In this article, I am going to discuss in detail about continuous audit and periodical audit. We will discuss here meaning of continuous audit and periodical audit, merits and demerits of continuous audit and periodical audit. You will also get here a comprehensive note of difference between continuous audit and periodical audit.
- 1. Continuous Audit
- 2. Advantages and Disadvantages of Continuous Audit
- 2.1. Advantages (Merits) of continuous audit
- 2.2. Disadvantages (Demerits) of continuous audit
- 2.3. How disadvantages of Continuous audit can be overcome?
- 3.Periodical Audit
- 3.1. What is Periodical Audit?
- 3.2. Methods to be Applied to conduct periodical audit
- 3.3. Objectives of Periodical Audit
- 4.Advantages and Disadvantages of Periodical Audit
- 5..Difference between Continuous Audit and Periodical Audit
Continuous Audit
What is Continuous Audit?
Continuous
audit is a system of audit where the auditor and his staff Examines all
the transactions and books of accounts in details continuously throughout the
year at regular intervals i.e. weekly or fortnightly or monthly etc.
According
to Spicer and Pegler, “a continuous audit is one where the auditor’s staff
is occupied continuously on the accounts the whole year round, or where the
auditor attends at intervals, fixed or otherwise, during the currency of the
financial year and performs an interim audit; such audits are adopted where the
work involved is considerable and have many points in their favour although
they are subject to certain disadvantages.”
Where Continuous audit is applicable?
Given
below some of the examples in which continuous audit is applicable:
(i)
Where there are enormous transactions in a big organizations and continuous
monitoring of accounts are required.
(ii)
If there is no internal check system in the organization or the system is not
very much effective.
(iii)
When the company wants to declare interim dividend and for this purpose interim
accounts are to be prepared.
(iv)
In case of financial institutional and insurance companies, where it is
necessary to get the final accounts just after the end of the financial year.
(v)
If the management of the company are to get statement of accounts at a regular
intervals.
Topic
of the Article: Continuous Audit and Periodical Audit
Meaning, Merits, Demerits and Differences
Advantages and Disadvantages of Continuous Audit
Advantages (Merits) of continuous audit:
Following
are the advantage of continuous audit in an organization:
(i)
Extensive checking: As the auditor regularly visits the client’s
office, he should get time for extensive checking of small transactions and the
audit work can ne smoothly conducted.
(ii)
Early detection of errors and frauds: As continuous audit is
conducted throughout the whole year, errors and frauds can be quickly detected.
The accounting staff should not get sufficient time to manipulate accounts.
(iii)
Early Preparation of Final accounts: AS this audit is conducted
throughout the whole year, it is possible to prepare final accounts i.e. Profit
and Loss account and Balance Sheet just at the end of the financial year. The
management and the owners can know the financial results without delay.
(iv)
Declaration of interim dividend: Those companies who want to
declare interim dividend at the middle of the year is to prepare interim
accounts. Continuous audit helps to get interim account in time.
(v)
More reliability on audited accounts: If continuous audit is done
throughout the year, all the interested parties can rely much on the audited
accounts.
(vi)
Moral check: As a result of continuous audit employees should feel
a moral pressure and the chances of errors and frauds are minimized.
(vii)
Early declaration of dividend: With the help of continuous audit
final accounts are prepared just at the end of the financial year and the
shareholder get dividend without delay.
(viii)
Early submission of report: As continuous audit is conducted
throughout the year the auditor can complete final accounts audited just at the
end of the financial year and can submit his audit report to the shareholders
as early as possible.
(ix)
Increase in efficiency: As audit is conducted on continuous basis,
all the transactions are correctly recorded in the books of accounts and
overall efficiency in according work can be made.
Disadvantages (Demerits) of continuous audit:
The
following are the disadvantages of continuous audit:
(i)
High Cost: As continuous audit is conducted throughout the year the
organization has to give huge remuneration to the auditor. Therefore, a small
concern cannot afford the high cost of conducting such audit.
(ii)
Difficulties in accounting work: As a result of frequent visits of
the auditor often it is seen that the books of accounts are checked by the
audit staff and for this audit work is hampered.
(iii)
Change of figures: It may so happen that the portion of accounts
which have already examined by the auditor may alter the figures by the
dishonest employees to achieve some personal interest.
(iv)
Loss of continuity of work: As continuous audit is conducted at
regular intervals, the auditor may left unchecked same audit work which was
pending during his last audit work.
(v)
Adverse effect on employee’s morale: Regular audit work can
adversely affect the morale of the employee.
(vi)
Monotony in Work: Continuous audit work can be monotonous and
reduces the efficiency of employees.
