Limitations: it gives no assurance whatsoever about the parts of the business that were not covered; it cannot be used to satisfy any statutory audit obligation; and its exact scope must be defined very precisely in the engagement itself, to avoid later disputes about what the auditor did, and did not, actually examine.
Internal Audit
An Internal Audit is a continuous, in-house appraisal activity carried out by employees of the organisation itself (typically an internal audit department, reporting to management or an audit committee), examining the efficiency of the internal control system, compliance with the organisation's own policies, and the reliability of financial and operating information, as part of the organisation's own ongoing management-control system.
Distinction — Internal Audit and Interim Audit. These two terms sound similar but sit on entirely different classification axes. Internal Audit is classified by who performs it and why — an in-house, continuous management-control function. Interim Audit (Unit 5) is classified by when it happens — an audit conducted at some point between two annual (final) audits, typically for a specific purpose such as declaring an interim dividend — and it may be carried out by either an internal or an independent external auditor. An organisation's internal audit department could well perform work that happens to fall at an interim point in the year, but that coincidence does not make Internal Audit and Interim Audit synonyms; one is a who/why classification, the other a when classification.
Distinction — Statutory Audit and Internal Audit. A Statutory Audit is legally compulsory, is performed by an independent, external Chartered Accountant appointed under a governing statute, and results in a report addressed to the shareholders/owners on whether the final accounts present a true and fair view. An Internal Audit is not legally compulsory for most entities (though large or listed companies increasingly maintain one voluntarily, or under corporate-governance and stock-exchange listing norms), is carried out by the organisation's own employees, and reports to management — not to the shareholders — on a continuous, ongoing basis about the effectiveness of internal controls and operations.
| Basis | Internal Audit | Interim Audit | Statutory Audit |
|---|---|---|---|
| Classification axis | By who performs it / its purpose | By when it is conducted | By legal requirement |
| Performed by | Employees of the organisation | Internal or an external auditor | An independent, external Chartered Accountant |
| Timing | Continuous, ongoing | A specific point between two annual audits | Usually annual, at the year's end |
| Reports to | Management | Whoever engaged it (management or owners) | Shareholders/owners |
| Legally compulsory? | Generally not (governance-driven where present) | Not compulsory in itself | Yes, wherever the governing statute applies |
Advantages of Internal Audit: it catches problems on a continuous basis, well before the year-end statutory audit; it strengthens internal control and day-to-day operational efficiency; a well-functioning internal audit can let the external statutory auditor reasonably reduce the extent of their own test-checking; and it has a real, ongoing deterrent effect against error and fraud. …