Nature, Objectives and Types of Auditing
What the domain tests
This domain tests the meaning and objectives of audit, independence, and the main types of audit. Questions often distinguish statutory audit from internal audit and identify the primary audit objective.
Core rules
- An audit is an independent examination of financial information leading to an opinion on truth and fairness.
- The primary objective is to report whether the financial statements give a true and fair view and are prepared under the applicable framework. Detection and prevention of errors and fraud are secondary, along with advice to management.
- A statutory audit is required by law, such as a company audit. An internal audit is an independent appraisal within the organisation.
- Types include external or statutory, internal, government, tax, performance or value-for-money, social, environmental, forensic, continuous, interim and final audit.
- Independence in mind and appearance is essential. The auditor is not a guarantor of the accounts.
Worked example
A company appoints a chartered accountant to audit its annual accounts under the Companies Act. This is a statutory audit: the scope and duties are fixed by law and the auditor reports to shareholders. If the same company employs an accountant to review purchase procedures and report to the managing director, that is internal audit. The statutory auditor may rely on internal audit work but cannot delegate the audit opinion to internal audit.
Traps
Do not say fraud detection is the primary objective; do not treat internal audit as a substitute for statutory audit; do not assume an audit guarantees accuracy; and do not confuse tax audit with statutory financial audit.