(vii)
Chances of collusion between organization’s staff and auditor’s staff: Continuous
audit work affects the regular working of organisational staff and there is a
chance of collusion between them and audit staff.
How disadvantages of Continuous audit can be overcome?
1.
No work unfelt
2.
Prepare fixed audit programme
3.
Rotation of Work
4.
Frequent visit
5.
Use of special mark
6.
Use of ink for writing of castings
7.
Keep important notes
8.
Preparation of effective audit Programme
9.
Pending of checking impersonal and general
ledger:
10.
A revise of the past work
Periodical Audit
What is Periodical Audit?
Periodical
audit is one which is taken up at the close of the financial or trading period
when all the accounts have been balanced and Trading and Profit and Loss
Accounts and the Balance Sheet have been prepared. It may also commence before
the final accounts are prepared and continue till the audit is completed even
after the close of the financial or trading period. The only thing is that the
audit is completed in one continuous session. At this period, the auditor holds
the books and checks the accounts. Auditor is in possession of the full facts
relating to accounts for the year under review. In the case of such an audit,
the auditor visits the client only once a year and goes to the accounts units
audit work for that whole of the period is completed.
Methods to be Applied to conduct periodical audit
Following
methods can be applied to conduct periodical audit:
a) Periodical
audit is conducted after the preparation of final account. So, an auditor needs
to check all those statements and accounts.
b) Auditor
should prove the final accounts correcting irregularities as far as possible.
c) Auditor
should use special sign after the completion of audit work.
Objectives of Periodical Audit
1. To
know whether the organization has maintained regularity at the time of
maintaining books of accounts.
2. To
know that the profit or loss presented by the business is true and
fair.
3. To
know that the financial position presented by the balance sheet is true and
fair.
4.
To help in detection and prevention of frauds and errors.
5.
To keep moral check on employees and management.
Advantages and Disadvantages of Periodical Audit
Advantages (Merits) of Periodical Audit
(i)
To Businessmen:
(a)
Convenient: The client is not put to any inconvenience because the auditor comes
only once a year.
(b)
Economical: The kind of audit is comparatively less expensive, and, therefore,
is the only viable form of audit available to small business houses.
(c)
Collusion not possible: The possibility of collusion between the auditor and
the client’s staff is much less.
(ii)
Advantages to Auditor
(a)
Lesser Time: The auditor can plan to finish his work in lesser time as he gets
full facts and materials for the conduct of his work.
(b)
Work planning: The auditor can plan his work as he knows the total quantum of
work involved.
(c)
No loss in continuity: The auditor’s staff does not lose continuity of their
work because the audit work once begun is continuously performed until it is
finished.
Disadvantages (Demerits) of Periodical Audit
(i)
Difficulty in rectification of errors: In periodical audit rectification of
errors becomes difficult as a long time gap occurs between the commission of
error, its detection and rectification.
(ii)
Planned frauds undetected: Frauds committed with due planning might go
undetected as the auditor cannot sense the intention of the employees nor can
he doubt their integrity as he becomes for a short while once a year.
(iii)
Delayed preparation of final accounts: As auditing is done at the close of the
financial year the preparation of final accounts is delayed.
(iv)
Lesser moral check: Less moral check is exercised on the employees of the
client in the case of periodical audit, as against continuous audit.
(v)
Postmortem: Periodical audit is only of historical importance rather than of
current practical use. It is only post-mortem of accounts.
Difference between Continuous Audit and Periodical Audit
|
Basis |
Continuous Audit |
Periodical Audit |
|
a) Timing of audit |
Continuous audit is conducted throughout the year. |
Periodical audit is conducted after the preparation of
final account. |
|
b) Organisation |
It is suitable for Large organization. |
It is suitable for small organization |
|
c) Preparation
of final accounts |
As this audit is conducted throughout the whole year, it is
possible to prepare final accounts i.e. Profit and Loss account and Balance
Sheet just at the end of the financial year. |
Since audit is conducted after the preparation of final
account, it is not possible to prepare final accounts just at the end of the
financial year. |
|
d) Costs |
It is costly. |
It is less costly as compared to continuous audit. |
|
e) Detection
of frauds and errors |
It helps in early detection of frauds and errors. Staff
does have sufficient time to manipulate accounts. |
It is very hard to detect frauds and errors because audit
is done only after the preparation of final accounts. |
|
f) Reliability |
If continuous audit is done throughout the year, all the
interested parties can rely much on the audited accounts. |
It is less reliable as compared to continuous audit. |
Conclusion
To
sum up we can say that both continuous audit and periodical audit are important
for large organisation because they help in achieving the objectives of
auditing.
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