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Friday, September 18, 2020

Continuous and Periodical Audit | Meaning, Merits, Demerits and Differences


Continuous Audit and Periodical Audit – Meaning, Merits, Demerits and Differences

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 this 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.

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?

(i)         No work unfelt

(ii)       Prepare fixed audit programme

(iii)      Rotation of Work

(iv)     Frequent visit

(v)       Use of special mark

(vi)     Use of ink for writing of castings

(vii)    Keep important notes

(viii)  Preparation of effective audit programme

(ix)     Pending of checking impersonal and general ledger:

(x)       A revise of the past work

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.

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.

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.

 

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